There are two ways to grow an established company. The first option is organic growth – increase existing sales and explore ways to develop new sales. Organic growth is a worthwhile goal, yet it is often difficult to achieve. Proctor & Gamble, for example, saw negative organic growth in 2015 as management decided to eliminate low performing products.
In other cases, some companies are able to achieve small gains through organic growth. Estée Lauder Cos, a cosmetics company, increased sales revenue by 8 percent in the third quarter of 2015. These incremental gains may not always be enough for an organization to achieve its financial goals. Growth through mergers and acquisitions (M&A), in contrast, has the potential to deliver much greater gains. Ever since the value-destroying merger of AOL and Time-Warner in 2000, many corporate leaders have become skeptical about the value of M&A. According to the Boston Consulting Group, “[mergers and acquisitions] are a high-risk game with significantly less than a 50 percent chance of success.” Yet, the practice remains popular because it is one way for large organization to outsource R&D. Rather than investing in large R&D functions such as Bell Labs or Xerox PARC, an acquiring company simply needs to monitor the market for opportunities. M&A is especially important in technology firms: Google completed over 30 acquisitions in 2014.
Managing large M&A activities
When a company invests time and resources into an acquisition, everyone is watching. Stockholders ask whether management is growing the company responsibly. Analysts and competitors consider whether the M&A transaction will yield results or destroy value. Given these pressures, leading CIOs approach M&A activity with a disciplined approach.
“’How do we have a big Day 1 splash’ was a key question as we worked on the DirecTV acquisition,” says Pam Parisian, CIO at AT&T. With millions of customers involved and thousands of staff, system problems or glitches would be immediately apparent.
[Related: Reasons mergers and acquisitions happen]
“I made the customer experience a key principle in my decision-making as I managed the acquisition,” Parisian says. Her perspective on customer experience includes AT&T’s front customer service and retail staff. It was vital that they be able to take orders and serve customers as the acquisition work continued.
“Following the Day 1 event, I changed my focus to integration. For example, where are the opportunities to cut costs? Are there duplication or unnecessary applications that can be removed?” Parisian says. AT&T’s merger with Cingular in the 2000s eventually resulted in several hundred applications being eliminated.
“Simplification and consolidation is a focus for the integration going forward. For example, the plan includes equipping our technicians and fleet so that one technician can service broadband and entertainment,” Parisian says. Over and over again throughout our discussion, Parisian’s focus on customer service and continuous improvement stood out.
Managing small M&A activities
In the business media, the blockbuster M&A transactions with billions of dollars on the line attract significant attention. Unfortunately, the risk and complexity of managing such a large transaction is considerable. Symantec, a multi-billion dollar company known for computer security software, has had good success with small acquisitions in the past.
In 2015, Symantec acquired Blackfin Security, a privately owned company that provides security simulation and related services. “The Blackfin acquisition fits well with Symantec’s unified security strategy. Blackfin’s staff and approach aligns well with our cyber security services line of business,” explains Symantec CIO Sheila Jordan.
According to Symantec’s press release, Blackfin had 15 employees when it was acquired. The comparatively small size of the company meant fewer challenges. “In large acquisitions, there are many challenges. For example, a large acquisition requires review of invoicing systems, finance systems and ERPs. With Blackfin, we had few of those challenges,” explains Jordan.
Becoming a strategic CIO through M&A
As Thaddeus Arroyo, CIO of AT&T for 2007-2014, explained in a recent CIO.com article, the days of CIOs simply running operations are over. Leading CIOs are expected to contribute new solutions and proactively support the company’s strategy. Making strategic contributions requires getting involved in the M&A process as early as possible.
“Mergers and acquisitions are exciting for me to work on as a CIO because I get to see the company strategy in action. With the DirecTV acquisition, we are defining a new category of entertainment,” notes AT&T’s Parisian. Her comment shows an important focus for other CIOs to consider: How will this acquisition improve the company and fulfill its strategy. “The Blackfin acquisition filled a gap in [the Symantec] unified security strategy so it made sense to acquire them,” says Jordan. Retaining a focus on the strategic benefits of M&A is important because it provides motivation to work through the inevitable challenges.
“Be part of the M&A assessment team as the CIO and refuse to take a back seat,” says Jordan. “We use a six step process for M&A activities. The IT organization I lead is part of the discussion in the pre-assessment stage. With M&A, it is important to think through value. You may not want to retain and integrate every aspect of an acquired company.”
The attitude Jordan brings to her assignment as CIO informs her work. “My advice to CIOs: you are a business leader who happens to run IT,” says Jordan, summarizing her philosophy. That means thinking about the best interests of the company, improving products, cutting costs and serving customers.
Managing M&A for operational excellence
Innovation and new products are a major draw for M&A projects however these benefits are only available through operational excellence. Reviewing vendor contracts and pricing is a key point especially in vendor intensive industries. For example, a 2013 McKinsey & Company report estimates that large credit card companies and banks have up to 50,000 vendors to manage.
CIOs in the financial industry can play a key contribution in developing systems and management approaches to manage vendors in a systematic fashion. Vendor contract review may review pricing and service level discrepancies. Harmonizing contracts after an M&A brings significant potential for cost savings.
Corporate culture is the other key question for CIOs to consider as they contribute to merger and acquisition activity. “Culture is often missed in M&A activities: there is an opportunity for CIOs and other business leaders to do better,” stresses Symantec’s Jordan. The drive to achieve Day 1 M&A success may result in sacrificing culture considerations. If retaining skilled staff through MA is a priority, culture considerations will need a higher priority.