Research shows that firms considering mergers or buy-outs should
take careful account of the benefits and hazards involved in
merging IT systems - failure to do will cost them money. David
Brown reports
Boardroom meetings on mergers and acquisitions often spend more
time considering the new corporate logo than issues surrounding
information technology.
They nod through an auditor's assumptions on synergy cost savings
long before the company's senior IT manager has heard of the
proposals and can raise questions about incompatible systems.
Although IT is crucial to the business process of most
organisations, fewer than one third of companies carry out
technical due diligence during the pre-deal phase of a merger or
acquisition.
New research by the Bathwick Group shows that where technical due
diligence is completed it leads to the cancellation or delay of one
fifth of all deals. Savings can be quickly achieved in front-office
systems, but merging back-office systems can often prove difficult
and in some cases this can significantly reduce the cost benefits
of a merger.
With 37,000 merger and acquisition deals agreed worldwide last year
it is probable that thousands that proceed without due diligence
are based on flawed assumptions about the benefits of IT
integration.
In both the UK and US 70% of mergers and acquisitions fail to
achieve the anticipated results, mainly because of the IT problems,
said Hugh Craigie-Halkett, CEO of IT due-diligence consultancy
Vestech. And it swings both ways. While some organisations are
rushing into deals that will never produce the anticipated cost
savings, others are abandoning proposals that could result in
benefits larger than those calculated by the accountants.
"IT due diligence is not just looking at the risks but also the
benefits and savings," said Craigie-Halkett. "It may say that if
you make savings of 20% then business critical operations collapse.
On the other hand, it might be that you could make savings of 30%."
So why do companies that would never dream of proceeding with a
merger or acquisition without a due diligence test of the accounts
and legal liabilities seem to be happy to leave IT considerations
to little more than an accountant's hunch? "The auditors will have
counted the boxes and made a calculation of asset value, so few
financial directors are going to see the benefits of having a bunch
of flat-footed techies crawling all over the company's systems,"
said Craigie-Halkett.
The issue will intensify because the merging of IT departments is
expected to act as a catalyst for consolidation in Europe's
financial services industry, according to analyst firm Datamonitor.
Although IT spending will fall by about 8% (£12.6bn) in the next
five years, merged companies will have to increase their spending
by an average of 15% in the first few years as they struggle to
merge their systems.
Even when successful it is takes about five years before the IT
budget falls to 70% or 80% of the combined pre-merger costs, said
Datamonitor.
Jonathan Steel, chairman of researchers the Bathwick Group, said,
"A lot of these mergers are justified on applying cost savings that
are supposed to fall on IT, but there is a lack of understanding of
the issues at board level.
"The bean counters on the board understand money and that element
of liability, but what they don't understand is technology and the
liability and asset value of IT."
The secrecy surrounding merger and acquisition discussions means
they are usually limited to two or three key players and it is rare
for even an IT director with a seat on the board to know of the
proposals until they are well advanced.
"IT directors should be taking a more positive role and should be
keeping themselves up to date with the way the wind is blowing in
the corporate environment," said Steel.
"The board will say, 'This is what we are going to spend so let's
make it work.' It is up for the IT director to say, 'I can unlock
value and create value, not just cut costs'."
After the news of the merger has sunk in it is only natural for
senior IT managers to become increasingly defensive of their own
positions and of their systems and staff - only one IT director and
one system is likely to survive.
Phil Morris, a director at management consultancy Morgan Chambers,
said, "The senior IT manager needs to be using his influence with
the finance director, or whoever he reports to on the board, to get
as much input into the decision-making process at the earliest
stage possible.
"They need to demonstrate that they can be as discreet, flexible
and entrepreneurial as anyone else on the board."
As soon as the merger is announced senior IT managers must consider
"people risk". They must sit down with their opposite numbers and
identify the crucial IT staff, who they need to retain and how to
achieve that, said Morris. Otherwise the IT director is going to
turn up on the first day to find that the staff needed for the
integration process have all left to take up jobs elsewhere.
In the end, no matter how successful the integration, the costs
will invariably be higher and the savings lower than the board
envisaged. But, with the next merger just around the corner, such
problems are hidden as a one-off cost to convince shareholders that
everything has gone to plan.
Role of IT in mergers and acquisitions
Royal Bank of Scotland and NatWest By the time Royal Bank of
Scotland acquired NatWest it had identified £350m of savings from
IT streamlining over the first three years of the merged
operations.
The calculations based on rationalising back office processing,
telephone technology, and adopting a single IT platform were a
crucial factor in its victory in the take over battle for its much
larger rival.
Although the figures look challenging Royal Bank of Scotland
remains confident that by the end of the 2003 its unified IT
infrastructure will have saved £180m by cutting out duplication and
produced efficiency gains of £170m.
The axe has already fallen on an estimated 80 IT staff at NatWest
Insurance as the back office functions move over the Royal Bank of
Scotland 's Green Flag group.
The bank has a reputation for being ferocious in hunting down cost
savings in its IT systems and has one of the most admired and
leanest operations in the world. Few doubt it will find the savings
it needs.
Lloyds Bank and TSB Integrating the IT systems of
Lloyds Bank and TSB took more than five years from the date of the
merger in October 1995.
In the meantime customers have had different levels of service
depending on which bank they originally used. The new system is
finally in place but migration of all 16 million customers will not
be completed until the end of this year.
Although government restrictions meant the systems could not merge
until 1999 it is clear that the integration has not been easy. The
retail division is using a Unisys-based system, formerly a TSB
platform, while the wholesale side uses Lloyds' IBM-based system.
It is hardly an ideal solution and the savings, if any, are
reportedly "not been as high as they could be".
The bank will be hoping for a smoother, quicker integration if the
proposed merger with Abbey National gets the regulator's go-ahead
later this year.
Glaxo Wellcome and SmithKline Beecham
Pharmaceutical company GlaxoSmithKline believes it will save 17% on
the combined IT budgets of the pre-merger companies by the end of
2003.
Regulatory delays and an earlier failed merger bid meant Glaxo
Wellcome and SmithKline Beecham had an unusually long time in which
to asses the potential savings that could be achieved in IT.
The companies conducted the background analysis with their own IT
staff, assisted by the Boston Consulting Group, which was hired to
give independent advice for the merger as a whole.
Ford Calhoun, chief information officer at GlaxoSmithKline, said,
"Our belief was that the people who would be leading the transition
from two companies to one were best placed to assess what was
achievable, with Boston Consulting Group providing external
perspective and experience to check our proposals against."