The IT Challenges of an M&A Strategy

By Jodi Mardesich

Mergers and acquisitions are a fact of life in corporate America. Companies aiming to increase their business scale, add new products, or become more cost-efficient often rely on mergers and acquisitions as a quick route toward those goals. However, successful mergers and acquisitions rely on information technology to achieve their aims; so it's critical that the IT infrastructure, processes, and strategies of the two companies be united.

CIOs are often left with one of the most challenging roles in a merger: that of bringing two companies under the same IT umbrella. All too often in the M&A world, IT integration is incomplete, delayed, and costly, and this can frustrate business goals and undermine the success of a merger. For a successful IT integration to happen, experts say CIOs must be involved in the process -- before the ink is even dry on the deal.

Last year, mergers and acquisitions announced in the U.S. topped the $1 trillion mark for the first time since 2000, making it the fourth-best deal-making year ever, according to Thomson Financial. This year, Thomson expects mergers and acquisitions activity to surpass $1 trillion again, says Richard J. Peterson, Thomson's senior researcher of capital markets. Forward-thinking CIOs should prepare their organizations for the rigorous process of merging two separately created and managed systems into one smoothly run, efficient unit long before due diligence starts.

One common goal of a merger or acquisition is improving efficiency, which usually entails streamlining organizations and reducing staff. When two IT departments come together in a combined company, the CIO starts with two separate organizations. There are two sets of applications and two physical infrastructures, so the CIO needs to take inventory of what exists and create a plan for how they can be combined. Once the deal is signed, the hard work may be over for the legal or finance department, but it's just started for the IT operation. Integrating staffs, processes, and systems can take months -- or years -- of organizational and technical maneuvering.
 
Gartner analyst Robert Mack says there are six stages to a merger or acquisition. While some may not involve IT, the more involved the CIO is in the decision-making process, the better chance that the merger or acquisition will go smoothly. Here is how a CIO can participate in each stage:

1. Screening Before a merger or acquisition, it's crucial to define the goals for the merged company. It's rare for IT staff to be involved in this process, Mack says, but CIOs can lend their expertise in gauging the cost to convert and run the new business.
2. Initial evaluation As the acquiring company begins evaluating a merger or acquisition target, information about the IT and management processes of the target company is necessary to determine if the potential merger can be successful. But that information can be hard to come by. Due to legal restraints on the companies from having contact before the merger is completed, the only information a CIO is going to be able to access is from public sources.
3. Due diligence As the deal progresses, on-site visits are conducted to gather information. IT must focus on learning about the target's infrastructure, business processes, and applications, as well as the IT organization. Mack recommends that firms with an aggressive M&A strategy have a team in place, poised for action, with a pre-determined process for integration of a target's IT assets. "The foundation of any due diligence is a checklist or questionnaire for organizing a comprehensive evaluation of the targets assets, liabilities, and capabilities," Mack says. The team should also compile a report including assessments and recommendations for organizational and structural changes, as well as an estimated cost in time and resources for the transition.
4. Closing the deal IT should keep business processes in mind as the legal and business staffs finalize the deal. "The more the IT organization can engage all parties in serious, detailed planning, the higher the probability for eventual operational success," Mack says.
5. Executing the merger The most time-consuming and important stage for IT, execution involves organizational tasks such as creating a team, defining schedules and deliverables, resolving staff issues, and maintaining alignment of IT and business goals.
6. Operational review The goal of this stage is to create or improve a repeatable merger and acquisition process, Mack says, so it's advisable to conduct a "post-mortem" in order to identify what did and didn't work pre- and post-merger.

Challenges facing IT integration efforts
The successful union of a combined company's IT applications, infrastructure, and staff is critical to the success of a merger or acquisition, but some common problems stand in the way, according to Forrester analyst Alex Cullen.

Each organization uses its own technology and has crafted its own infrastructure, with distinct operating costs.

"Bringing them together means additive costs, and integrating them means that complexity increases geometrically," Cullen says. CIOs must address the duplication and complexity with the least amount of disruption.

Finding a way to operate and manage the organizations as one is essential to maintaining service quality and controlling costs, Cullen says. Staff reductions are common, but CIOs must find ways to retain necessary staff during the integration, perhaps on a contractual basis, and then create a new, leaner organization.

IT management is usually focused on integration projects and maintaining security and availability, while the business side focuses on revenue and profits. "IT and the business must have both a common vision of the combined company end state and a common agenda for getting to it," Cullen says.

IT's tasks go on long after the ink has dried. "IT's workload mushrooms during due diligence and grows after the deal's close," Cullen says, "until systems integration or transition is complete and old systems shut down."

Mergers and acquisitions often come together quickly, but CIOs can increase the likelihood of success by preparing themselves beforehand. By assessing the current IT environment, making necessary improvements, training staff to handle integration efforts, and developing integration principles and templates for due diligence and planning -- all tasks that will need to be done in the case of a merger or acquisition -- the CIO will have a jump start, Cullen says.
 
Jodi Mardesich writes about business and technology. Her writing has appeared in The New York Times, Fortune, San Jose Mercury News, Salon, Slate, and Yoga Journal.