"Shotgun" M&As Put the Heat on IT

Mergers and acquisitions are not usually quick affairs. Just the due diligence process of examining a company's enterprise IT systems—the infrastructure, applications, outsourcing deals and vendor contracts—can take up to a week, according to industry consultants.

But as Wall Street imploded in September, entire deals in financial services have closed over a weekend. Bank of America and Merrill Lynch. JPMorgan Chase buying Washington Mutual. The Wells Fargo purchase of Wachovia.

These so-called "shotgun" M&As are both a testament to Wall Street's dire circumstance and a test of the ability of CIOs and IT staffs to analyze, prioritize and integrate systems in a hurry. "The shotgun marriages are being arranged—and there is no IT due diligence," says Tom Casey, a vice president at Booz & Co.

That type of insight is even more important in financial services, since IT spend typically is 15 percent of overall revenue, according to Casey. "IT is the backbone of how these banks operate," he says, "and you're not going to get these major [M&A] synergies without addressing the IT stuff."

M&As are tricky to get right even in normal times with appropriate due diligence, and many don't return the expected value. According to a 2007 study by The Boston Consulting Group (BCG) of more than 4,000 completed mergers and acquisitions between 1992 and 2006, 58 percent of deals actually destroyed value for acquirers.

There are several technology-related factors that are key to M&A decision making, according to BCG's Tom Reichert, a partner and managing director. First is post-acquisition synergies. "The synergy value should be 10 percent to 25 percent of the combined technology budgets of the two companies involved," he says. "That is a significant part of the valuation of mergers."

Next is whether there are significant deal breakers—"big security or regulatory issues that the acquirer is getting into in the tech environment that really need to get solved, or big contracts that exist," Reichert says.

Booz's Casey also points to considerations such as selecting the core systems and applications that will enable the combined company to grow, and knowing where the opportunities are to consolidate infrastructure and contracts.

Workforce issues such as layoffs are less troublesome than platform and application discussions. Casey says that power is the issue here. "If I'm an IT person or business owner of [that system], then I lose that, I lose that kind of power position," he says.

The bottom line? CIOs must make do with what they inherit (IT staff, systems, projects) in a merger or acquisition. "Complaining about it," he says, "does you no good."