WHAT ABOUTSYSTEMS?

The decisions andproblems facedin integrating

systems during amerger or acquisitionare often a microcosmof the same issuesfaced throughout theorganization. Howev-er, often systems donot get enough atten-tion or resources before, during,or after the merger/acquisition.

THREE AREAS OF FOCUS

We typically divide systemsinto three areas:

• IT (information technology)infrastructure, includinghardware, networking,operating systems, email,telephony, and other organi-zation-wide informationsystems;

• Software, including ERP,accounting, CRM, officeapplications, and manage-ment reporting; and

• Operations, including people,processes, and procedures.

While you clearly need toaddress the IT infrastructure, thefocus of this article is on themerging/conversion of applica-tion software, operations, andmethodologies during the M&Aprocess.

SYSTEM STRATEGIES

It is important to establishyour overall systems strategy forthe merger or acquisition. Whileeach situation is unique, andyour strategy should be some-what dynamic, there are reallyonly a few options:

• Continue to operate eachcompany’s systems as theyare. While minor changes inboth software and opera-

tions may be required,each company relieson the systems cur-rently in place. This istypically the leastexpensive strategyshort-term and easiestto implement.• Continue tooperate independentsystems, but consoli-date at the FinancialStatement and Manage-ment Reporting level.

Each organization continuesrunning their existing sys-tems but additional automa-tion and procedures areimplemented to allow forconsolidated reporting. Useof external reporting tools(Crystal Decisions, FRX, F9)are critical to this approach.We are currently workingwith a client that was recent-ly acquired by a large corpo-ration with dozens of sub-sidiaries operating onvarious systems ranging fromPeachtree to full ERP sys-tems. However, each compa-ny is required to transmit adaily file of general ledgeractivity to the corporateoffice, which is uploaded into

In the rush to complete a merger, the problem ofmerging two different IT systems often gets shortshrift. Applications software, operations, andmethodologies are particularly important to con-sider. Merging two companies will produce endlessproblems if their software isn't compatible. Theauthor shows how to avoid that nightmare. Whatfactors should you consider? How can you steerclear of common mistakes? © 2003 Wiley Periodicals, Inc.

Mike Fitzgerald

Software Systems: The Missing Elementin M&A Planning

featu

reartic

le

13© 2003 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com). DOI 10.1002/jcaf.10131

their Oracle financial systemfor consolidated reporting.

• Migrate one or more compa-nies to an existing system.Typically this means that theacquired or smaller companywould convert to the parentor larger company’s system,but I have seen instanceswhere the opposite held trueas one of the factors in theacquisition decision was get-ting a better system.

• Migrate all companies to anew system. This might be agood strategy when a singlesystem is important, butnone of the existing softwarewill accommodate the com-bined organization. This willtypically be the most expen-sive and potentially mostdisruptive solution short-term, but could be the bestlong-term solution. Lastyear, we got involved with acompany that was runningGreat Plains and acquired asmaller company runningPeachtree 2000. Rather thanconvert just one of the com-panies, they determined thatthey would be better offwaiting and once things set-tled down convert both to anew system, MAS200, whichthey have since done.

Exhibit 1 lists some softwareresources that can help withsome M&A issues.

FACTORS TO CONSIDER INDEVELOPING YOUR M&ASYSTEMS STRATEGY

What strategy makes sensefor you will depend on manyfactors, including:

• Overall Acquisition/MergerStrategy. If the overall M&Astrategy is to leave existingmanagement and operations

in place, then clearly itwould make sense to matchthat and leave existing sys-tems in place as well.

• Cost/Benefit. This soundspretty basic, but it is oftenoverlooked. I have seen situ-ations where companies areliterally spending thousandsof dollars to effectuate a sys-tem change that will havelittle or no benefit.

• Critical Factors. If the merg-er or acquisition will requirea common database (com-bined product line, customerbase, e-commerce presence,purchasing function, etc.),this may force you to con-solidate onto one system.

• Timing. If the merger oracquisition is going to hap-pen fast, you may not havethe luxury of integrating sys-tems. Controlling changeduring an M&A process iscritical. Organizational andcultural changes may domi-nate in the short run, and ifso, leaving existing systemsin place during this periodmay be the wisest strategy.Change control during theM&A process is a criticalcomponent to success.

• Staffing. Effecting systemchanges of any type is diffi-cult and requires excellentplanning and a strong andsupportive staff. Do youhave a strong enough staff atboth ends? The M&Aprocess often creates unex-pected turnover or staffingchanges; do you really wantto make big system changeswith new staff? Will theother demands of the M&Aprocess leave enough timefor the proper attention tosystem changes?

• Scope of Effort. The effortinvolved plays a big part inthe equation. If the company

being acquired is small, hasa small database, and fewpeople involved, making thetransition to another systemmight be a simple transition.

• Condition of Existing Sys-tems. If the systems in placeare producing reliable anduseful results, even if not inthe format or method youare accustomed to, you maybe more likely to leave themin place, particularly during

14 The Journal of Corporate Accounting & Finance

© 2003 Wiley Periodicals, Inc.

Software Resources

MAS90 · MAS200Best Software56 Technology DriveIrvine, CA 92618800.854.3415www.bestsoftware.com

Crystal DecisionsCrystal Decisions, Inc.895 Emerson Street Palo Alto, CA 94301-2413 800.877.2340 www.crystaldecisions.com

FRx Financial ReportingFRx Software Corporation4700 S. Syracuse ParkwayDenver, Colorado 80237303.741.8000www.frxsoft.com

F91444 Alberni St.,Fourth FloorVancouver, British ColumbiaCanada V6G 2Z4800.663.8663www.F9.com

Exhibit 1

the short run. Remember, “Ifit ain’t broke, don’t fix it.”One of our clients last yearacquired an alarm monitor-ing company. They expressedan interest in converting thebilling and accounts receiv-able processing into theirexisting system. While theexisting MAS200 systemcould certainly handle it, theexisting monitoring andbilling software worked verywell and the staff using itwas very experienced withthe software. We suggestedthat they leave the billingand A/R functions on theexisting system and integrateat the General Ledgerlevel instead.

• Similarity ofBusinesses. If the busi-nesses beingmerged/acquired aresimilar (markets, cus-tomer base, products,size, etc.) it is typicallyeasier to merge them togeth-er on one system than if theyare different. Each companyselected their particular sys-tems to meet their particularneeds. If the companies aredifferent it is very rare thatthe other companies systemswill meet their needs as well.We once consulted with acompany in the hotel busi-ness that acquired someunrelated businesses in theconstruction business. Thehotel companies were servic-ing consumers and were veryfocused on daily reporting,while the construction com-panies were servicing largecorporate organizations andwere geared toward longer-term project reporting. Whileit made sense to consolidatesome of the management, itmade little sense to bringtheir systems together at any-

thing but a financial state-ment level.

• Availability of Ad Hoc/Cus-tom Reporting Tools andOpen Databases. If you aremore concerned with resultsthan methods, good customreporting tools (CrystalReports, FRx, F9) and opendatabases will give you theflexibility of utilizing exist-ing systems but generatingcombined financial andmanagement reporting. InExhibit 2 there are some keyissues to consider if you planon consolidating systems atthe Financial or Manage-ment Reporting level.

MISTAKES TO AVOID

Here are some common mis-takes made by others (see Exhib-it 3 for a summary):

• Not enough due diligenceon existing systems. Makeno assumptions about thesystems in the companybeing acquired or merged.We had a distributor client,using the MAS90 software,that acquired a smaller dis-tributor also using theMAS90 system. Theyassumed that it would beeasy to bring the two com-panies’ systems together.What they failed to find outin advance was that thesmaller company beingacquired was only using theaccounting modules andwas processing orders andtracking inventory manually.

• Only the parent organiza-tion’s needs being considered.What might seem like a pret-ty simple request on one endmight have a huge impact onthe other end. Involving stafffrom both organizations willsometimes allow a middleground to be reached thatworks out for both.

• Unreasonable timetables.This is particularly a prob-lem when the smaller oracquired organization doesnot have a dedicated systemstaff or has lost staff duringthe merger/acquisition. Ifthey have never been throughthis type of conversion/con-

solidation, they are proba-bly nervous about theirjobs. But the parent organi-zation, having dedicatedsystems and conversionstaff, pays no attention tothis and sets unreasonabletimetables and demands,almost guaranteeing failure

and lack of commitment. • Lack of understanding of the

operation at the acquired orsubsidiary company. It is hardto create a roadmap if youdon’t know where you arestarting. In fact, it is difficultto even ask the right ques-tions. And if you aren’t famil-iar with the business, culture,and terminology at the otherend, getting the correct infor-mation is going to be diffi-cult. Sometimes it is likespeaking another language,you need a translator. Weworked with a client in aniche market that wasacquired by Dial Soap. Dur-ing the acquisition phase, thefolks on the project team atDial insisted that we providethem pallet level shippingreports. When you are sellingbars of soap to major super-markets, you are probably

January/February 2003 15

© 2003 Wiley Periodicals, Inc.

Make no assumptions about the sys-tems in the company being acquiredor merged.

shipping pallets of an item attime, but when you are sellingniche products, you tend tosell individual boxes or cases.The folks at Dial just did notunderstand this and requiredus to produce a lot of specialreports (much of it done man-ually) just to give them palletlevel reporting even thoughthe pallet quantities we werereporting were generally deci-mals (.10, .25, etc.). What wasironic was that they found outthe hard way that theirreporting system rounded all

of our decimals up to wholenumbers anyway.

• Mismatched resources. Thisis particularly true at themerged or acquired compa-ny, which is typically small-er. While your IT staff mayhave put together a greatproject plan, don’t assume itwill be understood or evenfollowed by other less-knowledgeable staff in thecompany being acquired.They likely will need help,either from your staff or per-haps from an outside organi-

zation. And like any systemconversion, the earlier in theplanning process they areinvolved, the better shot youhave at their full cooperationand success down the road. Iwas working recently with asmall manufacturing compa-ny that was acquired by alarge national corporation.They received an 86-pagedocument detailing the cor-porate financial consolidat-ed reporting system, map-ping documents, filestructure requirements, FTP

16 The Journal of Corporate Accounting & Finance

© 2003 Wiley Periodicals, Inc.

What Issues Should You Consider When Implementing Consolidated Financial Reporting AcrossMerged/Acquired Companies?

• G/L account structures (length, segments, positioning, departments, units) will likely differ. Typically, yourconsolidation system must accommodate the worst-case scenario.

• Even if you have similar account structures, you will have dissimilar G/L chart of accounts numberingacross companies. The same accounts will have different numbers or the same number will be differentaccounts. You will either have to do some renumbering (if your systems allow) or do some significant map-ping in the consolidation system.

• Journal and transaction coding is likely to be different. Most systems use some type of journal and transac-tion coding to allow tracking of like transactions across the database. You might be able to do some map-ping for historical transactions, but you are likely going to need one or more companies to change theircoding going forward.

• Fiscal year-ends and period-ends are likely going to differ. If the merged/acquired company is going tochange their fiscal year-end and/or period closing schedules, you may need to help them figure out how.But even if they do, your historical analysis from that company may be difficult on a month-to-month basis.

• The amount and detail of history may differ between systems. Some smaller systems (Peachtree, Quick-Books) only keep one or two years of detailed G/L history so you may be limited in how far back you will beable to report on a consolidated basis.

• Field sizes differ so do not expect to get a full transaction description from all subsidiary companies.• Budget reporting varies greatly between systems. Some systems allow no budgeting, some allow one budget

at a time and some allow three, five, or more budgets in the system for as many years forward and back asyou want. In some instances it may be necessary to get some of that information from outside the G/L.

• Interim formatting of interchange files may be required, as some systems do not have the flexibility todesign extracts that will exactly meet your formatting needs.

• The staff at the newly acquired/merged company may need some help in implementing this consolidation,particularly if they are smaller.

Exhibit 2

procedures, and projectreporting requirements. Thissmall manufacturer had noIT staff and did not have aclue what the document wasall about. We were hired tobe their IT staff during thisacquisition phase to makesure they had their proce-dures set up right to meetthe consolidationrequirements.

• Trying to do too much toofast. This is true for allaspects of a merger oracquisition. Recognize thatyou can’t do everything atonce and prioritize basedon importance to successand ROI.

• Too much attention toprocess and not enough

common sense. With systemsprofessionals, there is a ten-dency to lose sight of thepurpose and objective andfocus too much on the proj-ect. It is important duringthe M&A process that man-agement and systems folkshave an understanding of theimpact of their plans andrequests so that they canmake real-time adjustmentsusing a little common sense.Remember that the folks inthe company you are acquir-ing or merging have somegood ideas too. Listen tothem and make adjustmentsto your plans.

• The need for “Integrated Sys-tems” is sometimes overstat-ed. While there are signifi-

cant cost and operating bene-fits to truly integrated sys-tems, there are manyinstances where the cost toimplement cannot be justi-fied. This is particularly trueto integrate front-end systemsat a subsidiary into a corpo-rate G/L. Despite our recom-mendations to the contrary,we had a client that oncepaid a programmer close to$20,000 to create an integra-tion that automated a dailygeneral ledger entry that tookan accountant about twominutes a day to process. Ata $20 per hour pay scale, itwill take close to five yearsbefore they start getting areturn on that investment.

SUMMARY

The best strategy typicallyinvolves both short- and long-term plans. With the assumptionthat everyone is preoccupiedwith other M&A related issues,the fewer system changesrequired during the short termthe better. It often makes senseto leave existing systems inplace unless they are producingunreliable or unusable results.However, over the long term youmay identify significant costsavings, operating efficiencies,and reporting improvements thatmight justify some level of sys-tem consolidation in the com-bined organizations.

January/February 2003 17

© 2003 Wiley Periodicals, Inc.

Mistakes to Avoid• Not enough due diligence on existing systems.• Over-emphasis on parent organization’s needs.• Unreasonable timetables.• Unfamiliarity with operations at subsidiary company.• Too much, too fast.• Insufficient resources, particularly at subsidiary.• Too much attention to process.• Not enough common sense.• Over-emphasis on completely “Integrated System.”

Exhibit 3

Mike Fitzgerald has been implementing accounting systems for over 25 years. He got his start with theBurroughs Corporation and then spent two years in the systems group at a large insurance company. Forthe next 14 years, he managed consulting practices first in the Boston office of a National CPA firm, andthen at a large local CPA firm. In 1995, Mr. Fitzgerald started up The Fitzgerald Group, Brockton, MA, whichspecializes in supporting the MAS product line, from Best Software, in mid-sized companies throughoutNew England.