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The Role of Information Technology inMergers and Acquisitions

Introduction

The rationale behind prospective merger/acquisition transactions is theexpectation of specific business benefits such as increased market share,reduced joint operating costs, and a more integrated value chain. Thesepotential Mergers and Acquisitions (M&A)-related benefits are usuallydirectly linked to anticipated synergies including, but not limited to,shared overhead, economies of scale, cross-fertilization and operationalintegration. What is sometimes overlooked or underestimated is thecrucial importance of effective IT integration in achieving anticipatedsynergies. Examples include:

Shared OverheadReduction of IT support costs throughconsolidation of IT platforms

Economies of ScaleShared IT procurement

Cross-fertilizationMining of joint customer database information

Operational IntegrationIntegrated production, forecasting andlogistics systems

Evidence of the importance of IT to achieving M&A related benefits isreflected in numerous market studies over the past 10 years that indicate50% - 70% of merger and acquisition transactions fail to ultimatelycreate incremental shareholder value1. While there are many reasons forthe low rate of success, failed post-merger integration stands out as themost common root cause.

This paper addresses the essential role that we believe IT must play inthe full cycle of M&A activities, from pre-merger integration planningto post-merger integration, with the goal of increasing shareholdervalue from the deal. We define the four basic IT integration models,Preservation, Combination, Consolidation, and Transformationwithin the context of the four pillars of M&A and ways they can bepursued in parallel with both IT and the business.

The four pillars are:

Strategypicking the right model for integration

Due diligencegetting the right information upfront

Post-merger integrationaligning systems and processes

Executioneffectively implementing the merger or acquisition

Deloitte research, data, and practical experience gained from providingconsulting services support our position regarding the importance ofclosely aligning IT and M&A processes to maintain post-transactionmomentum, and to increase the potential of achieving the definedbusiness goals of the transaction.

The Quest to Capture Synergies

Synergy. The word is overused, to be sure, but it has real meaning forcompanies engaging in a merger or acquisition process. Synergy is definedas, a mutually advantageous conjunction or compatibility of distinctbusiness participants or elements (as resources or efforts) 2. Creating theseadvantageous conjunctions and compatibilities can have significant benefitsfor companies pursuing M&A activities. Some potential benefits include:

Increased market share

Expanded technical and management capabilities

Reduced costs through economies of scale

Improved market position

Increased assets

Diversification

Integration along the value chain

These potential M&A benefits are linked to anticipated synergies. However,synergies are meaningless unless their source can be identified, andexpensive to capture if they dont add real economic value to the newlymerged entity. Some synergies are produced by shared overhead throughgreater economies of scale. Others result from cross-fertilization of culturesand knowledge transfer. Still others come from operational integration andsynthesized capabilities. These synergies can add value by producing thebenefits discussed abovebenefits such as reducing costs, increasing marketshareas well as by enabling the newly created entity to enter or create newmarkets, thereby expanding their reach nationally or globally.

These benefits have one thing in common: they are realized through effectiveplanning and execution of pre-and post-merger activitiesespecially theintegration of the merging entities IT processes and systems.

Figure 1 on the following page depicts how properly integrated IT processesand systems can help achieve anticipated synergies post M&A.

1 Bloor Research, Nov. 2007; Deloitte 2000: (Solving the Merger Mystery, Maximizing the Payoff ofMergers & Acquisitions), etc. There are numerous studies that support the statement above. Fewerthan 30% of merging companies improve shareholder value five years after the acquisitions have beencompleted - Does M&A Pay? Robert F. Bruner, Chapter 3, Applied Mergers & Acquisitions, JohnWiley & Sons, 2004

2 Merriam Websters Online Dictionary. http://www.m-w.com/dictionary/synergy.

M&A Consultative Services

By Peter Blatman, Principal, Deloitte Consulting LLP, Mark Bussey, Specialist Leader, Deloitte Consulting LLP,

Jeff Benesch, Senior Manager, Deloitte Consulting LLP

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Failing at the Quest: What Goes Wrong

Through our experience serving multiple companies in a variety of industries,Deloitte has observed that one of the most frequent causes of failure toachieve expected M&A-related benefits is poor planning and execution ofthe merger project. Poor IT integration, especially the integration of disparateIT architectures, can be extremely detrimental.

Applications, data and infrastructure should enable efficient and effectivebusiness processes. Without effective planning and execution of the rightIT integration strategy, the capture of sought after synergies between theacquiring and acquired companies will likely fall short of expectations.

In a recent effort to quantify the relationship between IT integration andM&A success, we conducted a survey of over 50 M&A (including divestitureprojects) transactions from 2005 2007 to test the following hypothesis:

The lack of attention to pre-merger strategy setting, IT due diligence, post-merger IT planning and execution, as well as poor IT/business coordination,are dominant factors in explaining the empirical rate of M&A success.

Our findings were consistent with this hypothesis. Our survey results suggestthat while IT typically has limited impact on the valuation of the deal, earlyinvolvement of IT in due diligence is critical to the effective identification ofsynergies and the effectiveness of subsequent post-merger planning andexecution.

While the data with respect to the role of IT integration and its impact onthe results of M&A transactions is not conclusive, when taken together withanecdotal evidence, the hypothesis is compelling. The available evidence

points to a straightforward approach to M&A deals that will significantlyimprove the odds of achieving the expected benefits.

Getting it Right

This straightforward approach starts with the recognition that IT activitiesmust be closely aligned with business activities during the M&A process. Aswe highlighted earlier, there are four dimensions to an M&A transaction:

Strategy

Due diligence

Post-merger IT integration planning

Execution

These dimensions apply to IT as well as business activities. How wellcompanies navigate each of these dimensions during the M&A processespecially as they apply to IT integrationwill play a large part in

determining whether or not the merger or acquisition ultimately achieves theexpected benefits.

Strategy

Companies vary, of course, in their motivations to pursue M&A deals. Someare pioneers. The reasoning for the merger is to combine two (or more)entities to create a better future. These companies are most likely to have thedesire to seek out synergies as their main motivation for the combination.Others are talent scouts. Often in this scenario, the acquiring, or largerentity, wants to acquire knowledge or capabilities that it doesnt have.These companies also desire to create synergies with the combination. Thenthere are the consolidators. These companies seek mainly operating valuefrom the merger or acquisition. Finally, there are the revenue hunters. Thesecompanies desire operating value from the combination, but their mainmotivation is growthin revenue and in size.

These differing agendas are the dominant drivers of post-merger integrationfocus, complexity and intensity. The more synergies the companies seek,the more complex the post-merger integration will be. Companies who seta high level of ambition/expectation for post-merger synergy must placesignificant focus on external stakeholder management and integrationmanagement as the merger or acquisition progresses.

Whatever the strategy chosen, there are critical success factors that will helpimprove the odds of achieving the expected benefits. They are:

The business must be accountable for setting the IT integration strategy

Make the integration strategy explicitconsolidation, transformation,combination, or preservationeach has specific critical success factors andrisks

Set realistic targets and concrete performance measures for meeting thetargetsas well as consequences for not meeting them

Due Diligence

No matter the merger agenda, due diligence is not an optional process.Performing due diligence, especially with regard to information systemscompatibility and integration issues, is absolutely critical. When correctlyperformed, due diligence can help identify risks and opportunities. The risksinclude sources of instability requiring immediate action. Opportunities toreduce costs, leverage resources or assets in new areas, and to improve ITeffectiveness and increase business flexibility can be identified and pursued.

Moreover, during the due diligence process, decisions or actions that will beneeded before there is any significant progress on the merger or acquisition

can be identified. Expectations can also be set. For example, order-of-magnitude estimates of expected costs and anticipated benefits can bedeveloped, and resources and timeframes required to address risks and issuesand to capitalize on opportunities can be identified. Finally, due diligenceshould confirm how much (or how l ittle) compatibility there is between ITarchitectures and assets of the merging entities.

As with the process of setting the strategy, there are critical success factorsin performing due diligence that will help improve the odds of achieving theexpected benefits. They are:

Form an IT integration team early in the due diligence process

Get the right people on the teamboth internally and externally. Thesepeople should have cross-functional knowledge and experience, and beable to see the big picture going forward

Set a broad due diligence scopefrom assessing the IT environment toassessing risk and identifying potential synergies

Set the baselinethe knowledge base that must be in place to moveforward with the M&A process

The bottom line is that IT due diligence should result in a high level actionplan to mitigate identified risks, resolve key issues, and capitalize on majoropportunities.

Post-Merger Integration PlanningThe Model Makesthe Difference

Once due diligence is finished, the results can be used to push forwardwith post-merger integration planning. When two companies merge, orwhen one acquires the other, there are a myriad of scenarios in which thecombination can occur. In general, there are four models or approachesthat can be applied to post-merger integration of most M&A transactions.

Figure 1: Benefits of Effective Information Technology Integration

Reduce Costs Increase Market Share Enter or Create New Markets

Shared OverheadEliminate duplicate IS role and functionsReduce support costs through standardization

Economies of ScaleCommon technologies, platforms and systemsCombined IT procurement

State-of-the-art scheduling, forecasting oryield management Global systems

Combined electronic delivery Channelinfrastructure

Cross-Fertilization Groupware Intranets WorkflowCustomer databaseData mining

Selling derivative information Channelinnovation

Operational integrationIntegrated operational systems for example,production, forecasting and logistics Workflow engine

Order-entry or customer-facing systemsData warehouse Internet presense

Truly integrated products/services

Synthesis of Capabilities CAD IT technology transferUncommitted product andcustomer models

Cross-industry business models Content/context/conduit

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They are:

ConsolidationCalls for the rapid and efficient conversion of onecompany to the strategy, structure, processes and systems of the acquiringcompany

CombinationMeans selecting the most effective processes, structuresand systems from each company to form an efficient operating model forthe new entity

TransformationEntails synthesizing disparate organizational andtechnology pieces into a new whole

PreservationSupports individual companies or business units in retainingtheir individual capabilities and cultures

The approach a company chooses is dependent on its goals for the newentity. More specifically M&A business objectives usually reflect the acquiringcompanys acquisition profile and business agenda, as discussed in theStrategy section above.

Figure 2 below depicts how the adopted integration approach should matchthe business objectives and acquisition profile.

Key questions to ask when choosing a model include:

What are the main business objectives of the merger or acquisition?e.g.growth, market positioning, cost savings?

What key benefits are expected from the transaction?

What approach to business integration is required to realize thesebenefits?

What approach to IT integration is required to realize these benefits?

In what ways can IT help the business realize its goals for the transaction?

What opportunities exist to use technology to position the business forfuture growth and change?

For each model, the critical success factors, as well as the causes of potentialfailure, are strikingly different. Figure 3 below depicts some of these criticalsuccess factors and potential causes of failure.

In addition to critical success factors for each integration model, there arecritical success factors for the overall integration that will help improve theodds of achieving the expected benefits. They are:

Close integration between the IT integration planning and businessprocess and organization planning

Appoint a full time project manager under an IT integration projectmanagement office, (PMO) linked to a company-wide PMO

Decide the future state of the IT organization, processes, and architecture

Create specific project plans based on which integration strategy is chosen

Create and maintain a broad communication plan that keeps everyone inthe loop

Figure 2: The Approach to match the Acquisition Profile

Reason for Acquisition Approach Consolidation Combination Transformation Preservation

Consolidator Capture efficiencies

Open new geographicmarkets

Open new market

segementsRevenue Hunter Acquire new products

Buy into new distributionchannels

Talent Scout Acquire expertise

Buy new or superiortechnology

Pioneer Develop a new businessmodel

Execution

Each of the four post-merger IT integration approaches has associatedexecution priorities and management issues that must be addressed. Theexecution priorities focus on process and technology integration. Themanagement issues include leadership and cultural blending challenges.

For example, with a consolidation approach to IT integration, the focusis on risk management for process issues and on data conversion fortechnology issues. With a combination approach, the process focus is onsystems evaluation and the technology focus is on systems integration.With a transformation approach, the process emphasis is on innovation;the technology emphasis is on the overall IT architecture. Finally, with apreservation approach, stakeholder management is the focal point of processissues, while communication between business units is key for technologyconcerns.

Management issues can be challenging, even in the smoothest of M&Atransactions. The blending of organizations and cultures is not easy becauseno matter the industry, no two companies evolve in quite the same manner.Each will each have different leadership styles and cultures. To facilitatethe transition to the newly-merged entity, each post-merger IT integrationapproach will have to deal with different management and cultural issues .

For example, the typical leadership style in a consolidation approach toIT integration is an authoritarian approach that imposes the will of theacquiring company onto the company being acquired. The culture of theacquiring company is also imposed (as much as possible) on the new entity.In a combination approach, the leadership is more collegial and there is a

knitting together of corporate cultures. In a transformation approach, thereis often inspirational leadership that seeks out new ideas and synergiesmore than with any of the other approaches. There is often a new corporateculture that is sculpted from select parts of the prior cultures. With apreservation approach, the leadership style is most effectively described asrespectful, with leaders of both companies retaining autonomy and with thecultures of both companies remaining largely unchanged.

Why all the discussion about leadership styles and process issues? Becausethese issues directly affect how smoothly (or not) the post-merger ITintegration will proceed.

As with the other three dimensions of post-merger success, there are criticalsuccess factors for the execution of IT integration that will help improve theodds of achieving the expected benefits. They are:

Execute the post-merger integration in a timely manner. The longer ittakes, the lower the realized value from the transaction

Develop, track and report on project performance metrics

Measure and publish realized benefits. This will establish goodwill in thenewly merged entity going forward

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Authors and Contacts:

Peter Blatman, PrincipalDeloitte Consulting LLP

415-783-6169pblatman@deloitte.com

Mark Bussey, Specialist LeaderDeloitte Consulting LLP

469-417-3566

mbussey@deloitte.com

Jeff Benesch, Senior ManagerDeloitte Consulting LLP

408-704-4886jeffbenesch@deloitte.com

Figure 3: Success Factors and causes of M&A Failure

Consolidation Combination Transformation Preservation

Success Factors Detailed implementation plans

Rapid systems conversion

Uniform and consistentimplementation

True collaboration

Commitment to preservingthe most valuable parts ofboth organizations

Proficiency at synthesizingdisparate systems/technologies

Compelling vision of neworganization

Unwavering focus andcommitted leadership

Substantial expertise inchange management

Protection of autonomy;prevention of chaos

Restrained managementinvolvement

Rigorous operationalmonitoring

Causes of Failure Sqandering exploitable assets

Alienating key people

Overlooking possible synergies

Long-drawn-out assessment

exercisesUnresolved issues

Inefficient/complex patchworkof systems

Organizational resistance to

changeUnrealistic goals

Failing to balance long-termbenefits

Excessive inefficiency

Unneccessary duplication

Missed cost and operationalsynergies

Wrapping it Up

The M&A transaction process is not easy. It is fraught with pitfalls androadblocks to achieving the expected benefits that must be carefullynavigated and overcome with skill and care to achieve the goal of one new,(hopefully) improved organization from two separate, distinctly differentcompanies. While there are many hurdles that must be surmounted in anyM&A transaction, the one that most frequently poses a challenge is how toplan for and execute the post-merger IT systems integration. Consequently,proper selection and execution of a post-close IT integration plan in atimely manner can help achieve any anticipated synergies from the M&Atransaction. Our experience indicates that the better the post-close planningand execution, the better to overall merger results, and that a key attributeto effective post-close integration is a high level of integration between ITand the business.

To achieve this, effective IT due diligence and speed of integration are critical.Any post-merger integration approach chosen should be guided by the M&Abusiness objectives, and the selected approach (consolidation, combination,transformation, or preservation) should match the business objectives andacquisition profile. Each of these approaches has its individual characteristics,success factors, and potential causes of failure and should be selected witha full understanding of which approach most effectively fits the particularM&A transaction and which would work well with the IT integration issuesuncovered in the due diligence process. Each approach should be executedin a timely manner to realize the expected value from the transactionand benefits should be tracked and championed throughout the new

organization to promote acceptance of transition to the new culture.

To improve the odds of achieving the expected benefits, it is very importantto consider the four pillars of M&A:

Set the strategydevelop and carry out the IT and business integrationstrategies in parallel

Dont skip on the due diligenceform an IT integration team early on andcast a broad net to identify potential issues and roadblocks to success

Plan the post-merger IT integrationclosely align IT integration planningand execution with business planning and execution

Execute the post-close IT integration speedilyexecute fast and nimbly.The longer it takes, the lower the realized value

Following this path wont ensure that the expected benefits are achievednothing is guaranteed. However, proper planning and execution of post-merger IT integration can make the process easier and more effective toincrease the likelihood of achieving the expected benefits in the long run.Thats a win-win deal.

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