by William P. Miller

6 ways to improve data management and interim operational reporting during an M&A transaction

May 02, 2018
Data ManagementIT LeadershipMergers and Acquisitions

Data management and operational reporting visibility need to be very carefully considered and addressed in any strategic transaction scenario, whether you are on the buy-side or sell-side. The risks in these areas are very high and the strategies outlined here can help mitigate these issues.

04 mergers
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When considering the impact of executing a strategic acquisition for your company, access to data and visibility to operational reporting is paramount.  Not having it would be like driving a car without seeing the dashboard.  While you may know where you are going, you may not be clear on how quick you can get there, or even if there is enough gas in the tank to get you to your destination.   Even worse, your competitors may have faster cars, with more insightful dashboards, and intelligent navigation system that monitors road-blocks.  Further compounding the issue, your IT budget may prevent you from investing in the full systems necessary to actually deliver the kind of reporting demanded by your business.

In short, companies must invest in the people, processes and tools necessary to maintain effective reporting and data management through the full M&A transaction cycle, whether buying or selling.

Lack of visibility through the M&A deal cycle, and the problems it creates for acquirers

Through a typical deal cycle, acquirers will spend considerable time completing diligence on the target company. There is significant data shared during diligence, but there is a good chance that you are not getting the full context needed to run the acquired business on day one. For example, diligence typically leverages financial reporting metrics that are tailored to SOX regulations and other financial controls, in order to effectively value the target. As such, the management reports used to run day-to-day operations are frequently left unaddressed until day-one planning. Even if this data is provided, the terminology, reporting cycles and data formats frequently differ from the acquiring business to the target. The unstructured nature of the data also makes it extremely difficult to leverage after deal closure.

The lack of visibility to operational results can lead to several critical problems. Perhaps most obviously, it will be difficult, if not impossible, to make effective business decisions without good reporting. In addition, without good data, the ability to effectively react to business issues is severely diminished.   How will you even identify the problem if you do not have the data? What if there is an issue that will cause a business disruption, such as a broken data feed or unavailable master data? How and when will the executive team learn of the issue and then address it? Finally, without an effective reporting capability, understanding and capturing synergies in a newly acquired business is simply not possible.

What if you are the seller? Does data visibility and management matter?

Though different from acquirers, sellers have unique data management issues that can be even more challenging to tackle. For example, sellers need to define what data sits within both the deal perimeter and the scope of transition services agreements (TSA). Is the buyer entitled to all historical data? Can the buyer request data generated during TSA service that sits within the seller’s systems? Which party is responsible for data migration? What happens when the data is commingled?  

Many of these issues will need to be handled during the negotiation period, before a deal is even signed.  If there is a lack of clarity after the paperwork is done, conflict will inevitably arise as the counterparties struggle to address competing agendas around data visibility, resources and budget constraints.  Combined with the immense pressure to get a deal closed, these problems often lead to shortcuts that can create challenges later on, when IT leaders are left to sort out the seemingly endless details of data transfer and management across the application landscape.

Above all, data management is critical to risk mitigation efforts. Do not let your data security fall to the wayside by overlooking the methods of data storage and transfer during the course of a transaction.

How do we break the paradigm and avoid these issues?

Before we dig into the solutions, it is important to note that some solutions are not technical. IT leaders are prone to fall back on their knowledge and experience, which is frequently tool-centric.  However, by thinking more broadly, other options will also materialize. Listed below are several options, including some that are not technical or tool-related.

1. Include data management ownership in pre- and post-close negotiations

Defining data ownership through the pre- and post-close phases will help provide a smooth transition to integrated operations immediately after day one. It is not always obvious what data and records the seller should be required to provide, especially in the case of commingled data. Specifications of data ownership, authorization and entitlement can be written into the purchase agreement and, in the context of a divestiture, the transition services agreement. Having a trusted advisor familiar with the verbiage and implementation of these agreements will put your firm at an advantage in negotiations, which can translate into real savings at deal closure and beyond.

2. Have a clearly articulated plan and communicate with your counterparty

Legal agreements will help define ownership, but it is correspondingly important to help teams operationalize those requirements. Consider distilling the legal agreements into language that can be absorbed by business operators on both sides of the deal and disseminate the information via channels that accommodate your organization’s culture. Some options include regularly scheduled email newsletters, postings on an intranet site dedicated to the deal or an announcement at an all-hands meeting. If you have outside consultants managing deal-related projects, they can also help so that compliance is maintained. Whatever you choose, do not let data considerations fall through the cracks or you could end up wasting resources when issues are identified at a late stage and need to be revisited.

3. Implement an agreed-upon interim reporting tool

Implement an agreed-upon interim reporting tool that enables visibility into the acquired business as soon as possible. This tool can help establish agreed-upon data locations and proper handling methods. The solution should be discussed before the deal closes for maximized value but can be established at any time. The presence of an interim reporting tool establishes a secure method of data storage and is particularly helpful for the transfer and interpretation of large, unstructured data sets. The use of public cloud infrastructure makes this solution relatively easy to phase out once a permanent solution has been defined. Furthermore, a tool equipped with advanced analytics capabilities can help business leaders make decisions based on merged or combined data sets.

Technological innovations in the machine learning and artificial intelligence spaces are increasingly being tailored to facilitate large-scale corporate integrations. Though the tools are new, the concepts have been proven many times, and utilizing versatile interim reporting capabilities will provide key advantages once the business begins operating.

4. Develop clear data retention policies

Most companies have a formalized data retention policy, but these standard guidelines rarely address a transaction scenario. For example, if the target is being sold by a larger parent organization, should data be retained in the seller’s databases after the deal closes? When determining the retention policy, you may need to consider which party is accountable to financial audit requirements, or whether the seller has a legal hold on any data due to ongoing litigation. Additionally, some data retention decisions may be based on the operational feasibility of purging data from the seller’s systems. For example, it may be impossible to purge records that are commingled with the core business. If data is retained by the seller, both parties will want to make sure that the data is being stored and retained according to internal standards.

5. Always maintain security and compliance

There is increased risk associated with the transfer and retention of data before, during and after a deal. When sending data extracts to the acquirer or migrating data to a new database, make sure to establish guidelines that designate tools and systems approved by subject-matter professionals. Given increasing government regulation and public scrutiny of data security, this is especially critical for the transfer of highly sensitive or confidential information. When a seller retains data pertaining to the target, they could be held liable to any effects that a future data breach may have on the acquirer in addition to their own stakeholders. Addressing these risks should be a priority during the transition period.

6. Establish new reporting processes and leverage RPA where possible

To fully leverage the capabilities of an interim tool, you might also consider the use of technology that can automate processes during the post-close transition period. Robotic process automation (RPA) can facilitate the transition of data into the interim tool, saving countless hours of manual labor. In previous posts, I have explained some of the key advantages of RPA. While developments in this arena are new, the potential for significant efficiency gains is enormous. IT leaders would be well served to better understand the capabilities being developed and how they are being deployed.

Data management and operational reporting visibility need to be very carefully considered and addressed in any strategic transaction scenario, whether you are on the buy-side or sell-side. The risks in these areas are very high and the strategies outlined here can help mitigate these issues. 

While there are many new technical tools on the market, there are often other equally important approaches. Retaining a firm with significant experience in this area can help to identity and mitigate the numerous important risks involved, and IT leaders should take advantage of the experience available to improve the odds of success. By doing so, they can help the business achieve the expected deal synergies, moving IT from a risk management role to a true deal enabler and an integral part of business strategy.

[I want to extend a special thank you to Bianca Giusto for her significant contributions to this article.]