The value of companies' IT is coming under the
microscope in potential takeovers, and expert opinions differ about
how it should be assessed.
Many IT directors could be asked some tougher-than-usual
questions by the board this year about their IT cost base and
outsourcing arrangements.
The grilling is likely to be driven by the number of corporate
raiders seeking out UK takeover targets after a busy 2005, which
saw European merger and acquisition activity at its highest level
for five years.
With firms looking to maximise value to shareholders in part as
a defensive measure against possible takeover, the value being
derived from IT is coming under increasing scrutiny by chief
financial officers and chief executives alike.
And it is not just IT cost-cutting that is on the agenda, but
how strategic choices about a firm's technology arrangements can
increase the share price of a prospective takeover target.
Last year, overseas firms spent almost £50bn on acquiring UK
businesses - up from just under £30bn a year earlier. The number of
deals was up 31%. UK firms were similarly busy shopping in Europe,
spending £30.9bn on acquisitions, up from the previous year's
£18.7bn.
Among the major pan-European deals was the £7bn acquisition by
France's Pernod Ricard of drinks group Allied Domecq, and
Saint-Gobain's £3.9bn hostile bid for BPB, the UK building
materials manufacturer.
This year the pace has hotted up still further on the continent,
with the first six weeks of 2006 seeing the volume of merger and
acquisition deals in Europe reach £88bn - almost three times the
number recorded in the same period last year. This includes a
£12.8bn hostile bid by Mittal Steel for rival steel group Arcelor
and a £6.2bn offer by banking group BNP Paribas for Italy's Banca
Nazionale del Lavoro.
Consultancy Ernst & Young says this growth in activity is
pushing UK firms to review every aspect of their competitiveness -
and the value of a firm's IT assets is climbing up the boardroom
agenda. Giles Watkins, who is in charge of IT due diligence
services for Ernst & Young, told Computer Weekly that in the
past year there had been an increasing focus by would-be buyers on
their likely IT systems inheritance - and on how to derive maximum
benefit from the technology mix acquired once a deal is signed.
Ernst & Young says it has been pushing the IT agenda for
five or six years, but it is only now that firms are taking a
detailed look at IT as a key factor.
With thinking around the subject still in its infancy, there are
several different schools of thought about just how to assess the
value of a firm's technology.
Chris Digby, a partner at global consultancy Deloitte, warned in
last week's Computer Weekly that the impact of IT in a deal varies
enormously.
He said, "If the sale is likely to attract commercial trade
buyers, issues such as integration with the buyer's IT systems will
be high on the agenda because although this involves additional
one-off costs, there should also be considerable operational and
back-office savings following the integration. But if the buyer is
more interested in grooming the company for future sale,
integration is less likely to be important. In this case, working,
self-contained IT operations could be more attractive."
But Robert Morgan, director of specialist outsourcing
consultancy Morgan Chambers, emphasises a different set of
variables.
"One critical question about a potential takeover target is what
its fixed IT cost base represents," he said. "The average will vary
enormously - depending on the target firm's industry sector, it can
be anywhere between 4% and 12%. This will often give a broad
indication of the health of a firm, since undue expenditure will
allow huge consolidation savings, while evidence of too little will
ring alarm bells on the state of its interrelated business
processes and drive down the price.
"However, another crucial part of the equation is outsourcing.
Potential target firms are only now waking up to the value of
outsourcing relative to their overall value. I would argue that
being significantly outsourced can really add to your corporate
value."
Morgan's argument is that, because outsourcers are professional
integrators and rationalisers of business processes, setting up a
strong outsourcing relationship is a great way for firms to have a
stronger hand in the face of a hostile takeover bid.
"The advantage for acquirers is that, if a target is not
outsourced, they can bring in a trusted outsourcer to undertake a
consolidation plan in a fixed time and at a guaranteed lower
price," he said. "This iron-clad commitment laid before the
analysts instils confidence in the value of the deal which will be
reflected in the acquirer's stock price."
Morgan adds, "But this can be used defensively too. What the
institutional investors want to hear when a hostile takeover is
being proposed is that the target's executive can radically reduce
costs without business risk. A costed, guaranteed outsourcing
programme sends out a powerful message that can push up the share
price of a takeover target - avoiding the takeover."
Morgan estimates that a quarter of outsourcing deals are now
being done for strategic purposes, but says awareness of the
strategic potential of outsourcing still has a way to go. "Chief
executives and chief financial officers are starting to see the
possibilities of using outsourcing for strategic positioning, with
cost savings as a secondary factor, but it is a harder sell to
CIOs," he said.
Outsourcing as a defensive measure
One major UK-based financial services company used outsourcing
to rationalise its business and cut overheads in a bid to prevent a
hostile takeover bid when its share price slipped, according to
Morgan Chambers.
After a period of growth through acquisition, the group had
become unwieldy and its IT fixed costs had risen to 14%. It decided
to embark on a major IT outsourcing programme which involved
integrating many of its recently acquired businesses.
Once the programme was completed, it had cut the number of
applications it was using from 114 to 26, slashed its IT costs by
41% – and effectively warded off the threat of a hostile
takeover.