According to the Boston Consulting Group, between 1992 and 2006 around 58.3 per cent of all mergers and acquisitions (M&As) not only failed to create shareholder value but actually destroyed it, resulting in a net loss of 1.2 per cent across all transactions.
One might question why businesses continue to regard M&As with favour and, from the CIO perspective, how does an M&A impact upon the CIO remit?
Typically one of the claimed benefits of M&A activity is the reduction of back-office costs. The theory is that by combining the systems of two participating companies there should be significant savings in infrastructure and headcount.
Yet the numbers above seem to contradict that theory.
The event was held only two days after HMRC admitted losing 25 million records. Of course, the creation of the behemoth that is HMRC saw the merger of two very distinct cultures and organisations and this was followed by heavy duty outsourcing contracts. CIO attendees suggested that even more insidious to the success of an M&A on such a scale is the fear of job losses and unclear changes to individual life plans.
Must M&As end in cultural and people conflict or can they deliver the value that strategic business planning suggests they should?
All attendees agreed that it’s essential to get to know the pros and cons of different M&A models and the consequent cultural and economic implications of those integration models. That is, establish how as a CIO he or she can provide excellent ROI to the business – whatever the business’ rationale is for merging, acquiring or disposing.
Gordon Lovell-Read, CIO, Siemens
Gordon Lovell-Read, CIO of Siemens, has vast experience of mergers, acquisitions and disposals.
“There is no blueprint. I’ve been involved in 30 acquisitions, some friendly and some unfriendly. Fortunately there has been only one case where I was asked to leave the premises of the company we were actually acquiring. Most issues can be spotted early on in the diligence phase, so CIOs should elbow in as soon as possible. Early involvement will also determine whether the process should be a ‘light’ or ‘heavy’ integration.
Lightweight integration followed by heavy integration can really sweat the assets but it’s a much harder process. Equally, if you start a heavy integration then you need to finish it. The alternative is two lots of costs, departments and systems.”
“Determine how the CIO use potentially high integration costs to help negotiate the purchase price down.... that’s a sure winner with shareholders looking for added value. The City tends to give a merged company only 100 days to deliver tangible benefits, so the CIO can really improve his stock and influence by ensuring data integartion costs are factored in accurately and by talking to the shareholder’s wallet,” said Lovell-Read.
Sian Miller, CIO, ABN Amro Investments
ABN Amro was recently acquired by RBoS and Santander Totta and Sian Miller says staff are suffering from uncertainty.
“We’ve grown by the acquisition of many businesses. The problem is, many people, even now, will describe themselves as A or Bs, rather than ABN Amro.
The key thing is any merger or acquisition will have a deep impact on the people. There are divisions of culture and senior people need to see the impacts not just for themselves and how their lives will pan out but the same impacts on their teams.
In some ways, nothing changes immediately but at the same time, everything changes. Worlds are turned upside down.
At the moment there’s usually somebody at my door saying how vulnerable they feel and asking me what do I think will happen next.”
Ben Wishart, group CIO, Whitbread Group
Ben Wishart, group CIO of Whitbread Group is another M&A veteran having seen Whitbread first acquire lots of hotels and then dispose of other leisure businesses.
“Heavy, deep integration. Always. We have that working model and it’s relatively simple.
Similarly, we’ve done lots of disposals and they’re relatively easy. In some ways, any problems there are really those of the acquirer.
Interestingly, where we are finding new complexities is in building a series of joint ventures around the world.
In a business era characterised by far more, not fewer external relationships, joint ventures are neither an acquisition nor disposal.
That makes these relationships a different challenge entirely.”
Nick Masterson Jones, CIO, VocaLink
Nick Masterton Jones, currently overseeing a merger at VocaLink, is similarly clear that the focus is people and culture.
“For me the culture clash isn’t so exotic as multinational cultures but simply Yorkshire versus home counties. We’ve now gone for heavy cultural integration to create one company culture and I’m not ashamed to say I’m struggling. It’s extremely difficult and sharing experiences with others who’ve been through it is invaluable. Both companies have long-serving employees and they are very good at what they do. How to change cultures without losing really good people is tough.”
IT left out in cold
According to research sponsored by Informatica and conducted by Bloor Research and the NCC – Mergers and acquisitions and their IT impact – only 21 per cent of companies surveyed feel that consideration of IT issues had been given appropriate weight in the decision to perform a merger or acquisition.
More than 50 per cent of companies were not able to provide any integration within three months of acquisitions so it was impossible to provide consolidated financial reporting. Yet, the City expects to see benefits of an M&A within 100 days of completion.
More than 33 per cent of companies did not expect to complete integration for more than two years or could not say when they would complete such integration.
Poor documentation of systems, a lack of metadata, diverse and uncontrolled data sources and poor data quality were also reported as significant problems by more than 50 per cent of companies. Poor planning of the IT integration process was cited as a significant problem by 54 per cent of respondents.
Bloor says it is clear from the comments made by survey respondents – just under 60 CIOs and senior decision makers – that IT does not feel it is properly consulted either before or during the M&A process in most cases.
Second, the business does not understand the problems that can arise from poor documentation, lack of metadata and other issues that ought to be addressed prior to or in the early stages of integration.
Consequently, says Bloor, it is too easy for the business to underestimate the work to be done and the costs and time involved. Many businesses simply don’t have an understanding of IT and understandably, will make assumptions about how easy it is to integrate systems from separate organisations. Moreover, says Bloor, this is ‘one of those things you don’t know you don’t know’ and it may never occur to business people they should consult with IT over the complexities of integration and timescales.