Feb 16 2011

Keep IT In Mind When Merging

For a successful merger or acquisition, remember the importance of IT.

When a company merges with or acquires another company, everyone has high expectations that the deal will cut costs, grow sales, increase operational efficiencies or achieve some combination of the three. Unfortunately, 72 percent of these transactions will fail to meet their financial objectives within the first three years.

Why? The reasons are myriad, but a major contributor is that company executives don’t consider the critical role that IT can and should play when bringing together two companies.

IT personnel are often in the dark about the rationale behind such transactions; sometimes they don’t even learn about the deal until it’s been inked. That oversight can set up company stakeholders for disappointment.

Imagine a case where Company A buys Company B: The deal closes, and Company A suddenly tells its IT department that it now has to support roughly double the volume of business, double the number of customers and double the number of shipments, while concurrently reducing the combined IT operating expenses of the new company by 20 percent. That 20 percent savings was probably factored into the financial model justifying the transaction, and it may not be a number that IT can achieve.

Moreover, by not involving IT leadership early on, Company A may have squandered opportunities for a better business model. IT executives are often in a better position than deal negotiators or even business executives to identify the best processes available to the go-forward company, as well as value opportunities beyond the cost savings and cross-selling opportunities that are typically the rationale behind these types of transactions.

To optimize the IT function during a merger or acquisition, businesses should take the following steps:

  • Communicate the desired outcomes of the deal. Management should fully explain to IT leadership the rationale and goals of the transaction under consideration in business terms (not just IT terms), along with measurements of success both for the transaction overall and for IT’s part in it.
  • Involve IT early. Given its horizontal nature, IT should be part of the exploratory due-diligence process. IT leadership should be present during initial meetings between various departments of the two companies, including accounting, sales, manufacturing and distribution. That will let IT leadership develop a feel for the different operations and begin to plan for the technology changes needed to foster new, optimized processes and goals.
  • Direct IT to conduct an in-depth analysis. During the due-diligence process, IT should find answers to the following questions: What does the other company do better from a business or technology perspective that we should consider adopting? What skills, talent, experience or competencies does the other IT department have that we don’t yet have or are better than what we have and that we should retain? What technology investments has the other company made that can be leveraged to support the rationale for the transaction and the overall growth and performance of our company?
  • Don’t hesitate to get extra help. To allow a streamlined IT leadership team to effectively take on these added tasks, either backfill their day-to-day responsibilities with contractors or consider bringing in a consultant.

Ultimately, having IT involved in the right way and at the right time during a merger or acquisition can have a positive impact on the go-forward company. It increases the potential that the rationale for the transaction will be realized. It can allow a company to significantly exceed its short- and long-term financial targets. And rather than just cobbling something together based on what the business used to be, the IT depart­ment will have the time and resources it needs to create a truly effective IT operation for the new company.