Let's Make a Deal
- 07 May, 2007 12:44
Reflecting the current global economic turnaround, mergers, acquisitions and divestments (MA&Ds) are on the increase. Enterprises are using MA&D to drive growth, reduce costs and acquire assets, such as new capabilities and brands. And despite the popular myth that MA&D destroys value, evidence shows that most deals are positive for all stakeholders. Success it seems rests on clarity of MA&D goals along with a well thought through approach to integration.
The problem is that MA&D activities represent significant challenges for the CIO and IS organization: they involve really complex integration projects with very tight time frames; they demand lots of very tough decisions and the creation of a new decision-making body; and they produce a great deal of uncertainty for IS staff on each side of the deal. That said, MA&D activities offer golden opportunities for the CIO and IS organization too. Opportunities include: a chance to contribute beyond IT leadership by taking a leadership role in business integration; a chance to support staff growth by giving them an opportunity to develop new capabilities as the post-deal merger progresses; and a chance to improve infrastructure and business applications.
Taking the time to cultivate relationships with the target CIO and IS staff at an early stage will pay off many times over
From a CIO and IS perspective then, preparing for MA&D needs to start long before the deal is announced and preferably long before it is even a glimmer in the M&A team's eyes too.
Plan the integration before the deal is done. The first step is for the CIO to work with the senior business team to define and agree on the appropriate role for him or herself and IS in each of the deal's phases. CIOs who get involved earlier in MA&D deals tend to take a more positive integrative viewpoint, rather than an IT functional one. Beyond providing IT functional leadership in the deal, information-integrator CIOs often provide leadership throughout the whole deal in areas such as project management, measurement and reporting; risk assessment, monitoring, mitigation and reporting; and legal issues, including intellectual property. They also bring together information to help the due-diligence team make decisions that are optimized for the deal as a whole, not just for each functional part.
Page Break
IT is not necessarily a deal breaker in due diligence, but the IS organization is uniquely placed to provide or ratify information across multiple business disciplines. This vantage point is a compelling argument for inclusion in the necessarily limited due-diligence team. Inclusion in the informal and formal phases of due diligence gives the CIO more "runway" to think through and prepare for deals.
Because information is a scarce asset in the early stages of a deal, it should be treated as a key source of value — validated as thoroughly as possible, documented, and stored and shared appropriately. Remember too that in most deals, time is tight. Information has to be gathered and analyzed as efficiently as possible. Most CIOs experienced in MA&D deals have templates for gathering and communicating IT due-diligence information and lists of stakeholders that need to be kept informed.
As well as getting yourself and your team on the inside as soon as possible, it is valuable to push for your counterpart to be included to help identify and think through integration issues and possibilities. In a typical acquisition, the target CIO would not be brought in until quite late in the deal, missing a valuable opportunity to find the buried bodies early enough to do something about them. It is also important to realize that while information is important, relationships can be even more so. Taking the time to cultivate relationships with the target CIO and IS staff at an early stage will pay off many times over.
A traditional M&A timeline suggests that initial discussions and due diligence are a time for learning and deal making, and only once the deal is done should the integration be planned and executed. The fact that information about your counterpart is hard to come by before the deal leads to perilous delay. Waiting to finalize integration plans until after closing the deal ups integration risk considerably. The most experienced MA&D CIOs use both the informal discussions and due-diligence phases to evolve an integration plan that gets more detailed over time as information becomes available.
Execute decisively to minimize uncertainty. It is often said that acquiring professional services businesses is dangerous because the assets "have legs and can walk out the door". However, the same principle is true in all businesses, and you must address staff retention and morale before it is too late. This is doubly true for IS staff, since left-brained technologists tend to be less comfortable with ambiguity and many have extremely portable skills.
The best practice is to identify key staff and take steps to make them comfortable with staying. This includes spending a significant amount of "face time" with IT staff, resolving as much uncertainty for key staff as you can through effective communication, and addressing staff remuneration. Note that these principles apply to all staff from all parties — acquirers, targets and divestments.
Page Break
While all the tasks in the integration seem urgent, CIOs who have experienced many M&A deals consistently identify three standout areas that allow the newly integrated business to function on day one: first is moving staff to a new payroll so they can be paid without interruption; second is providing management with essential information and an integrated view of the business; and third is facilitating communication and collaboration among staff.
Proactively approaching these three areas so that they are right on day one has legal, financial and motivational benefits. In analyzing real M&A disasters, researchers have found that problems tend to occur where there is a lot of complexity, "business is not as usual" and the decision-making units have significant cognitive biases (for example, decisions are biased by inappropriate beliefs or lack of information).
From an IS perspective, the CIO must work fast to reduce complexity and ensure that there is broad input in decision making. Three practices help: governance of IT integration with broad input from both the acquirer and target's business and IS groups; clear communication to avoid misunderstandings and alienation of counterpart IS staff; and including integration projects in the portfolio management process and prioritizing based on enterprise value.
Special circumstances: acquisition targets and divestments. MA&D deals come in many shapes and sizes. The value generated and the challenges faced vary based on the characteristics of the deal, such as relative size; private vs public company ownership; the degree of business, geographic and cultural diversity, and relationships with local vendors; complete vs partial absorption of a company and the associated legal ramifications, and what transitional services need to be in place and for how long; and friendly vs hostile takeover and associated integration challenges.
But two particular types of deals stand out as requiring special mention here. The first is how to survive and thrive if you find yourself as the target CIO, not the acquiring one. And second, how to conduct a divestment if a part of your enterprise is to be cut loose.
Page Break
For every acquirer, there is a target. CIOs in target companies often have less information and less "runway" to prepare for a deal. In many deals, the CIO of the acquirer is on the inside of the deal much earlier than the CIO of the target.
There are a number of behaviours that work well for the CIO of a target organization. They include document and be able to communicate about your processes, human resources and assets; learn as much as possible about your suitor's business strategy, goals and situation; develop a plan and be ready to discuss it with future management; and keep your staff motivated by helping to resolve uncertainty for them and identify related opportunities.
Many M&As also result in divestments, sometimes as a result of monopoly issues or as part of refocusing the business strategy. With a divestment, the "target" is inside the IS organization. All of the approaches to acquiring can be applied to a divestment but in reverse. The most important single element of all this though is again the human one. Computer servers don't care who they work for, but the people that look after them care deeply.
Be Prepared
CIOs need to understand and influence their enterprise's MA&D agenda, create MA&D-ready IS organizations and build MA&D capabilities into their personal toolkit.
In effect, three things distinguish the behaviour of CIOs who thrive in an MA&D rich environment: engaging, preparing and executing earlier than a classic MA&D timetable would suggest; envisaging and promoting the role of the CIO and IS more broadly than the IT functional role; and executing MA&D with a strong bias toward fast, clear decision making and people issues.
Andrew Rowsell-Jones is vice president and research director for Gartner's CIO Executive Programs.