How CIOs Can Make Mergers, Acquisitions and Divestitures Work for Them

The Problem: Managing Uncertainties and Expectations

The complexities of mergers, acquisitions and divestitures (MAD) can be chaotic for IT organizations. Knowing that IT’s performance can impact the results of a deal, today’s CIOs prioritize IT integrations or divestitures. Even the most seasoned IT executives worry about an integration’s budgetary impact and recognize the advantages of quick completion. Common questions include:

• How can IT leaders be better prepared to handle the uncertainty associated with managing business expectations and ever-changing IT priorities?
• How can CIOs contribute beyond IT leadership to truly support business strategy?

MAD IT projects can sometimes adversely impact a deal because of the following:

• Misalignment between IT and business strategy.
• Lack of organization-readiness efforts prior to an M&A deal.
• The complex nature of integrations and divestitures.

Beyond the obvious subject of synergies, it’s important to identify how CIOs can use MAD activities as a platform to demonstrate IT’s business value. Based on interviews with several IT executives, we examined critical decisions and common causes of failed MAD IT projects. The interviews helped us better understand the challenges of integrating or divesting various IT functions. The real-life lessons learned can benefit other CIOs preparing agile IT organizations and their companies for future deals.

Scenario: A Highly Customized Merger of Equals

To accelerate growth, establish greater market penetration and improve the customer experience, two companies merged. The IT team began planning for the integration, which included the activities necessary to support both “day one” integration—operations on the day the merger was legally completed—and the eventual goal of integrating all people, processes and technology, namely:

• Readying infrastructure, such as e-mail, domain, and active directory, and integrating HR, payroll, and benefits policies and systems;
• Upgrading the acquirer’s existing ERP suite to enable a common ERP platform;
• Merging all systems, processes, policies and procedures across organizations.

Challenges: Experience—and Time—Are at a Premium

In addition to the typical implementation challenges described above, this project faced the following issues:

• Lack of integration experience. Most IT employees had production support experience; none had performed an integration of this size.
• Lack of experience in infrastructure and application consolidation. One organization lost several key employees after the merger. Complicating matters, geographical separation of the two organizations meant that application and infrastructure knowledge resided in two locations, making collaboration and information exchange difficult.
• Limited system access prior to day one. Legal and compliance issues prevented direct access to one of the company’s IT systems, so information exchange prior to the deal closing had to be conducted in an isolated, “clean room” environment.
• Poor data quality. Business-critical contract manufacturing required uninterrupted service and complex customized applications for procurement processes. One company’s system data had quality issues due to back-end updates, poor governance processes and unpurged, obsolete data.
• Aggressive implementation time line. If the team missed any deadlines, the integration go-live window would be delayed by at least three months to allow for the quarter- and year-end financial closing process. Consequently, even a small delay in system integration could jeopardize projected merger synergies.

Resolution: Keep It Quick and Simple

The team relied on experience, patience and rigor to overcome these challenges and consolidate and integrate the two organizations’ IT systems within just eight months. The team used an ERP application to support the combined employee force with day-one, HR-related services. Integrated order management, finance and support functions soon followed to provide uninterrupted customer service and support. Although productivity and revenue metrics weren’t possible, the team recorded the following achievements:

• ERP instances were consolidated 90 days after the transaction closing.
• Integration synergies met and exceeded estimates.
• The team rationalized its IT applications portfolio.
• The integration supported business synergies and end-state plans.
• The restructured IT organization successfully supported the newly merged company.

Several critical factors led to the successful IT integration:

• Limiting the integration’s complexity by adhering to an “adopt and go” philosophy;
• Involving the IT organization early;
• Clearly communicating expectations for quick integration;
• Proactively retaining and involving key IT leadership resources from each organization;
• Using a loosely coupled, modular integration architecture to limit dependencies, expedite application and data consolidation, and provide flexibility and scalability for future M&A initiatives.

Scenario: Establishing a Newly Divested Business Unit

After a company divested one of its business units, the carved-out entity needed the IT infrastructure to support the requirements of more than 400 employees and multiple global locations. The CIO’s task: managing the expectations of legacy business users while aligning IT with corporate strategy. The CIO also needed to prioritize the software projects essential to business process improvements and increased revenues. At the same time, an outsourced IT infrastructure required a focus on security, regulations, vendor and cost-management issues.

Challenges: Juggling Priorities, Triaging Tasks

This divestiture involved a number of common challenges for carve-outs:

• Pre-divestiture confusion about employee and vendor roles, timelines and post-deal status;
• Strained resources due to simultaneous “business as usual” requirements and divestiture activities;
• Planning and executing cost reductions for IT infrastructure, data centers, networks, databases and software licenses across multiple global locations;
• Ripple effects of providing long-term support for dozens of services in the carved-out business;
• Isolation and security of data for regulatory purposes.

Resolution: Supporting Staff, Decreasing Complexities

The CIO cited the following critical success factors in this effort:

• Establishing a robust project and program management office early in the planning process;
• Addressing employee-retention issues early and often;
• Proactively minimizing the number and complexity of system customizations;
• Building a repository and certified catalog of services that would help facilitate agreement among stakeholders on the choice of service offerings;
• Leveraging several crucial projects to demonstrate IT’s value to executive management.

Lessons Learned: Be Prepared, Have a Plan

Because so many companies are likely to be involved in MAD activities in coming years, CIOs should prepare their organizations, even if the companies aren’t currently engaged in any deals. The scenarios above show that it’s important to:

Involve IT early in the MAD process. Many companies don’t realize that IT can affect corporate valuation, and as a result, don’t involve IT in MAD activity until after the deal is closed. What happens when IT is brought in too late? CIOs are simply presented with a budget and a mandate to complete the integration, eliminate overlapping systems and reduce headcount within a certain time frame. Often budgets and time frames are insufficient for the work at hand. To meet deadlines, hasty decisions may be made, and key people and critical knowledge lost.

Instead, when IT executives are involved in target selection and due diligence, they can help identify potential issues and high-cost items and uncover additional synergies the merger team may wish to pursue. Because up-front IT involvement can be critical to driving synergy value during a MAD deal, IT should be involved in creating the time lines and budgets to realize these synergies.

Establish a process for issue escalation and decision making. Speed is important in MAD projects, and effective implementations require timely decisions. Companies may benefit from a centralized mechanism for decision making and conflict resolution.

Align IT and business strategy. In many organizations, CIOs get little face time with their CEOs. In a MAD world where IT integration is so critical, frequent, ongoing communication between the CEO and CIO on strategic issues is essential to achieving and maintaining business-IT alignment. This is particularly important when you’re preparing an organization for potential MAD activity. Specifically, IT must understand the company’s primary reasons for engaging in MAD activity—is the company looking to achieve economies of scale, expand the product portfolio, acquire strategic assets, expand geographically, diversify, access new distribution channels, or just make an opportunistic play?

Identify key employees and a mechanism to retain them. The loss of key personnel can slow the integration or divestiture process, causing missed deadlines and unrealized synergies. Critical IT personnel often possess the knowledge and experience needed for the integration or divestiture, as well as the knowledge to keep the business running in the long term. Any MAD IT strategy needs to focus on employee retention.

Involved, Aligned IT Is Important to Thriving in a MAD World

MAD deals are complex, and effectively tackling them is not a perfect science. However, in a MAD world, organizations and their CIOs can find ways to help deal with the insanity. By involving IT early and continuously aligning it with the organization’s overall objectives, many CIOs have been very effective at helping their organizations achieve short-term goals. They have also helped their organizations achieve overall business objectives by implementing the processes and programs that helped position IT departments and companies for long-term agility and competitive advantage.

Ali Bandukwalla is a manager in the technology integration service area of Deloitte Consulting. He focuses on providing consulting services involving enterprise data management for large-scale business transformation and system integration projects.

Pavel Krumkachev is a senior manager in the business integration and operation service line of Deloitte Consulting. His experience includes providing consulting services involving IT merger integration and divestiture; Oracle and Siebel enterprise application implementations; enterprise application integration and systems architecture; IT infrastructure design and implementation; business and technology strategy development; and program management.

Shalva Nolen is a senior consultant in the platform architecture and infrastructure service line in Deloitte Consulting’s technology integration service area. Her focus has been on providing consulting services involving next-generation data centers, M&A IT integration, custom IT implementations and IT shared-services operations.

Rajat Sharma is a senior consultant in the technology integration service area of Deloitte Consulting. He focuses on providing consulting services involving the solution architecture of middleware-enabled business process, applications, and system component integration within and across enterprises.

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