Vendor View: Mergers, Acquisitions and Surprises

Mergers and acquisitions are curious animals. There are vast differences between pre-acquisition expectations and post-acquisition reality. 55% of acquisitions fail to meet cost-saving targets . Only 31% of acquisitions are proven to create value .

Pre-acquisition activities are driven by visionaries and deal-makers. These folk are essential to the deal but they are not renowned for their interests in matters of fine detail. Post-acquisition, sooner or later, the facts prevail.

We were participants before and after a merger involving two very similar businesses in Australia and New Zealand respectively. The businesses are highly information-centric and heavily IT-dependent. Pre-merger investigations proceeded over many weeks; the IT component of these discussions occupied less than one day.

The Australian platform was big, secure, reliable, functionally rich and technologically obsolete. Some said it was expensive to run. The Kiwis promoted their platform with passion and eloquence but little evidentiary support. It was fast, modern, cheap to operate and had been sold to overseas agencies. Maintenance was efficient and new products could be launched in a few days. The merger went forward on the basis of consolidation onto the Kiwi platform.

Post-merger, we were engaged to devise the consolidation works program. On investigation, the Kiwi platform revealed itself to consist of five separate systems, each containing different functionality. The total function set across the five systems did not meet Australian requirements. Maintenance was cheap because testing was performed on production versions. Security did not meet audit parameters.

The Australian dinosaur was retained with reluctance. Over the next few years, after several further expensive studies into consolidation options, all the original platforms are still running. By and large, process and IT synergies have not been achieved. Financially, pre-merger expectations have not been met.

We’ve completed seven IT planning engagements following mergers or acquisitions. We’ve found that business process integration, which almost always depends on IT integration, is under-researched, under-estimated and often undelivered. Consequently the anticipated synergies are not forthcoming, even though the new combined enterprise ends up with similar operations on three or four different platforms.

In five of our seven cases, similar business operations were supported by at least two incompatible legacy platforms, for which the cost and effort of integration was prohibitive. In two of these five, it was decided to consolidate all operations onto one of the platforms. Consolidation was achieved at great expense, disruption and -- in some areas -- frustration at lost functionality. The end results are not entirely satisfactory as the surviving legacy systems are under more pressure than they were before. Most of the anticipated synergies will be achieved, but more slowly and at greater cost than was predicted.

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The remaining three cases will not find their way into the annals of successful IT rationalisations. The stakeholders had, and still have, two unpalatable options.

The first is to replace all the platforms with a brand new one, at great cost and business disruption, but eventually delivering the long-awaited synergies and efficiencies. The second is to leave all the platforms in place, incurring ongoing cost and deferring synergies but avoiding disruption. The second option has been chosen in all three cases, more or less by default. Some mixed options, taking components from various old and new platforms, are theoretically possible but frightening in practice.

These cautionary tales go some way to explaining why cost-savings targets are not usually met, and illustrate what can happen when you sign off before completing the homework.

We’ve observed that mergers and acquisitions pass through six stages. Astute CIO will recognise these stages and can apply the learnings at the end of in this article.

Stage 1: Pre-merger Hype
Each participant extols the virtues of their IT assets, and the colossal benefits of consolidation onto their own platform.

Comments made during this stage may provide some useful guidance to set scope and objectives for the next stage. . .

Stage 2: Due Diligence
IT facilities -- especially data and applications -- are subject to cursory examination. Conceptual integration programs are developed based on sketchy details and personal agendas.

If you’re the CIO and you intend to stick around, this stage is career-defining. Due diligence effort has to be commensurate with the size of the problem.

We were engaged to lead the development of an integration strategy for what was probably Australia’s biggest acquisition, in an IT context, outside the banking sector. The eventual works program cost somewhere between $100 and $200 million, much to the surprise of the management, the board and the shareholders. Pre-acquisition due diligence amounted to less than four person-weeks, so due diligence costs were 0.01% of project costs -- you get what you pay for.

In another case involving two IT-centric businesses delivering web-based services, pre-acquisition due diligence for IT matters was, astonishingly, zero. If a proper due diligence investigation is to be conducted, it should be by independent experts with no stake in the eventual outcome. (If the investigators aren’t expert in the industry sector, they won’t be able to work fast enough).

Stage 3: Early Days
The business climate may be unclear, confused or combative. Key participants, including the CIO, are focussed on personal positioning.

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Stage 4: Reality Dawns
The ExCo realises that the same set of products is being delivered via three different platforms, and that customer data is horribly fragmented. Virtues of each platform are re-extolled. A scientific investigation into process and IT integration is commissioned. Clear, signed-off business directions are an absolutely essential prerequisite to IT investigations. The astute CIO will ensure that terms of reference are adequate for the job in hand and that, as above, the investigators are knowledgeable, independent and have no stake in the eventual outcome.

Stage 5: Reality Bites
Science overcomes pre-merger euphoria. Genuine integration options with realistic costs, benefits and disruption factors are placed on the table. There is much wringing of hands and gnashing of teeth. Some participants decide to make career changes. The CIO is a natural scapegoat as most of the expensive works programs will fall within his or her purview. Stakeholder engagement and independent advice throughout the preceding stages is mission-critical.

Stage 6: Action
This stage consists of anything except the original integration program, which by now has been consigned to the dumpster.

Key Messages for the CIO
In pre-acquisition activity, there are exquisite tensions between getting the deal closed quickly and getting an accurate picture of post-acquisition realities. In our view, the CIO’s job is to ensure that all parties have a well-researched understanding of the post-acquisition IT options, costs and impacts. Regrettably, realism and popularity aren’t always mutually supportive. Our experiences lead us to these suggestions:

• Get in early. Adequate pre-deal due diligence is the key to success.


• Stakeholders are emotional. Rely on independent experts.


• Remember that you have to live with your promises. In a publicly-listed company, this means that pre-merger estimates are monitored by post-merger shareholders.


• The business climate will remain unclear, confused or combative for some time. Stress the importance of stabilising the business context before defining the works program.


• Avoid religious wars. There will be only a small number of genuine integration options.


• Everything always takes longer.

While researching this article, we noted that Cisco and BT include IT integration components within their acquisition methodology. Cisco and BT are serial acquirers with immense experience. Aspiring acquirers could do worse than follow their example.

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Allen Shatten specialises in IT strategies and programs for medium and large enterprises. He also has extensive experience as a vendor of IT services and software products. Allen is the proprietor of Lattice IT, an information technology planning company www.latticeit.com.au.