Liberation Day
Still, the greatest comfort of all is knowing that the value expected to be liberated by the merger will materialise and not be sucked up by the cost of the integration. "When I look at companies taking over one another, I need details over the time frame and how much money has to be spent integrating companies because they go to the core of whether the deal stacks up financially," Binsted says. "Ideally, you need systems that are adaptable and easy to communicate with, rather than arcane systems."
He believes that far more attention is now paid to IT due diligence than was the case in the past. "I've been doing M&As for 20 years. There are two areas of due diligence that did not receive much attention in the 1990s but where there is now extreme emphasis. One of those is IT and the other is environmental."
SIDEBAR: In Due Time
Avoiding the nasty surprises
One of the hurdles in performing accurate IT due diligence is the lack of an established value yardstick. Ulysses Chioatto, principal of consulting firm SSAMMs, says that between companies, there is no one standard method. "And how do you value the IT projects behind the IT systems?" he asks.
For CFOs involved in performing due diligence, the company balance sheet should provide most of the important value indicators. Not so for the CIO. "If you're going to merge the two organisations," says Chioatto, "then you need to consider the culture, the brand, the locations. And at the heart of that is the IT systems. You need to establish the value of the IT no matter how imperfectly."
There can still be nasty surprises he warns. "If you are doing your due diligence and they tell you that they have a state-of-the-art system and you get in there and they don't, then you may have to revalue the cost of the integration - and that's where it becomes problematic because IT projects often blow out."
Suncorp's IT general manager, Carmel Gray, says that as far as valuing the competency of the organisation she would ideally be looking for a CMM (Capability Maturity Model) Level 3 accreditation, which would ensure that good practices and services had been established. "You need a method of assessing what you have found and then how to bring that into discussions [on the merger] about price and risk," she says.
Getting into the discussions is another hurdle entirely. "There is a greater importance [placed on] technology; but I would question that in putting M&As together, deal-makers put that much effort in [to IT]," PricewaterhouseCoopers partner Sean Gregory says. "The deal team generally involves the investment banks, the CEO and CFO and usually the financial advisers. Then there are lesser roles for the COO and CIO. But as they [the deal team] are assuming that they'll get these value synergies, the CIO and COO should come in to help verify that."
The flip side to mergers and acquisitions is the corporate carve-out, which presents CIOs with a another set of challenges. "There have been a number of deals where companies have been part of a larger group and are sold off. Carve-out situations are the opposite of integration," Gregory says.
The issue facing the CIO is that as part of the carve-off is that they may lose a critical part of the technology. For example, in some businesses the information infrastructure may have been owned and operated by the core business, leaving the carved-out business with applications but not the wherewithal to host those applications.
"The carved-out business may have some of the information technology, but a lot of the infrastructure and staff may reside with the core business, and that could be an issue," Gregory says. Again it is up to the CIO to explore the costs and risks associated in order to ensure that the appropriate value is realised from the carve-out.
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