Businesses are increasingly under pressure to deliver value to stakeholders, particularly when undertaking bold initiatives such as mergers, acquisitions or asset disposals. This is the case not only for corporate acquirers but also for private equity (PE) firms, whose strategy is leaning toward add on acquisitions as a means of growing their portfolio companies.
Among the fundamental change brought on by mergers and acquisitions (M&A), management teams often require significant effort in restructuring or streamlining operations of acquired businesses to deliver success in the absence of financial engineering. But given the challenging success rate of M&A activity delivering realised value to organisations in the short and medium term how can those parties involve in M&A actually deliver realised value?
Information Technology (IT) is fast becoming a key lever which management can use to deliver operational benefits, whether in reducing operational costs, entering emerging markets, serving customers in a more profitable manner or scaling their business across multiple geographic regions. With advances in technology and its evolving and significant impact on today’s business models, companies are increasingly pushing the boundaries to remain competitive. IT is one key area to do this and firms need to view IT as an enabler rather than a cost centre and sometime it can even be a profit centre if structured correctly.
Firms can no longer ignore IT or view it as a back-office function if they want to achieve maximum value. IT can be a leading vehicle for growth and value creation if leveraged effectively in transactions. However, despite the considerable upside, executives too often place inadequate focus on IT leading to value erosion or even deal failure.
IT can enable M&A success but doesn’t feature prominently in approach to deals
IT underpins all business functions from human resources (HR) to operations and finance. However, few firms admit to putting a significant emphasis on IT as part of their approach to transactions. The dependency on IT can present a platform for business opportunity through innovation, but can also present risks such as higher costs, lost synergies and unmet deal objectives. At the same time, globalisation is adding a new layer of complexity to business, and IT is helping to navigate these challenges. It is fair to say that IT often proves a more costly and time-consuming element of transactions than was originally anticipated.
Understanding the strategic value of IT to focus efforts and maximise returns
One of the underlying challenges is connecting IT to the strategic drivers behind a transaction. Consolidating product ranges, increasing market share, entering new markets or gaining new customers all rely on a reorganisation of the business to some degree. This is all underpinned by IT. Understanding these strategic drivers set at the management level, will help focus the IT transaction efforts. The alternative is missing the depth or breadth of the IT business needs and negatively impacting the overall strategic objectives.
IT needs to have a seat at the table to deliver real value
It is most common for issues to occur during transactions if IT is not involved early enough in the process. There is a common view in the industry that inaccurate cost estimates and timelines are the main reasons for not bringing IT to the table early enough. Appropriate IT costs need to be planned for and built into the investment case to avoid major cost overruns. The view that IT will be dealt with when as and when it becomes necessary can be a dangerous approach and harm greatly the chances of success.
Critically assessing the skills needed to deliver the deal
While involving IT in all phases of the M&A process, the skill-set required to make IT an integral part of business strategy is not necessarily present in companies’ internal IT teams. Engaging with third-party advisers to aid in pre-deal IT due diligence or the post-transaction phase can often be a feasible solution. The combination of transaction experience coupled with a depth of IT knowledge can lead to a higher rate of deal success, which comes down to the detail, such as engaging with all relevant workstreams and getting accurate costings.
Planning for day one with a view to day one-hundred
IT plays a role in the full cycle of M&A activities — from premerger planning to post-merger integration. Including IT in the due diligence stage can help a company to move from integration to innovation. Moreover, a lack of IT due diligence in the pre-deal stage is linked to value erosion, with many firms finding that more detailed IT due diligence could have prevented value erosion.
Day one business continuity and data migration issues are always the most concerning challenges, but firms should also take into account the necessity to develop and longer-term view of which IT systems need to be upgraded and which need to be replaced entirely. All of these factors are important to consider, as the cost associated with these changes can directly impact the value of the deal and the planned synergies.
IT is critical in laying the groundwork for companies. The strategic rationale behind every deal is unique but all will inevitably be underpinned by IT. When a deal closes, its original prospects could be dramatically altered due to IT. The company may find it cannot expand into new markets or field complaints from customers. If IT is not taken into account, there will inevitably be a direct impact on the value of the deal.
For example, the synergies that have been publicly announced may not be reached in the set time frame, share price could be negatively impacted and the deal will almost certainly exceed costs and budgets. However, as companies gear up for a spate of post-recession M&A activity, some businesses have a new appreciation for the role of the CIO in these deals – a role that can go well beyond just the integration of IT systems.
Sourced from Tony Qui, partner in Operational Transactions Services OTS at EY