After that, the newly swelled company needs to convince the City, customers and its own employees that it is business as usual – only bigger and better than before. Technology is clearly key to making this happen. The faster companies can link up their business processes, the faster they can start working as one entity and set about generating more revenue. Shame then that in many cases IT is only consulted late in the day or not at all.
“Too much at the moment can be left until after the decision is made,” says Darin Brumby, group IT director at FirstGroup. Brumby believes that IT should be part of the pre-deal M&A negotiating team, a view backed by experts such as Ross Macallister, associate partner, head of IT governance and management at Atos Consulting. “Regardless of the deal rationale, IT is a fundamental part of the pace of change, therefore the IT director needs to be involved early on, even pre-deal origination,” says Macallister. “Where we see problems is if the IT director isn’t involved – that means there’s a lack of understanding over IT’s impact on shareholder value.”
Realistically, if a deal stacks up from a financial and business perspective, it is unlikely to be scrapped just because the CIO raises an objection. But having an understanding of the IT challenges can certainly affect the price offered for a company.
So if the company does not have a disaster recovery plan or company data is in legacy systems that will be hard to integrate, then this needs to be factored into costings and plans.
In at the start
This is only possible if the CIO is involved early in the decision-making process. “We’re part of the due diligence process because we want to get a head start on integration,” says Paul Martin, group director of information management at aluminium can maker Rexam. “IT integration in terms of M&A can really cripple a company and Rexam is aware that IT needs to be at a table.”
To ensure that everything runs smoothly, the company has a ‘playbook’ which it follows for every acquisition. It sends in a SWAT team of finance, legal, IT, operations and other departments to manage each integration process. “We’re old pros at this,” he says. “Over the last six months we have had four acquisitions, two in the US, one in Europe and one in China. Typically, we have five or more a year.”
At the due diligence stage it will look at the technology infrastructure, types of systems the company has – particularly what it is doing with ERP – and the business applications. It will chart the business processes and work out a strategy and timeline for integrating the systems.
The key, notes Martin, is not to over-complicate an already complex situation. Rexam is a SAP house and the acquired company will be migrated onto the SAP platform. End of story.
“Basically, when we do an acquisition we take that new business and put our platform in place. We migrate them to our desktop suite and then start moving them to SAP. They may have a non-SAP ERP system that runs well, so for a short period of time we will keep that running and just create consolidated reporting. Over time we will integrate into SAP because we have a lot of things embedded in that from a business process point of view.”
"We’re old pros at this. Over the last six months we have had four acquisitions, two in the US, one in Europe and one in China. Typically, we have five or more a year"
Paul Martin, group director of information management, Rexam
During the first phase – that initial 100 days or less – it aims to complete infrastructure integration, wide area networking, managed services, operating systems, telephones and finance. Then it will look at moving business systems. Brumby says there are three stages to this integration. First, you connect up the plumbing such as email and telephones. Then planning – where you make your decisions about SAP, for example, and finally, transformation, where you look at which projects will actually extract benefit for the business. “I have seen and been involved in acquisitions where that big question is left unanswered,” says Brumby. According to a McKinsey study, two-thirds of all deals result in no growth for the first three years after the merger. “For every three mergers and acquisitions, one is done extremely well, one fails and one kind of narrowly succeeds or fails,” says Jim Campbell, director at Diagonal Consulting. Productivity will also suffer for the six to eight months after the deal is signed.
Like Rexam, Computer Associates has grown through acquisition and believes that you need to act fast. “Once you’ve got a model in place, don’t decide how to do it, just do it. It’s not a negotiation point,” says CA’s EMEA CIO Phil Stunt. This ‘adopt and go’ approach allows the company to be able to cross-sell quickly.
Any company entering an acquisition should avoid the temptation to pick the best-of-breed systems from each company. Any advantages gained from picking a superior system will almost certainly be nullified by the time lost in running the beauty parade, warns Stunt. But in a merger situation, there may be political reasons why a beauty pageant is necessary. “In a merger situation, it could be there’s a red system and a blue system. Reds wanted the red and the Blues wanted the blue. It can be a protracted process, then at the end of it you have to integrate between blue and red,” says Stunt.
Mike Denis, ICT director at South London and Maudsley NHS Trust is only too aware of how hard it is to merge companies. He was involved in the merger of three NHS Trusts in 1999, when changes in government policy meant a major reorganisation of mental health services in south London. Rather than simply integrating the three hospitals together, the merger involved creating a whole new business strategy and structure. “There was no acquiring company, so it was really set out so that no one company would dominate – but each of the three organisational heads had different priorities and different sets of legacy systems,” recalls Denis.
Top tips for successful mergers
- Involve IT as early as possible in the deal. The first 100 days are critical for a successful transaction and IT is no exception
- Conduct IT due diligence and articulate the IT implications of the deal
- Align IT strategy with deal rationale so that it can support the deal objectives
- Take a holistic approach that encompasses people, process, organisational models, as well as technology
- Agree clear and measurable IT objectives
- Appoint an integration team to work with both the IT teams of the acquirer and the acquired company
- Set realistic budgets – often companies underestimate the money that needs to be spent on IT to eliminate duplication of cost, and/or enable the growth synergies necessary to realise the value
- Assess the IT risk at each stage
Source: Atos Origin
All three parties knew the merger was on the cards but little preparation work could be done. “Although consultation for the merger ran for about a year, three months before it happened there was still a feeling among a sizeable number of people that things wouldn’t change,” says Denis. “The new trust was set up on April 1st and I was appointed in July. There was a delay just because of the sheer size of it. In retrospect that took too long.” The companies shared information pre-merger but they did not discuss the needs of the new organisation and with a new CEO taking over on day one of the deal, there was a lot to be sorted out and a business strategy to be formalised.
But from an IT perspective the problem was not so much linking the systems together as working out what the new organisation should look like. “Looking back, the needs of the new organisation aren’t the sum of the three other organisations,” he says. “We were prepared to get rid of all of it. We were aiming high and wanted to move forward with what the organisation needed.”
Charting and integrating the IT was challenging as there was little commonality between the companies but this was nothing compared to integrating people into the new structure. “Inevitably, when you come from one of the constituent organisations people look at you with some distrust, so I made the key decision early on to bring in external consultants. I think it was the best thing I could have done. I still had major problems in terms of dissent, but that at least had a degree of objectivity.” The policy was to pick the best people from all three companies, which took three months to complete. “Looking back, mistakes were made. It took too long. We tried to accommodate people into a structure but if I did it again I’d look at appointing the people from the same company. We gave opportunities to people who’d come from other organisations and in some cases they just weren’t the right people for the new structure. We were trying to be fair and we were fair, but I’m not sure that was the best for the organisation or the people concerned,” says Denis.
One of the problems was that Denis could not set up a centralised IT function. “We had to run services out of the old sites for five years. It enabled some people, who hadn’t put their trust in the new organisation and were happy in the old company, to continue unchanged. That proved quite an obstacle because it allowed a local culture to remain.”
At the other end of the spectrum, acquisitions can be relatively pain free if there is little integration of systems or people. Independent TV production group All3Media brings to our screens Richard & Judy and Midsomer Murders among many other well-known programmes.
The group, backed by a private equity company, is formed of many different production companies. When a new company joins the group, it runs separately.
“We have a federal management structure so each company runs itself. We have monthly meetings with companies but we allow the companies to run as before. If the IT systems are up to scratch then they are run on our network,” explains Damien Frost, IT director for All3Media. The more acquisitions you do the easier gets. David Rowling, CIO at Punch Tavern says: “We’re getting quicker and quicker. Last year we did an acquisition within six weeks in total. You can do that if you have relatively open systems such as SQL Server and Business Objects. ” Rowling says it is easy to load data into their systems: “The biggest challenge is keeping everyone motivated,” he says.
Keeping key people
The faster you can identify key staff and offer them ‘golden handcuffs’ to stay, the better. And if you have to let people go, let them know upfront instead of leaving them in limbo.
“Get in there and give them continuity. Tell them that they will be gone in six months and we will give you this much money. If they know they are going they will be much more settled and focused on the job. Although nobody wants to hear they aren’t needed, that’s a lot better than not telling people at all,” says Deloitte’s Chris Digby, partner in consulting.
Communication has to be a priority to minimise the rumour mill. “It sounds trite and clichéd but it’s a truism that communications are key. You need clear schedules and a planned communication from day one,” says Stunt. “But you can say things too early or too late. Getting the balance right is a tricky one.”
And do not forget existing staff. “We found we’d done so much communication to the acquired people that they were better informed than the CA staff and that’s not good either,” adds Stunt.
But what about your own motivation, especially if you are IT head at the company being acquired and therefore in a very vulnerable position? “If you are being acquired, they will tell you that you are merging and if you are buying they will say you are not being merged,” says Steve Anderson, IT partner EMEA at Davis Langdon. It is often the case that the acquiring CIO will stay on, but it is by no means certain.
“It’s usually driven by who’s buying whom, personalities and their influence with the board,” says Anderson.
So even if you are part of the company being acquired, having a strong relationship with your board may swing you the CIO post.
If you know you will be leaving, resist the temptation to be obstructive. “The only way you can behave is being positive and supportive. If you obfuscate, it’s not going to position you well for the long-term,” cautions Digby.
“So, decide whether you’d like to stay or go, but in either case, be very supportive. If you want to go, there may be a better exit package and it’s a huge opportunity to add skills and experience to your CV.” According to US investment firm JP Morgan, M&A activity could account for more than £532 billion by the end of 2006.
It is up to you whether you view that as a threat or an opportunity.