How to make an IT merger work

For the true value of a corporate acquisition to be realised, the IT director must be involved in the takeover bid as early as possible.

When faced with a merger or acquisition the single most important task for IT is to get involved in the bid as early as possible. That was the message for IT directors at last month's CW500 club meeting.

"You need to do a lot of work early in the due diligence stage, when the target has been identified, to understand both the value and the risk of the merger or acquisition," says Chris Digby, partner in consulting at Deloitte, who specialises in advising on M&As.

The state of IT at the target company can significantly affect both the final cost of the M&A and the time required to complete the IT and business process integration at the new company.

In the current economic climate, says Digby, as well as the traditional corporate M&A activity, where one company buys another, there is also an increasing amount of activity by the venture capital and private equity houses making financial acquisitions of companies, buying them from other VC houses or taking them private either in whole, or in part as a corporate demerger.

In such cases there will be no challenge of integrating disparate IT architectures - although the demerging company's IT may need to be severed from the original company's - but the VCs will need to get a very clear, and early, picture of exactly what the IT component of the acquisition will cost them.

In one such acquisition, says Digby, the company had made little provision for IT disaster recovery, as it was comfortable to operate on a high-risk basis. But the VC wanted to take the company to the high end of the financial services market, where the IT has to be extremely reliable.

"The VC had to allow enough capital in the acquisition to fund a disaster recovery upgrade," says Digby.

Sometimes, IT can even be a deal breaker. "One VC I know was keen to buy a European manufacturing company that was implementing SAP at the time," says Digby.

"But the more we looked at the implementation the greater the forward provision the VC was going to have to make to cover the cost of it. In the end, the VC walked away from the acquisition."

But a single-company financial acquisition by a VC is straightforward compared with the challenge of making two companies work as one: and two IT functions work as one.

"There is no one-size-fits-all integration solution," says Digby. "It depends where each IT department is in its refresh/investment cycle; what business model each is supporting and whether that is going to change post-merger; what new IT capability is required for the new company; and so on."

Sometimes a temporary fix may be the best option initially. When one European industrial company acquired a division from another company, it was in the process of a corporate-wide SAP implementation and had just started to roll out to its own chemicals division.

Pausing the roll-out while the acquired company was integrated would have been significantly disruptive, says the company's IT M&A manager, and lead to higher implementation costs.

"Because IT was involved early in the acquisition process, we flagged the issue at due diligence and made it a condition of the acquisition that the selling company would continue to run its former chemical division's IT, on a third-party basis, until we were ready to move them to our own, new SAP system," he says.

When it comes to integrating two corporate IT functions there are several options available, from the acquiring company migrating the acquired company's IT across to its own platform, or vice versa, to outsourcing the whole lot, to cherry-picking the best systems from both companies.

This last, mix-and-match option is seen as the hardest to pull off successfully, and it is what Jane Kimberlin, IT director at Spirit Group, one of the UK's largest managed pub operators, achieved when Spirit acquired Scottish and Newcastle Retail (SNR).

"Usually IT M&A integration is a case of 'We'll do IT your way or our way', but we went for the mix-and-match method: the most challenging and scary," says Kimberlin.

Kimberlin also faced the added complication that Spirit's IT had been outsourced, and she wanted to return it in-house, as well as integrate it with SNR's IT. That meant that as well as negotiating contract termination, she also had to sort out IT premises, equipment and staff.

She moved Spirit's IT off mainframe to midrange, as at SNR, relocated SNR's IT base from Northampton to new premises in Burton-on-Trent where Spirit is based, took back some of Spirit's original IT staff from the outsourcer, and hired new staff as well.

Mergers are always disconcerting for staff and their issues need to be addressed promptly, says Kimberlin.

"You must pick your teams fast. Take away or try to minimise their worries about their post-merger jobs and they will jump through hoops for you. But anyone who is anti the new set-up needs to go as soon as possible."

Kimberlin also had to sort out which of the hundred-plus applications to keep.

"We asked each business department which system most suited the way we needed to work going forward," says Kimberlin.

Finally, she took the opportunity of the merger to implement a new Epos system for the whole company.

"A merger is a great opportunity to get changes through," she says. "There is no better time and there is usually some money available for investment."

Integrating IT through a merger can be highly demanding - "Put your personal life on hold," says Kimberlin - but, she says, it is also "the most exciting thing I do."

Golden rules for IT merger success

• IT must be involved in due diligence as early as possible, with a senior team to assess the value and risk of the IT at the target company.
• The board of the acquiring company must be aware that IT at the target can significantly affect the final cost and value of the acquisition.
• Board-level IT directors are far better placed to ensure a successful IT merger.
• Act fast: due diligence takes place in days, not months.
• Check all supplier contracts for termination and change control clauses to assess dependency, criticality and exposure.
• Ensure neither you nor the target is under-licensed.
• Decide whether you will migrate the acquired IT, outsource it, insource it, replace both/some or cherry-pick systems from both companies.
• Be aware that existing, business-critical systems may not scale sufficiently post-merger.
• If IT premises at the new company are further than 90 minutes travelling time, staff there will probably need to relocate, or leave.
• Integration is a major project and needs a first-class programme office to run it from.
• Hire specialist advisers both pre and post merger to exploit their experience and expertise.
• Sort out staffing issues quickly. Pick the team to stay, and lose staff who will not accept the integration. Reassure those staying and recompense those being let go.
• Scrutinise and, if necessary, redesign business processes underlying IT to suit the merged organisation.
• Data integrity will be a problem when companies and systems merge.
• Go for quick wins, such as merging e-mail systems, to demonstrate IT integration is happening.
• Decide whether to continue with pre-merger IT projects or reschedule or pause them until integration is complete.
• If opting for temporary fixes, such as buying IT services from third parties or the selling company, factor the cost into the bid.
• Exploit the all-change climate to implement new systems or refresh existing ones.