IT deserves a strategic role in merger & acquisition integration

25 April 2017 6 min. read

IT should be involved earlier in the merger & acquisition process, and be given a more strategic role throughout, from due diligence to post merger integration, say experts from Wavestone Consulting.

After a record breaking year for merger and acquisition (M&A) activity in 2015, with deal value hitting a total of $4.9 trillion, and a strong 2016, when deal value stood at $3.8 billion, the M&A boom is set to continue in 2017 according to many industry analysts. Interest for deals from both corporates as well as private equity remains high, lifted by the drive for expansion strategies, innovation and the availability of cheap capital, and cross-border activity continues to rise on the back of market disruption and globalisation.

In light of the flourishing deal market, combined with the growing complexity of deals (cross-border; megadeals), increased emphasis is being placed on ensuring that deal synergies are attained. Key herein is that the groundwork for the transaction is fully in place, building on among others a robust due diligence and business case, and that deal execution is run effectively, supported by a clear roadmap and integration plans. Research from for instance The Boston Consulting Group and McKinsey & Company show that M&A success is underpinned by a range of success factors, with masters in M&A execution able to generate stronger returns than their peers.

IT deserves a strategic role in merger & acquisition processes

IT due diligence

One of the common pitfalls of deal success is the role of technology. According to Nick Conway, a Senior Manager at Wavestone Consulting in the UK, the challenges can often be linked back to IT’s lack of involvement in the early stages of the deal process. Despite the rapidly rising stature of IT in boardrooms globally – technology today forms the backbone of operating models and innovation – due diligence for M&A activity typically still involves an assessment of financials, channels and partnerships. “All too frequently CIOs are not engaged until after a merger or acquisition has been announced”, remarks Conway.

IT synergies
Down the line this brings rise to several challenges. One of those is that IT planning and impacts of technology to wider business cases tend to be off the mark. Conway: “Without a proper IT due diligence, programme leaders are left with unrealistic expectations on synergies and savings that can be generated.” In particular in industries where digital forms a significant part of operations, such as banking, telecom, services or technology, efficiency improvements in total IT costs of ownership serve as a large contributor to (growth) synergies, with flaws set to “seriously impact” benefit realisation.

Costs of IT integration
Another area in which IT inaccuracies can influence execution is in estimating the cost of integrating IT services and infrastructures. “It is essential to properly appreciate the complexities that are likely to be encountered when integrating IT services”, Conway says. Integrating different ERP systems is cited by CIOs as the largest challenge when it comes to post merger integration, but also the amalgamation of different architectures, landscapes and applications can pose a daunting task. When there is insufficient visibility in IT complexities, the accuracy of plans drop, with as a consequence that IT budget overruns are more likely.

Success factors for IT integration

Based on decades of experience in the field – Wavestone’s consultants support a variety of organisations with M&A IT engagements – Conway and his team at the consulting firm have crafted a number of success factors that in their view facilitate smooth post M&A IT integration. At the heart of the approach should be an early involvement: “When undertaking a merger or acquisition, IT should be involved in the initial evaluation stages of the M&A process for technical evaluations.” In doing so, IT should be handed a role at a strategic level, with CxO commitment key for ensuring that the right information is on the table and that action plans are integrated and aligned.

Success factors for IT integration

Building on the strategic involvement, IT should draft a clear strategic roadmap that provides a framework for achieving effective and secure IT integration. “It can help achieve short-term benefits and a longer term target IT capabilities that are equipped to better service business aspirations”, highlights Conway.

The roadmap, and underlying integration plans, should further be based on the IT capabilities of both buyer and seller (or both merger parties). Whilst decision-makers at one end of the table can have relatively good insight in the IT capabilities of their own teams, integration plans commonly falter on the fact that capacities of the ‘other party’ are insufficiently incorporated into planning. “It is essential that IT capabilities of both M&A parties are evaluated early in the process to establish a realistic integration plan. The plan should leverage opportunities and synergies to improve IT service delivery as well as tackling underlying service challenges, such as legacy risk. This may require an IT audit that considers all facets of IT delivery to highlight technical, security, operational, delivery and contract/governance challenges and opportunities”, says Conway. 

Eyeing less visible factors, such as cybersecurity vulnerabilities or the potential for data breaches, is an increasingly important dimension for IT due diligence. The damages associated with cyber breaches have spiralled in recent years, up to an estimated $280 billion globally, and not taking into account cyber vulnerabilities is, given the impact cases can have on reputation and operations, a risk that organisations of all sizes should not be willing to take. “This also includes looking at IT complexities that could be a potential future risk to the business and the deal itself.” 

Conway concludes, “The evolving IT landscape demands that CIOs undertake early technical and security evaluations in order to achieve smooth, effective and on-schedule post M&A IT integration.”