How IT can make or break a merger and acquisition deal?

Mergers and acquisitions, intended to generate more value for businesses through inorganic growth, can sometimes have disastrous impact, even eroding the existing value. Think of Microsoft and Nokia merger or America Online and Time Warner!! The deals that were supposed to be game-changers ended up with billions of dollars of write-off and thousands of lay-offs, making each a debacle. When pondering over a merger and acquisition decision, it is therefore important to have a long-term vision of the value creation and be circumspective of the myriad reasons where the deal could possibly fail.

As a sequel to the first blog on the evolving role of IT in M&As, in this bog, I will reflect on various examples to demonstrate how the timing of IT involvement may impact a deal.

Typically, when we talk about the top reasons for merger and acquisition failures, we tend to focus on financial aspects such as overpaying, or overestimating synergies, or lack of strategic plan or insufficient due diligence or even cultural misfit. Rarely do we pin point discord in IT compatibility as a key reason. However, there are a few cautionary tales that unfolded when IT was not given its due diligence. Let’s borrow a fig leaf from the tale of Banco Sadabell and TSB – Lloyds Banking Group mergers.

Deal Background: Spanish bank Banco Sabadell bought TSB from Llyods Banking group in 2015 after it reported bankruptcy and received a government bailout.

Estimated outcome: The deal was estimated to save £160 million a year and access to TSB’s customer base

Impact:

1. Eroding customer confidence: Following the migration of 1.3 billion records, even after three years, TSB’s customers reported a host of major glitches. Online banking customers were locked out of accounts or even saw the accounts of other users.
2. Top Level resignations: The ensuing problems cost TSB’s chief executive Paul Pester his job.
3. Additional penalty cost: An extra £176.4 millions of post-migration costs were added to the TSB deal, including compensation, additional resources required, and the foregoing of income as a result of waived overdraft fees and interest charges.

Reason for the failure: Ineffective integration between TSB and Sabadell systems and delay in movement of TBS’s customers on to a version of Sabadell’s Proteo system even after a three years integration process.
What TSB and Sabadell could have done differently is to gain knowledge of IT compatibility earlier in the process by involving the IT heads during due diligence. Once a deal is finalized and the momentum starts building, there is always a grave risk of stepping back.

Another example from the stable of Llyod banking group is that of Santander and Williams & Glyn. In 2012, when Santander pursuing to acquire Williams & Glyn branch network from Lloyds realized that the complexity of unpicking the existing technology became too much, it had to halt the process leading to a failed merger and acquisition in the banking history.

Ineffective integration is a pretty common issue in mergers and acquisition, though it might not necessarily meet the extreme fate of Sabadell and TSB or Santander and Williams & Glyn. The list of open requirement grows, new SKUs get added, that in turn disrupts the integration schedule pushing out all the predetermined timelines.

Now let’s consider some examples where an appropriate integration practice resulted in increased value of mergers and acquisitions.

Oracle, a seasoned acquirer, consolidated 70 internal systems into a single enterprise-resource-planning (ERP) system for all business functions, including sales and finance from 1999 to 2004. This practice saved the company $1 billion annually. More importantly, it created a platform that supported an ambitious M&A strategy of more than 50 deals from 2005 to 2009. Today, Oracle can integrate most acquisitions within six months.

Another best practice example is that of EMC, the world’s largest data storage equipment manufacturer. EMC has a dedicated IT M&A integration team that comes into play as a rule immediately after signing a letter of intent of mergers and acquisitions. Early IT involvement highlights not only the operational challenges and financial risks but also illuminates potential areas of opportunity.

The key take-away from the above examples is that the IT heads should be a strategic partner to merger and acquisition deals and not considered as a back-office function. Today, IT is a key pillar to support any business functions. Involving the IT teams during due diligence in therefore absolutely critical for a smooth and speedier transition. Here are the key things IT leaders can contribute when involved at the initial stage:

• Identify potential challenges to integration across people, processes and technology
• Identify potential gaps such as lack of scalable architecture, security loopholes, skill and capacity constraints, licence issues etc.
• Establish an end-state IT architecture, with well-defined IT operating model, portfolio and process rationalization, and organizational design
• Develop a clear strategy indicating the systems to be retained without duplication, the data that needs to be migrated, the organizational structures and key performance measurements
• Ensuring that the merged identity can be operational from day one without any disruptions.

Through this blog, my objective was to answer the ‘why’ factor of involving IT at the initial stage. With the above examples, I have hopefully been able to put your doubts, if any, to rest.

Continue reading my next blog on ‘Role of IT in deriving true value in M&As’ to gain more insight on a structured IT approach for a successful merger and acquisition.