M&As offer CIOs a chance to shine

A spate of recent mergers means life is becoming "interesting" for the CIOs at British Airways and Iberia, the Co-op and Somerfield, and EDF and British...

A spate of recent mergers means life is becoming "interesting" for the CIOs at British Airways and Iberia, the Co-op and Somerfield, and EDF and British Energy.

More CIOs are likely to find themselves grappling with similar mergers as weak economic prospects in the US and Europe lead to more consolidation.

"Companies are desperate for growth, so M&A (mergers and acquisitions) is replacing one-off dividends as a company's most likely use of cash. Companies are holding off because they think prices will drop, but CEOs will start feeling the pressure to do deals if profits keep heading south," says Karen Olney, chief European equity strategist at investment bank Merrill Lynch.

During the downturn, the preference for most organisations will be for "bolt-on" deals, where they buy businesses in the same line or markets as them. "This is a low-risk strategy compared to the macho empire-building that goes on when markets are rising, like Time-Warner and AOL," Olney says.

This means that while CIOs can plan on "business as usual" post-deal, they will need to integrate dissimilar business cultures, practices, products and services.

"Mergers and acquisitions are tricky times for CIOs, but they needn't be if they concentrate on getting the financial side of the IT department right," says John Berney, co-founder of IT financial consultancy CIO Plus. Berney is the former CIO of energy firm Scottish and Southern, and has steered the firm's IT department through four acquisitions.

"Most mergers fail," Berney says "but properly handled, IT shouldn't be the whipping boy." He stresses the need for IT directors to understand how shareholder value is created and reported financially.

"If your company is paying 10 times earnings of say £5m, the interest cost alone will be more than £2m," he says.

"The CIO might be able to save £1m of that in the first year, which should make him or her popular in the boardroom."

The first place for IT directors to look for savings and synergies is in the existing contracts of the target company, he says. This should be part of the due diligence enquiry that precedes a takeover. Good areas to explore are software licences up for renewal, outsourced arrangements, and pending projects.

"If you are big enough you should be good enough (to take IT operations in-house)," says Berney.

He believes in speed. "You should know on Day One which projects you'll keep, which to kill and which staff to let go," he says. "It's only fair to tell them as you walk in the door so that you and they can get on with life."

Berney says if a firm's strategy is to grow by acquisition, the CIO should develop a protocol for dealing with the IT due diligence study and subsequent implementation.

"Each (M&A) teaches you different things. One way to increase IT's value to the organisation is to capture that knowledge in a way that you can apply it in future. We learned a lot from the first one we did at Scottish and Southern. By the time we did the fourth, the IT side was pretty slick," he says.

This lays the ground for a second wave of synergies, Berney says. "Once you have taken the low-hanging fruit that you identified in the due diligence you can go for projects that build shareholder value. But never forget the day job."

Few CIOs have the chance to build up the experience to maximise IT's contribution in M&As. Those who build shareholder value at all times are most likely to be with the buyers.

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