In today’s economic climate, once desperate business measures now appear plausible at any given time, inside any given company: a sudden bankruptcy, a hurried acquisition, a sale of a profitable division to free up cash.
The phrase, “Expect the unexpected” has taken on new significance during this recession.
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Steve Berez, a Boston-based partner in Bain’s global IT practice, says hasty mergers, acquisitions, divestitures, break-ups and bankruptcies are occurring more and more often, and not just in the embattled financial services industry.
Recently, GM abandoned Saturn to cut costs, Merck announced it would buy rival Schering-Plough, and GE is facing questions about keeping its finance and industrial units under the GE umbrella.
“Firm after firm is giving up what had been assumed as their crown jewel because they had no choice—for liquidity and capital purposes, they had to divest,” Berez says.
CIOs and their IT departments must be prepared for the sudden and disruptive upheavals in their enterprise computing environments that stem from unexpected business transactions.
Regardless of what side of the deal their company is on (whether they’re the acquirer or the target), IT leaders need to ensure their company’s systems are in proper working order, and they need to be part of the decision-making around the deal. Unwieldy systems may not be worth acquiring, says Berez, and could dramatically lower the value of the transaction.
And if your CEO knocks on your door tomorrow morning to tell you that the business is selling off a division next week or acquiring a competitor’s assets, he’s going to want to know if the IT systems can handle this type of abrupt transaction.
Well, can they?
IT Is a Key Player
Berez is unequivocal about IT’s role in any acquisition or divestiture right now. “The way that technology is managed in the business,” he says, “makes a huge difference in terms of the difficulty and success of both divestitures and integration or acquisition.”
In other words, the better two companies manage their technology, the easier and more successful a merger or acquisition will be.
In numerous client engagements over the years, Berez has seen a wide range of IT footprints, ranging from the “messy” to the neat. He’s seen legacy ERP applications with tons of hard-coding and connections between systems. He’s witnessed too much enterprise architecture fragmentation among various divisions using different software for similar business processes.
Comparatively, he’s also seen “cleaner” IT environments “where you’re working with modern packaged systems, you’re in reasonably current releases of systems, and you’ve got relatively few systems.”
Not surprisingly, the cleaner the IT environment in a particular line of business, the easier it will be to sell that business to an acquirer, Berez says, “because it’s going to be better documented, more understandable, better supported by vendors and have lower operating costs.”
Companies will also likely pay more for organizations with top-notch IT systems than they will for organization’s whose systems are in disarray, says Berez.
“Sophisticated acquirers revise their price based on how difficult it’s going to be [to integrate IT systems],” he says. “So a company that has a mess in their IT systems and can’t clearly describe what’s supporting their business is going to get a lower price.”
Even when your company is the acquirer, the flexibility and maturity of your own IT systems still matters, too. In one example, Berez says that one acquirer didn’t fully understand the complexity of the acquiree’s back-office systems and the massive problems that were likely to surface as a result when it came time to integrate—in part because IT hadn’t been involved in any of the preliminary discussions.
Consequently, Berez adds, the acquirer will wind up spending nearly two extra years and millions of “wasted” money to upgrade and migrate both systems to a new platform. (For more on the trials and tribulations of enterprise software, see the Enterprise Software Unplugged blog.)
“The moral of the story is: Know thyself, first, and what your own capabilities are as an acquirer, says Berez. “And second, make sure you involve IT when considering deals, even in screening. You might decide not to do the deal once you see the true cost of [a potential acquisition].”
And not doing the deal might end up being the best business decision.