Reasons Mergers and Acquisitions Happen

Back in the late 90’s my company was preparing to acquire another firm. A couple of weeks before the transaction was finalized, The CEO called me into his office to tell me that I would need to “get with the target firm’s IT people and figure out what needed to be done.” I had heard through the company grapevine that management was thinking about an acquisition, but still found myself unprepared for the magnitude and urgency of the task. I rushed back to my office to begin preparing an approach.

I knew that the first thing I had to do was find out what the target company’s IT environment looked like. This meant I had to conduct IT due diligence before I could create an IT integration plan, but – I asked myself – which IT due diligence areas should I focus on, given that I had a limited amount of time to evaluate the target firm’s systems? I quickly realized I needed to know more about why this particular company was chosen for acquisition. This meant I would have to ask the CEO for a follow-up meeting.

Before I asked for the meeting with the CEO I wanted to be confident that I was ready to ask the right questions. My goal was to obtain business-oriented insights that could be translated into IT-oriented priorities. But, in order to formulate the right questions for my meeting with the CEO I needed to first understand what motivates one company to acquire another. As I researched information about mergers and acquisitions (M&A), I discovered the following broad categories of deal motives:      

Strategic Goals

Strategic goals is an all-purpose category of M&A motives that include re-inventing the company, increasing or protecting market share, accessing new markets, acquiring new products or services, gaining access to resources and capabilities, and achieving economies of scale. I concluded that an acquisition based on strategic goals could result in a variety of integration scenarios, ranging from a complete “absorption” of the target firm’s IT assets to a more limited “touch points” approach. Obviously, I needed to understand which strategic M&A goals applied to my company’s planned acquisition.

Synergy

Synergy is the motive when the acquiring firm believes that by combining the aggregate parts of the target firm with the aggregate parts of the acquiring firm, the resulting business will generate benefits that exceed the sum of the separate parts of each firm. I realized that an overall business goal of exploiting synergies could involve integrating multiple systems or focus primarily on data integration. Clearly, if expected synergies were driving the deal I would need to understand which IT assets would be required to achieve those synergies.

Diversification

The diversificationmotive holds that acquiring a diverse business outright may be a less risky way for an acquiring firm to diversify its stock portfolio than investing directly in other, often unrelated, businesses. Since this type of acquisition is often done by conglomerates, and given how conglomerates are often organized, I concluded that limited integration of IT might be the appropriate solution for this acquisition.

Reaction

Sometimes an M&A transaction by one firm in a market will trigger an M&A response from other firms that perceive the initial M&A transaction as a “strategic indicator” of an emerging trend (or threat) to which they should respond. This motivator can set off a kind of “M&A contagion” that can sweep up an entire industry. I didn’t think my company’s acquisition motive was reactionary, but if it was, I needed to understand the level of integration and urgency before I began planning my approach to due diligence and integration.

 After analyzing these four broad categories of M&A motivators, I was able to craft a set of questions for my meeting with the CEO. The meeting went well and the resulting insights that I gained enabled me to develop an approach to due diligence and integration that preserved deal value while mitigating integration risk.

 In my next post I will delve a little deeper into the specific categories of M&A deals and how IT is typically impacted in each category.