IT deserves a strategic role in merger & acquisition integration

25 April 2017 Consultancy.uk

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.”

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.