Accelerate Merger Value With A Pre-Merger IT Diagnostic


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Accelerate Merger Value With A Pre-Merger IT Diagnostic

By A.T. Kearney

Traditionally, merger success has been built on the integration of the front office — including customers, product lines and sales channels — while back-office functions such as finance, HR and IT took a backseat in the drive for merger synergies. Today, however, increased competition and market expectations have raised the stakes for a successful merger. For merger savvy organizations, “above the line” growth must be complemented with “below the line” cost management and efficiency. 

The 90 days preceding change of control in a merger provides a “golden window” of opportunity to capture additional value. Companies that build merger synergies in this timeframe — particularly in information technology — can accelerate value and meet the expectations of the new organization and the market. A pre-merger IT diagnostic is the key to realizing significant operational synergies much earlier in the process (see figure 1).

For example, in our work for a leading chemicals company, IT merger planning was incorporated into the early stages of pre-merger due diligence. The IT element was critical to the success of the merger because the company had to integrate its supply chain and manufacturing systems to support plant closures and the start up of new production. During the IT pre-merger planning process we found that achieving merger synergies would require more time and larger investments, and that immediate savings could be generated by cancelling expensive software contracts that existed in the target organization. The savings from the cancelled software contracts was used to partially fund the additional integration requirements.

Moreover, the company secured key resources and established a software integration team. Prior to close, both companies were able to share detailed system information, which the software integration team used to develop project plans for the day-one transition. While other day-one activities were underway, the software integration team worked in parallel to kick-off the systems integration work. The combination of early planning, IT funding, and access to IT resources allowed the company to realize significant operational synergies four to six months earlier than expected.

A pre-merger IT diagnostic can accelerate merger benefits, reduce IT integration risks, and allow a company to report great news to the Street.

Figure 1 Capitalizing on the Golden Window of Opportunity

Golden Window of Opportunity

Mergers generally represent the execution of a key business strategy, whether it is to build presence in a market, or to leverage expertise. Accommodating a new business strategy usually results in significant shifts in operations — including integrating redundant customer-facing and back-office operations. Mergers tend to focus on operational areas that must be combined to achieve strategic goals of the transaction, while other operational areas, those not seen as core to the merger strategy, are either overlooked or de-prioritized. The months immediately preceding and following merger change of control represent a golden window of opportunity to capture additional value by quickly executing these often overlooked enablers of operational delivery.

Topping the list of overlooked enablers is IT integration, though it is an area that can rapidly expand and enhance overall merger synergies. IT serves not only as a source of merger synergies but also as a key enabler of synergies across other areas of operations. Through effective pre-planning, companies can accelerate merger synergies, reduce risk and increase operational flexibility.

For example, as part of merger pre-planning for a large CPG company, we facilitated a global workshop with IT personnel from both the acquirer and the target company. The workshop allowed us to share findings from our analysis of software procurement, and it was an opportunity for IT team members from both companies to meet, get to know each other and agree on the IT integration strategy.

Jump Start Your Merger

Capturing pre-merger synergies is not a new concept. By now, the “clean room” approach is fairly common as designated teams from both companies, armed with confidentiality agreements, join together early in the merger to share company sensitive information. Yet an A.T. Kearney clean room is unlike any other. First, it takes place three to four months prior to change of control and it is designed to support pre-merger IT planning. We use a series of data management tools, and the IT diagnostic, to assess integration opportunities. In one case, we conducted an IT clean room three months prior to change of control for a global conglomerate. Rather than waiting for regulator and shareholder approval, we jump started the process to realize IT synergies in the pre-merger phase. Companies that follow this approach can increase savings projections by 20 to 30 percent.

Focusing on IT Before the Merger

Fewer than half of all mergers meet the goals set by top management, with IT often blamed for the failures.

In fact, IT issues are the third most cited cause of merger failure, after operating philosophy and management practices. Clearly, as more merger strategies depend on IT to enable synergies in other parts of the organization — including supply chain, manufacturing and logistics — companies must have a comprehensive plan to achieve savings targets and ensure merger success. The challenge is to establish an appropriate balance between investing in IT to support the broader organization while also consolidating IT operations.

In our experience, companies that invest in an IT due diligence diagnostic in the three months prior to change of control capture more merger value. The diagnostic, which takes about six weeks to perform, positions the organization for post-merger success by identifying the tools, technologies, and practices to best enable merger activities and reduce integration risks (see figure 2). An IT pre-merger diagnostic provides two fundamental benefits:

• Timing. After the merger, when resources and time are stretched thin, it is important to have day-one plans so to execute integration strategies immediately. For example, a combined company can expect significant increases in volume for call center and help desk systems immediately after change of control. Potential disasters can be averted with detailed pre-planning that understands the need to accommodate new capacity and personnel requirements.

• Risks. A company that identifies potential IT risks prior to change of control can use the information in constructing the merger deal. For example, it is important to assess integration risk in areas such as customer call centers and messaging (email) applications. The pre-merger audit should also include disaster recovery procedures that highlight the impact of increased volume on disaster recovery service levels, and eventually lead to renegotiation of service level agreements and relocation of recovery facilities.

Figure 2 IT Pre-Merger Diagnostic

The Seven-Step IT Diagnostic

A.T. Kearney’s IT pre-merger diagnostic consists of the following seven steps:

1. Build a baseline of financial costs and drivers (costs, processes and skills). Document the CapEx and OpEx budget for both organizations and standardize budget categories to provide an equal representation and basis for comparison. This baseline is helpful in understanding over- and under-investments, areas of concentration, and similarities and differences in investment strategies.

2. Develop a technology and headcount baseline. Develop a catalog of existing applications and infrastructure, including operations, network, desktop and help desk. The diagnostic also documents and standardizes organization charts for both companies. This baseline is helpful in understanding similarities, differences and complexity in the operating environment.

3. Conduct risk and compatibility assessment. Prioritize high-risk items, develop appropriate mitigation plans, and document concerns of key business and IT leaders. Also, identify key items required for successful integration and determine what it will take to execute.

4. Create day-one plans and identify short term or “quick hit” opportunities. Identify all items that need to be completed for day one, determine what it will take to execute them, and prioritize activities or quick hits that can deliver tangible results quickly.

5. Establish medium- and long-term strategies and action plans. Prioritize and schedule resources and budgets to execute more complex, longer lead-time tasks. Determine strategic investments in application and technology infrastructure to support the new business model.

6. Craft an integration scenario and business case. Develop various integration models to support the merger approach, apply selection criteria to choose the appropriate integration option, and develop business cases for the top options to facilitate final selection.

7. Create an implementation roadmap and determine IT investment requirements. In step seven, all efforts are on stabilizing the business immediately following change of control while opening communications to facilitate change management. Also, key decisions are made about global, regional and country specific integration plans, interdependencies, and how to deal with unexpected issues and costs.

Good News for the Street

The difference between merger success and failure often lies in effectively managing the integration process. Successful integration requires juggling multiple tasks, covering a wide spectrum of issues, and managing expectations of shareholders and analysts — all while keeping an eye on competitors. The market wants to hear good news about synergies, cost efficiency and growth. A pre-merger IT diagnostic can accelerate merger benefits, reduce IT integration risks, and allow a company to report great news to the Street.

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