A Perfect Match: IT’s Role in Mergers and Acquisitions

The following article was reprinted from the February 2003 issue of Smart Business, CSC’s United Kingdom-based business publication.

By Linda Wooldridge

The subject of mergers, acquisitions and divestitures generates enormous passion in everyone who has been through them: what worked, what didn’t work, the pressures, the need for speed, the turmoil when several deals overlap, the disturbance to the business, the loss of key people and the nightmare possibility that these devices for creating business value might end up destroying it instead.

And failure is very common. Every set of statistics that you come across dwells gloomily on the fact that success is rare and failure can be catastrophically expensive. The financial press is full of schadenfreude articles about mergers and acquisitions (M&As) that fail to live up to the market’s expectations. The inevitability of later divestiture at a loss is apparently accepted without question as just a fact of life.

So why is it that companies with sound business strategies fly in the face of apparently good advice and merge and acquire anyway? Why do they believe that they alone are invincible and will not get their fingers burned by these deals? Why are they so convinced that they can make their companies (and themselves) seriously rich and that nothing bad can ever happen to them?

Without attempting a full analysis of corporate machismo, there does seem to be an interesting angle on the subject. It seems that managers who make decisions on M&As frequently look no further than the deal itself. This is perhaps an understandable mind-set; the whole pre-deal process is a hugely emotional, absorbing and time-consuming exercise. There is the target to be selected, the synergy to be identified, the due diligence to be performed, the legal and financial issues to be negotiated and the critical messages to be communicated to all the interested parties. And then, of course, there is the prospect of getting rich – either directly through positioning in the new organization or indirectly through the increased value of the company.

But successful deals don’t create value automatically. The value has to be dug out and liberated. Something has to be consolidated, reorganized or integrated. The really critical question is not “why are you going to do the deal?” but “how are you going to realize the value?”

Synergy value comes in two flavors: hard and soft. Hard synergies are guaranteed, or at least they have a very high probability of being achieved. They are mainly concerned with financial engineering – consolidating borrowing, restructuring taxation or tariffs, pooling working capital, purchasing at higher volumes or netting currency positions. These synergies are in the CEO’s domain and they are largely in place when the deal is done. Their execution follows very quickly.

Soft synergies are very different. They are in the operational domain and they are much less certain. They include operational consolidation, process improvement, channel merging, technology sharing, staff layoffs, exchange of best practices and extension of the customer base. Soft synergies take time and effort to achieve, yet it is often assumed that they will materialize just like the hard synergies without any special management attention.

Where IT can make a difference

The big irony is that there may be more soft synergies than the top-level managers realize. The process of due diligence could be treated as a search for opportunities as well as risks if the operational and IT managers were involved earlier. It is in the design, valuation and delivery of soft synergies that IT can really make a difference. By articulating more clearly not only what the synergies are but how they are going to be realized, IT could strengthen the hand of the senior managers in doing the right deals, paying the right price and achieving the right results.

CSC Research Services research shows that the real heroes of M&A are not the figureheads and dealmakers, nor the financial wizards who juggle with spreadsheets. The true heroes are the operational managers who make the organizational changes work, the human resources people who cope with the layoffs, retraining and cultural incompatibilities, and the IT people who create a working system out of all the disjointed bits handed to them. But all too often these heroes tend to get treated as villains or as part of a “clean-up team”; they are given very little credit but plenty of blame if it all goes wrong.

Being involved in a divestiture often feels like being part of a clean-up team, but a divestiture presents a great vehicle for a company to raise money, reinvent itself or change tack. There is a lot of anecdotal evidence about companies that languished for years as a division of a major corporation, burdened with corporate overheads, corporate systems and processes, and then, when divested for “poor performance,” turned around and stunned the markets (and the corporation that sold them) with fantastic results. It is hard for any corporation to get their heads around the fact that a part of their business may do better on its own, but that is often the case – and it is not a sign of failure, just of a misguided view that bigger is always better.

Divestitures are nothing to be ashamed of and deserve the same amount of management attention as M&As. Yet they do involve very different approaches. In M&As, the systems and organizational change projects can take as long as the business strategy allows. In fact, these programs frequently merge into “business as usual,” becoming indistinguishable from the kinds of project that make up normal business restructuring or reorganization. Divestitures, on the other hand, have to be completed in a fixed time period – and you have to do it all. By the time the deal is finalized, all business boundaries must have been defined, processes mapped, data transferred and cleaned, and systems cloned or broken apart (no mean feat if they are custom-tailored). Additionally, people must be prepared to move or stay, outsourced deals need to be created or broken, corporate systems for the seller must be made secure and access arrangements need to be finalized.

Yet again, the real heroes of these deals are the operational people who make this happen. The board that loses interest once the decision is made, leaving all this work to the hard-pressed operational managers until the deal is ready to be done, does so at considerable risk to their business strategy. Without proper attention, investment and focus, the best price will not be realized or, worse, the deal cannot be done at all because the operational disconnection is not completed in time. Divestitures triggered by regulatory demands are the most prone to problems here because the decisions about how to carve the business up pay scant attention to the neutral business joints. So, yet again, it is the IT people and the other operational managers who step forward and rescue these situations by making the most sense possible out of chaos.

Linda Wooldridge is a researcher in CSC’s Research Services team. She can be contacted at lwooldr2@csc.com

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