IT strategy is key to merger success

Alliance Boots minimised risk, New York Stock Exchange has ambitious plans, but whatever your approach, business mergers hinge on systems integration

Mergers and acquisitions are a dominant theme in global corporate news, with the voracious way the big names of the IT industry are absorbing smaller suppliers mirrored across many other sectors.

Gartner vice-president Robert Mack has estimated that between 50% and 70% of the analyst group's corporate clients would be involved in merger and acquisition activity by 2010 as an acquirer, a target or as part of a divestiture.

The justification for these mergers is not simply the acquisition of new markets and new customers it is often about the ability to strip out back-office and IT costs.

The creation of pharmacy retail and wholesale company Alliance Boots two weeks ago was a rare example in which executive directors saw a business case to merge companies, but not, for a considerable period, their IT systems.

The merger of pharmaceutical retailers Alliance UniChem and Boots, which came into force on 31 July, has been designed to minimise disruption to the IT function.

The three IT functions from Boots, Alliance Pharmacies and UniChem - the wholesale arm of Alliance UniChem - were left alone by the merger.

Alliance Boot's executive management team also decided to leave Boots and Alliance UniChem's IT directors - respectively Rob Fraser and Adrian Chen - in their existing roles.

For the foreseeable future, Alliance Boots will continue to run an SAP system for merchandising, procurement and property for the Boots business. It will run Evant Replenishment from software supplier Manhattan Associates as Alliance UniChem's enterprise management and planning system.

Ovum principal analyst David Bradshaw said, "Directors have to look at why they merged in the first place and that has to drive their systems choices.

"If they are seeking to drive down costs overall, they need to look at the financial systems. If they are competing for customers, maybe they should start looking at the customer level of data. If they are combining manufacturing businesses, they have to look at their manufacturing systems."

David Elton, senior IT strategist with PA Consulting Group's management group, said, "It is not immediately obvious that just because there is a merger, there is an economic case for putting the IT systems together. However, I would be surprised to see two large companies not moving towards a single infrastructure over time."

Merging companies will find it easiest to consolidate networks, datacentres and e-mail systems. Business applications are more difficult to consolidate because the choice of application is specific to the processes of the individual business unit.

Elton said, "Where the applications are run by separate business units, there is less of a business case to consolidate those systems."

TowerGroup associate director Chris Skinner said, "In a merger situation, one of the best ways to limit the risk of IT failure is to choose between the existing systems and migrate on to your preferred platform, rather than create something new. If you do not take this approach, you may be missing out on the most straightforward merger efficiencies."

Systems consolidation is made more difficult if the companies involved in a merger have customised their packaged applications.

Bradshaw said, "The biggest nightmare in a takeover is not from the software itself, but from the customisations that have been made of the software. The more people that have messed with the software, the more problems the companies will encounter."

Whether merging companies opt for absorption, standalone systems or best-of-breed architectures, they will have to produce accurate financial reports within the first few months.

Companies can either consolidate their financial systems as their first major IT project, or report the results of their operating companies separately and bring the information together at the end of the process.

For its financial systems, Alliance Boots is continuing to use a Codascisys system for the Alliance UniChem operating company and SAP for its Boots business.

Alliance Boots plans to consolidate both sets of accounts in its Frango performance management system so that it can produce its first set of financial results for the City in November.

Stock exchange merger

Possibly the most ambitious consolidation of systems this year will follow the New York Stock Exchange's expected merger with pan-European stock exchange Euronext.

The two stock exchanges have announced that they will replace three cash trading systems with a single platform by 2009. They will also migrate three derivative trading systems on to a single platform.

The companies' 10 datacentres will be reduced to four and their four networks will be rolled into a single global network.

At the announcement of the merger, New York Stock Exchange chief executive John Thain said, "The numbers have been very thoroughly scrubbed by our technology teams over the past two weeks and we are very confident that we can deliver."

System integration success and failure

Some recent high-profile UK takeovers have focused on IT integration, with differing results.

When Banco Santander published its plans to take over UK bank Abbey in 2004, it revealed that some of the cost savings to be generated by the acquisition would come from moving Abbey's systems on to its own Partenon platform.

Abbey's profitability has improved dramatically since it was taken over by Banco Santander, but other high-profile attempts to consolidate systems following an acquisition have failed to add value.

LCH.Clearnet has written off £45.9m against its consolidation project, which it formally abandoned in July.

LCH.Clearnet was created by the merger of the London Clearing House and Paris-based Clearnet in 2003. The merged company planned to replace about 30 legacy trading systems with a single trading platform based on Java and Oracle technologies.

But the project missed a series of milestones, and by May 2005 work on the new platform was suspended.

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