Information Technology (IT) is no longer a cost center or department for most modern firms; it is the very core of a firm’s strategy. In many cases, it simply is the strategy. In a previous article, we looked at how IT is a key to understanding the potential value drivers in mergers and acquisitions (M&A). It is equally important, however, to appreciate the post-deal operational challenges that may threaten the value of the deal being realized.
Whether you are a corporate M&A investor looking to strengthen your industry position, or representing a private equity firm aiming to expand your portfolio company’s geographic reach or market share, the M&A analysis will have pinpointed both where you can expect to experience synergies with your acquisition, and where you can anticipate issues. The challenge is to ensure that the synergies are indeed realized and the issues minimized.
70-90 percent of mergers fail to bring the value anticipated1. The main reason is, arguably, that the acquirer overestimates the synergies that will be achieved2. Half of the synergies available in a merger are strongly related to IT3. Being able to accurately flag IT issues during the due diligence process is therefore essential. And even more importantly, in order to capture the benefit, you need to realize the value in IT once the merger is completed. Doing this requires you to have both a strong foundation of digital maturity in your organization and a structure that supports delivery excellence in your post-merger activities.
How you then deal with IT issues to some extent depends on the nature of your business. Based on our experience, we have listed below some common themes that are relevant, regardless of whether you represent a private equity-backed growth company or an established industrial firm.
The level of digital maturity reveals how well the acquirer has developed and put in place a mature IT landscape that can be quickly adapted and absorb third-party information. It includes:
If the acquirer does not have these preconditions in place, the chances of being able to absorb large amounts of external information or processes, while continuing to grow, are slim.
While some companies may have a standardized process to conduct due diligence (especially if they have prior experience from it), fewer than 40 percent have a standardized approach to post-merger acquisition4.
Delivery excellence is the necessary corollary to digital maturity. Having an excellent “as-is” model is key when integrating your acquisition, but without robustness in delivery you are unlikely to reach a satisfactory end state. This is arguably the most significant risk for firms engaging in M&A, and potentially the most common value destroyer once a deal has been successfully concluded. The risks of inorganic growth lie as much in the inability to handle the increased scale of the resultant firm as they do in getting the mathematics of the merger right. What you should have in place is:
In order to execute a successful merger, you therefore need to envision the end result of IT early on in the process. And here are five things to consider when doing that:
Laying successful groundwork for integration is not difficult but it does require a lot of planning.