'Shotgun' Mergers in Financial Services Put IT Teams and the Success of the Deals to the Test

Weekend M&As don't offer IT teams enough time to analyze security threats, competing systems and integration synergies, or figure out how to consolidate enterprise applications. But even in today's tumultuous financial landscape, IT needs to ensure due diligence is done and make the deals work.

Mergers and acquisitions are not usually quickie affairs. There's much thought given to M&A synergies, cost savings and value creation. And in the gray zone between "intent to purchase" and finalizing a merger or acquisition comes the critical IT-related due diligence—that period where IT (and other) systems are scrutinized, and buyers can decide to pull out because the company's a mess or there's just too much risk involved.

But, of course, these are not usual times.


Financial Industry Mergers, Acquisitions and Meltdowns: What's in Store for IT Execs and Staffers?

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The critical due diligence process of examining the overall state of an organization's enterprise IT systems—the infrastructure, applications, outsourcing deals and vendor contracts in place—can take up to a week, according to industry consultants.

Recently, however, entire acquisition deals in financial services have taken place over the course of one weekend. A few of the biggest deals of late include: Bank of America acquiring a desperate Merrill Lynch; JPMorgan Chase buying a floundering Washington Mutual (WaMu); and Wells Fargo besting Citigroup to purchase Wachovia.

These so-called "shotgun" M&As are both a testament to the dire circumstances on Wall Street and a test of CIOs' and their IT staffs' ability to analyze, prioritize and integrate systems in a hurry.

"The shotgun marriages are being arranged, the companies are at the altars, the ceremonies are being held over the weekend, the ministers are various federal agencies, sort of instructing companies about what they need to do and on what terms, and there is no IT due diligence," says Tom Casey, a VP at Booz & Company. "It's just not happening."

In M&As, the Heat Is on IT

The prospect of not vetting IT systems before a deal is scary: Unknown security threats and vulnerabilities, and unsecured IT assets and Internet connections are just a couple of the worries for the customers of Lumeta, a network mapping and monitoring vendor, says CTO Michael Markulec. "You can't secure what you can't manage," he says, "and you can't manage what you don't know."

That type of insight is even more important in financial services, since IT spend typically is a hulking 15 percent of overall revenue, according to Casey, which is an indication of the crucial role IT (and its security) plays in financial institutions. "IT is the backbone of how these banks operate," he adds, "and you're not going to get these major [M&A] synergies without addressing the IT stuff."

Wall St guy
The mood on The Street.

When companies give short shrift to scrutinizing IT systems, M&As become even riskier than inherently they already are. 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 an August 2007 Boston Consulting Group study of more than 4,000 completed mergers and acquisitions between 1992 and 2006, 58 percent of deals actually destroyed value for acquirers, with a net loss of 1.2 percent for all transactions.

Now, in these crazy times, IT teams will be put to an even greater test to try to make these deals work. CIOs and IT departments are tasked with assessing and, ultimately, meshing together dissimilar systems that are expected to provide efficiencies and savings—ASAP.

"One of the key factors of very big integrations is the ability of IT to consolidate and streamline the acquisition onto a single platform and gain significant cost savings," CIO Tom Sanzone told CIO in late 2007, when he was CIO of Credit Suisse. (Sanzone took over the top IT spot at Merrill Lynch in 2008. See "Financial Industry Mergers, Acquisitions and Meltdowns: What's in Store for IT Execs and Staffers?" for more on his transition and fate in the new Bank of America.)

"As the head of IT," said Sanzone, who has been through several M&As, "I know what would be expected of me, and that's certainly a type of pressure I have felt."

But in a heated M&A climate with little if any time for due diligence, pressure on IT intensifies. The difficulty of ensuring smooth systems integration and careful consolidation (with no surprises) is dialed up even more. Unfortunately, said Barry Jaruzelski, VP and lead marketing officer at Booz Allen Hamilton, in the CIO article, companies "don't realize just how hard and expensive it is to consolidate onto one platform."

The Importance of IT Due Diligence

In more tranquil business times, when banks and investment firms aren't teetering on the brink of failure and credit markets haven't collapsed, most companies follow a standard operating procedure for an M&A situation.

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