It's Not Easy Being Merged
Merging IT systems is clearly costly and full of pitfalls, says Gregory, but even so, it has to be done in order to liberate the value from the merger. He's seen cases where the IT integration costs blew out to double or even three times what was expected; but he says once a merger is completed IT integration has to proceed almost regardless of cost. "That IT project is a one-off cost," he says, "the deal-makers assume that the savings will be an annual saving".
The extra spend, Gregory says, is rationalised using one of two arguments. "[First], if you don't get the IT integrated then you can't achieve the synergy. Or second, if you want to achieve the synergy by headcount reductions then you couldn't sustain that without the IT infrastructure to support that."
Although IT integration is unlikely to put the mockers on a merger, it can significantly affect the perceived value of the organisation to a buyer, even to the extent of deciding whether it is worth making a bid in the first place. In most M&As, Gregory says, "if you understood more about the IT systems then that could be used as a bargaining chip over the purchase price".
Paul Binsted is the vice chairman of investment banking at Salomon Smith Barney, a leading financial adviser on mergers and acquisitions. "Three years ago we acted for the Trust Bank of Tasmania," says Binsted. "We canvassed every bank in Australia to see if they'd buy it."
Interestingly, information technology itself was the reason that the bank was up for sale because there was an insufficient customer base over which to cost effectively spread the cost of technology. "They needed a larger customer base in order to defray the costs," Binsted says. "When we put the bank forward as a merger candidate one item in which there was very keen interest was the banking platform and how that might be integrated. It was only going to be economic if that was not a major expense."
The merger made sense for only some of the banks to which the Trust Bank was offered. "Some potential acquirers were not able to put forward such a good price because of the cost of merging the IT," Binsted says. Clearly it was necessary to conduct a thorough IT due diligence in order to make the M&A proposal financially sensible. And in these instances it was important that the CIOs of both sides were involved. Ultimately, the State Bank of NSW bought Trust Bank.
Due diligence is more than conducting an inventory of platforms, applications, licences and staff - it is about understanding the core competencies of each merging enterprise, the extent to which legacy systems are held together by prayers and promises, and the efficiency levels at which the current information systems run. It is one reason why Binsted is very wary of hostile takeovers, because without a deep level of IT due diligence there may be many nasty integration surprises ahead, which might undermine the envisaged value of the acquisition.
As well as selling Trust Bank, Binsted was the financial adviser on the more recent sale of AMP's GIO business to Suncorp-Metway. "For an insurance company the platform is its factory," he says. "When Suncorp purchased GIO, in working out where cost savings could be made, IT was critical. "There was an enormous effort involved in that and [Suncorp's] Carmel Gray was pivotal."
Although Binsted knows of Gray, Suncorp's general manager of IT, he never actually met her during the merger. He dealt with Peter Johnston, Suncorp's group executive operations and integration. Although in this case the deal seems to have gone smoothly and relatively few surprises were left uncovered by the due diligence process, the CIO was still one step back from the front-line merger managers.
However remote the CIO, at least in the financial services sector the need for IT due diligence is well understood. Chioatto, like Gregory, believes this is less so in other sectors. He says that last year when a Sydney-based utility initiated a takeover, it failed to conduct adequate due diligence and on completion of the merger found it was underlicensed for its software to the tune of around $500,000.
The fundamental problem, Chioatto says, is that CIOs are kept out of the loop pre-merger and then told to "fix the problems" once the merger is a done deal. Worse, the CIO also has to carry the can for the integration costing too much and sapping the value from the takeover. "In the last 24 months I've been involved in five transactions and each time I've been called in post-event, and every time the CIO says they haven't been in the loop," he says. "CIOs need to insist on a seat at the table. When you look at the services sector IT is core."
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