Opinion: Key role for IT in M&A success

The much anticipated economic recovery has set tongues wagging about the prospects of new life returning to the mergers and acquisitions industry.

The much anticipated economic recovery has set tongues wagging about the prospects of new life returning to the mergers and acquisitions industry.

After the strongest annual start for many years, some forecasters predict an upturn in activity as we move through 2011, driven by a spate of forced divestments and opportunities for market consolidation. This year, companies will need to derive value from new assets or shore up the value of old ones and will require technology-based solutions to solve their integration and divestment challenges.

But be warned: technology is a double-edged sword in the M&A battle. On the buy side, technology delivers the promise of post-merger integration, enhancement and optimisation, and underpins much of the wider business benefits and synergies. But approached lightly, it can also be the source of massive budget over-runs and productivity-sapping disruptions.

On the sell side, buyers want a growth story without unnecessary pain. The ability to demonstrate an efficient and effective technology environment can add to the value of a sale; whereas an overly complex or weak IT environment can easily reduce the size of the final bid by introducing extra complexity and risk.

In fact, in the boom years M&A has traditionally done more to destroy value than create it; typically through a lethal mix of overpayment and failure to extract value or deliver synergies in the post-deal environment. And, somewhat justifiably, IT is often vilified as the culprit of this loss of value. But this doesn't have to be the case: instead, technology must be viewed as a key component of any deal-making strategy.

The glue in the value chain

In many cases, technology is the key enabler of the business's core operations, fundamentally intertwined with their ability to deliver results. So merging companies need to be able to identify and understand the key processes and supporting technologies that must be protected to help ensure fluid integration, and maintain long-term value.

This leaves many businesses wondering how best to approach the technology aspects of an acquisition or divestment. Full-scale 'roll-outs' promise less risk post-merger, as organisations take advantage of existing experience and processes. But roll-outs also tend to ignore the underlying value of existing legacy systems, which have been honed to support the slightly different business process, choosing to prioritise global consistency over inherent value.

Increasingly, organisations are opting for a level of integration, where the "best of breed" of each technology environment is adopted throughout the business. Even so, purchasers often end up taking more of a roll-out approach in applying their enterprise systems and then spend a large amount of their initial integration budgets trying to interconnect the supporting systems.

In some instances, companies may opt for a third option and decide to design a completely new IT environment modelled around the best aspects of the merged business, particularly in situations where both parties are running aging systems or in a "merger-of-equals" transaction. A "rip it up and start again" approach allows organisations to take advantage of new technology models (such as cloud computing) to reduce complexity and cost across the business, while refocusing their technology priorities on the areas that create the most value.

The strategy also needs to take into account the future growth plans of the business. For example, building a light footprint model for technology can allow a business to enter new markets rapidly, at low cost and with minimal local support. Likewise, if further acquisitions are on the menu, companies should look to enhance their ability to integrate new assets.

The value of planning

Regardless of the post-merger integration strategy, successful M&A almost always boils down to one key element: planning. The problem is that few organisations put proper emphasis on technology as a necessary component for success in the deal-making process.

Due diligence - the process by which any prospective buyer seeks to gain a better understanding of the target business - is a necessary but often painful stage in the M&A process. Here, the need for speed, the desire to win and the fear of disclosing business-critical information come into direct conflict, leaving little time for a thorough analysis and understanding of the underlying technology environment.

This would be a grave mistake. While it is impossible to separate the real value of an asset from the underlying technology and processes that support it, it is vitally important to understand the role that individual technologies play in value creation.

Curing the post-merger hangover

Equally critical to the success of M&A is the quality of post-merger integration planning. Integrating disparate systems can be complex and fraught with risk. Companies should pay careful attention to the hard costs of integration and factor the impact of these changes into their due diligence and feasibility studies.

More than just the 'simple' cost of systems implementation, the integration must also focus on the training requirements, organisational changes and process redesigns that will be necessary to ensure smooth transition and integration.

Know your buyer's needs

Increasingly, sellers are acknowledging the influence that technology can have on an asset sale, and are taking creative steps to respond and protect shareholder value. One strategy that is growing in popularity is the creation of a two-track approach. This recognises the fact that private equity will often want to view the value of the organisation as a stand-alone business, whereas other corporate suitors will be more concerned about integration scenarios.

The underlying technology of the asset, therefore, can be positioned in the way that is most favourable for each type of suitor, rather than a one-size-fits-all approach that may not reflect the true value of the organisation.

Setting up for success

The key lesson is that IT must be viewed as a strategic component of any M&A transaction: get it wrong on the buy side and you may end up overpaying and under-delivering; get it wrong on the sell side and you will almost certainly reduce the sale price and, ultimately, return for shareholders.

And while no company enters the M&A process consciously wanting to lose, many management teams disadvantage themselves by failing to realise that technology can be either one of the biggest enablers of value creation, or a significant hindrance.

Sunil Harji is a Director within KPMG's Performance & Technology practice, where he leads the firm's transaction related services teams.

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