By the time the board of Australian retailing giant Coles Group recommended Wesfarmers’ AU$21.9 billion takeover bid in June – still to be completed – the company had been in M&A play for over a year. During that time its executives had to steer a steady course; maintaining shareholder value and positioning the business for future growth – setting to one side the knowledge that everything being done today could be unravelled tomorrow by a new owner.

Why read this?

■ How M&A disclosure can undermine reputation and price
■ How CEOs can support the office of the CIO
■ How integrated teamwork can bring transformational change.

Flagged as the largest takeover in Australian corporate history, for the executives running the businesses, the takeover marks the beginning of a new era.
With a new ownership structure (Coles shareholders will end up with 44 per cent of the group, compared to Wesfarmers shareholders 56 per cent) and new management, massive change is expected in the future, not least in information technology where Coles supermarket chain has been long cast by some as the laggard compared to arch rival Woolworths.
Coles is meanwhile midway through a five-year transformation project, much of it underpinned by new IT, expected to deliver millions of dollars’ worth of annual savings. This programme, however, will inevitably be scrutinised as the takeover rolls ahead. Wesfarmers, for example, may seek closer integration with its own information systems. And, now shouldering massive debt to finance the takeover, Wesfarmers will be looking to squeeze savings from every quarter.
Yet even before a suitor had been selected Coles’ information technology found itself in the spotlight’s glare. Huge takeovers require massive amounts of due diligence: the process by which value is assigned to corporations. Teams of professionals are permitted access to vast amounts of confidential information, combing financial statements, probing inventory levels, assessing human capital and poking about in the information systems.

The kimono isn’t so much opened as shredded

While due diligence is supposedly confidential, the process often leaks. A “well-placed source” mentions to someone in the media that perhaps an entity is hoarding too much inventory, or that its information systems are in disarray, and that this means there is a justifiable reason for suitors to lower their bids. At this level of corporate cut and thrust, the barbarians are rarely far from the gates.

"Coles is an iconic Australian company and one that’s always under scrutiny, so media commentary, positive or otherwise, comes with the territory"

John Fletcher

And so it was with Coles. The original barbarian – Kohlberg Kravis Roberts – the American leveraged buyout firm whose bid for RJR Nabisco was immortalised in the best selling book Barbarians at the Gate – was one of the first to throw its hat into the ring for Coles. Other interest came from a range of suitors including Wesfarmers, a private equity bid led by TPG and European buy-out fund Permira.
By early June – when the barbarians were literally crawling over Coles for due diligence – a newspaper article appeared in The Australian Financial Review headlined “Investors shudder at Coles IT bungles”. The article noted that one of the latest “titillations” from due diligence was “allegations of IT cost overruns and implementation delays which are said to be threatening the transformation of Coles supply chain and inhibiting the ability of Coles’ supermarkets to function as efficiently as those of Woolworths.”
Classic spoiler tactics: sow the seeds of doubt regarding the value of the IT, and then carve a dollar off the bid price. CIO Peter Mahler’s picture appeared with the article, captioned as having his “job believed complicated by internecine struggles”.

King Cole

Linda Kennedy, editor of CIO Australia, had this to say in her leader column on the championing CEO.
“If CIO magazine named a ‘Person of the Year’, I have my dead-cert 2007 winner picked – Coles Group CEO John Fletcher. CIOs around Australia should raise a glass and toast him heartily, while their respective CEOs should take note. Why? Because Fletcher championed his CIO, Peter Mahler, and Mahler’s IT team after they took a licking in The Australian Financial Review. In fact, in a letter to the editor, Fletcher suggested that what the writer had portrayed as an “IT bungle” was “an unfair and inaccurate slur on a team of hard-working professionals”.
Next morning over coffee I winced when on page 15 I saw a commentary piece titled “Investors shudder at Coles IT bungles”, accompanied by a photo of Mahler.
Mahler was cited as generally having “done a good job” in paring down and merging what had been siloed systems and moving to packaged software. But then out came the knife. ‘Where there is criticism is that it has taken him too long and has been too expensive . . . ‘In other words they are developing Rolls-Royces to do work capable of being performed by Volkswagens.’
I’d been at a meeting where the issue of CEOs largely not seeing IT as strategic, and now a negative story takes lethal aim at both a massive project and the CIO. It’s not buried back on the ‘Information’ pages, but in the ‘Companies’ section, which CEOs are more likely to read.
The following morning, when sipping coffee and flipping pages of the Fin, there – lo and behold – is a letter from Fletcher with the heading: “Coles IT projects on time and on cost”, and he’s saying the claims in the original story were “without basis”.
The CEO of a mega corporation doesn’t take the dissing of his CIO lying down. In fact, he defends him, supports him and is an advocate on his behalf.
Would your CEO defend you? Well… would he?”

Batting for the CIO

A day later the newspaper ran a letter to the editor from Coles’ CEO John Fletcher, stating: “Your claims of information technology bungles and cost overruns are without basis.” According to CEO Fletcher, the Coles’ technology transformation was on schedule and on cost.
After Coles’ CEO went into bat for his CIO Peter Mahler and the company’s IT team via the letter to the newspaper, both men spoke with CIO reporter Beverley Head about the company’s IT; their take on the controversy and the reality of IT and business alignment – all within the context of a likely M&A.

How would you describe your information systems at present?

Coles CEO John Fletcher: When I came to Coles we were dealing with a maze of disparate systems, which was mostly a legacy of the way the company had grown over time through mergers and acquisitions. Since then we’ve massively re-engineered our IT platforms and are ready to reap substantial business benefits as a result.
Coles CIO Peter Mahler: I took this role for the challenge, and was not disappointed. As John has said, the systems were a legacy of the company’s growth via acquisition. Most of the technology was developed in-house too, which created a lot of problems for the business when it needed new functionality to compete successfully.
The systems today are significantly different; we don’t develop in-house anymore, we buy best practice and refine to suit our needs. We have a strong focus on strategic architecture, so our systems are largely integrated. Systems are modular, [which means] we are flexible in responding to market needs and we don’t have to spend a month trawling through indecipherable code that was written by 50 different people over decades. Less focus on the minutiae of the code means we can focus on engagement with the business.

To what extent does IT influence Coles’ business strategy – to what extent is IT an enabler of change?

Fletcher: IT enables the business strategy. We are fortunate to have a team that is focused on how to support the business in achieving the strategy. This is possible because IT has a seat at the table. Peter is on the executive team and reports directly to me.

"As a leader, I think the key thing when such reports come out is to reassure your team that the business still has faith in their work and direction"

Peter Mahler, CIO, Coles

Mahler: I believe that IT should be intimately involved in the business; we need to understand the business, otherwise how can we ensure that our work enables the business to meet its objectives? The days of getting isolated requests for programming then throwing the code back over the fence for the business to deal with are long gone.
The relationship is much more sophisticated these days, throughout the corporate world. In Coles, technology requirements are defined by the business and IT working together, based on the business’s strategic objectives. On major technology changes, IT is in a unique position to use our inherent process and analysis skills to guide the business in their thinking about managing change. We can help them understand the implications of changes because our experience reaches into all parts of the business. We can see the interactions between elements of the business because we have to understand them in order to implement systems.

How does a fast moving enterprise cope with the nexus that exists between developing new applications for current strategy, while maintaining sufficient agility to be able to cope with any changes that are required by rapidly shifting business conditions?

"It certainly wasn’t because of any failure of IT to deliver their part of transformation – far from it."

John Fletcher, CEO, Coles Group

Fletcher: There’s no denying that we embarked on a massive transformation programme, and I think such programmes are always tweaked and refined as the business requires. Over the course of our transformation programme, we have brought some initiatives forward, and pushed other initiatives back where it made business sense to do so. This does require a degree of flexible thinking by a management team, and I think it’s been a feature of our team that we’ve been able to focus on what’s best for the business when these sort of calls are made.
Mahler: I anticipated in 2002 that things would change over the course of the five-year strategy. It would have been foolish to think otherwise. So we designed the IT strategy very consciously to cover both the long-term strategic requirements and the shorter-term operational requirements. As well as some flex for any surprises, which did come, retailing is a very dynamic environment. And we did all of this within a pressured environment.
It also comes down to constant engagement with the business. Being partners with the business, not just service providers. Our IT people are represented in management teams at all levels. We are there when changes are first raised and discussed, so we have input. We do have to respond to a changing environment, but we have not put ourselves in the position of being the last to know.

There have been press reports that Coles’ IT systems upgrades are behind schedule and over budget. Can you comment?

Fletcher: I think those reports have been a bit mischievous. We’ve made no secret of the fact that we have brought forward some of our transformation initiatives and pushed back others. These have been conscious business decisions based on what was best for Coles. It wasn’t because some transformation initiatives weren’t ready to roll, or because we were struggling with implementation. And it certainly wasn’t because of any failure of IT to deliver their part of transformation – far from it.
Mahler: That coverage was unfortunate and disappointing for an IT team that has done a great job delivering projects to time and budget. As John said, the business has made decisions along the way to amend some timelines according to business needs, but we have always been able to accommodate that. As a leader, I think the key thing when such reports come out is to reassure your team that the business still has faith in their work and direction, and do what you can to keep everyone focused on the main game.

The letter to the editor in response suggested a very close link between IT and the business. There appears to be no culture of blame at Coles – rather a tightly integrated team approach to developing information systems. How has this been arrived at?

Fletcher: Coles is an iconic Australian company and one that’s always under scrutiny, so media commentary, positive or otherwise, comes with the territory. However, with the specific story you mention, I did feel it was important to correct on the record what I felt was inaccurate and unfair reporting about our IT team’s performance.
Mahler: I think that’s been a strength of the Coles team, in that we’ve had a clear business strategy and everyone’s worked together to deliver it. At different times, different areas of the business will be the top priority, but the key to success is that the management team all agrees on the priorities and how their area can best support them. I think the IT team we have here at Coles has been exceptional for its ability to be real business partners and to be flexible as they help deliverthe strategy.

Fast Facts

■ Coles Group is one of Australia’s largest retailers with 3,000 stores
and 165,00 staff.

■ More than 250 initiatives, mainly IT driven, are expected to achieve AU$353m savings in FY08.

■ AU$100m savings were achieved in FY07, exceeding the AU$70m target.

■ The board recommended in July that shareholders accept the AU$22bn offer from Wesfarmers.