Business Driven M&A for IT

Drive Your Business
Business-driven
Mergers and
Acquisitions for IT
Better strategies for managing technology integrations

2 ©2015 WGroup. ThinkWGroup.com
The integration of two companies into one functional unit inevitably involves great change.
Employees must adapt to culture shifts, and power structures evolve. The IT department is one
of the areas in which these changes are most significantly felt. Mergers and acquisitions can
create new needs and goals and result in numerous projects for which IT doesn’t have the time
or resources. IT requires careful planning and prioritization to avoid integration problems.
Introduction
Mergers and acquisitions can be challenging
Many mergers fail or lead to an inefficient, poorly run IT organization that doesn’t meet the
needs of the business. Combining the people, processes, and technology of two separate
companies is hard. In order to do it successfully, companies must have fully formed
target metrics for integration and have comprehensive plans to meet those goals.
The importance of a business-driven approach
Given the intense pressure and uncertainty present during mergers and acquisitions, it is important
to remember the end goal of IT: driving business goals. By aligning technology integrations with
core business objectives, enumerating priorities, and basing decisions on data, companies can
have more successful integrations and
emerge from the transitions stronger
and better able to face new challenges.
This paper will discuss some of the
major challenges faced by IT during
mergers and acquisitions (M&A), and
present an effective framework to
handle this change more effectively.

The challenges of M&A
When companies merge or acquire other companies they must make considerable changes
to integrate and become a functioning whole. Culture, business strategies, and many other
variables must be adapted to fit new environments, people, and goals. This can create
numerous problems, leading to unhappy employees, inefficiency, and abandoned projects.

Poorly defined goals
Many companies undertake a merger or
acquisition without fully defining the goals of
the process. Without pre-established metrics,
there is no way to know what success looks like
and no way to formulate actionable strategies
to get there. Establishing what the goals of
integration are and what integration model the
merger or acquisition will follow helps establish
priorities and facilitate a smooth transition.
Numerous studies show that the failure rate of mergers and acquisitions ranges from 70% to
90%.1
These numbers should serve as a warning to those who enter into the integration process
lightly. Companies must have effective, tested strategies in place that can reduce risks and lead
to positive outcomes. Thorough planning with insight from M&A experts is critical to success.
The high failure
rate of M&A
Mergers and acquisitions fail for many reasons. In some cases the companies were not
a good fit or business leaders could not decide on how best to take advantage of their
combined strengths. In others, IT organizations became too bloated and could not fill their role
efficiently. Too many M&A failures are simply the result of a lack of planning and foresight.
Some of the major reasons M&As fail include:
Why is M&A the source
of so much failure?

Ignoring cultural differences
Every company has a unique identity with unique ways of doing things. When
another company is added to the equation, everything can change. New
superiors, different rules, and shifted values can create culture shock for
employees and lead to resignations, inefficiency, and other problems.
A lack of focus
The CIO has a particularly important role in
ensuring that the transition is a success, but
many CIOs face an overwhelming number of
projects and goals during a merger or acquisition.
This can lead to a lack of focus that in turn leads
to abandoned projects and inefficiency. Clear
leadership with consistent methodology toward
achieving overarching business goals is an
important component of any successful transition.

A wide range of factors must
be accounted for in order
to complete a successful
merger or acquisition.

Technology is one of the
most challenging aspects
of integration
In a recent survey, only half of respondents said that they had a favorable view of how well their
company integrated IT following a merger or acquisition, the lowest of any department except
for research and development.2
The reasons for the particular
difficulty of integrating IT are numerous. Companies often have
implemented technologies in vastly different ways. For
example, one company might focus largely on cloud
and other third-party services to meet their needs, while
another may use primarily in-house technology. Software licenses,
service agreements, equipment, policies, and a wide range of other
factors must all be accounted for in order to complete a successful
merger or acquisition. This involves a number of varied projects that
must be undertaken to consolidate technologies and form a cohesive foundation for the future.

Understanding
integration models
Holding
In this model, the target company is owned by the parent company, but remains a separate entity.
In many ways, this is the simplest of all integration models and will involve minimal transition
efforts on the part of either the parent or target company. It will be necessary to engage in efforts
to assure workers that the merger or acquisition will not result in significant changes for them.
Preservation
The preservation model is similar to the holding model in that the target remains
largely autonomous. However, this scenario does involve a certain amount of
integration and requires greater planning on the part of the IT department.
This model usually only involves integration of back-office technologies. Examples
of this include the parent company adopting the target company’s proprietary
software, or some service contracts being merged to produce greater value.
The target integration model for any given merger or acquisition will dictate the strategies used
to achieve success. Companies must have a solid understanding of how and to what extent they
want to combine resources and efforts. Integration models can run the gamut between holding
models, which essentially keep each individual company completely intact, and absorption, in
which the parent company fully integrates the target company. Deciding on an integration model
will form the basis for how the integration will proceed and help CIOs prioritize their efforts.

Symbiosis
Symbiosis is an intermediate model between full integration and full autonomy. In this
scenario, companies will integrate wherever there is an advantage to doing so, but nowhere
else. This can be best thought of as a partnership between two separate companies
sharing resources and working closely together toward common goals. Technologies
will likely be merged in many areas, and many processes and policies will be shared,
but there will still be some degree of separation between the target and parent.
Absorption
This model represents full integration between the parent and target companies. It involves
the greatest amount of work to ensure that all elements of the new company that can provide
value are put to use and that all unnecessary
elements are terminated. Often creating
significant turmoil and work for the IT
department, this process must be carefully
managed if it is to be successful. However, it
also provides the opportunity to form a more
robust IT organization that benefits from the
strengths of both companies and potentially reduces
the long-term friction that might occur in other integration models.
Absorption involves the greatest
amount of work, but it also
provides the opportunity to form
a more robust IT organization.


Determining the right
level of IT integration
What are the overarching goals of
the merger or acquisition?
Ultimately, any merger or acquisition is undertaken
to drive some larger business goal. IT leaders
must consider these goals when choosing a
target integration model. If the objective was
to acquire people and technology to meet the
core business needs of the parent company,
substantial integration may be necessary. If
the target company is profitable in its own
right and can simply be another source of
revenue, less integration may be necessary.
The first step in any M&A strategy is deciding the right level of IT integration. The
choice will largely determine the course of the acquisition and have great implications
for the success of the IT organization. Leaders must make a structured analysis of
the situation and ask themselves several questions before making a decision.
What value can integration add?
In many cases, technology integration may add significant value through synergy,
lower costs, and improved time to market. It is important to carefully consider every
potential impact of integration and evaluate based on models and data. One of the
most important components of integration is examining areas in which target company
technologies, people, processes, and service contracts can be combined with those
of the parent company to reduce costs, increase efficiency, or drive innovation.

What are the downsides to integration?
Although there may be many benefits to integration, there can also be many pitfalls
and downsides. Culture clashes, incompatible policies, and overlapping systems can
all create problems and additional work for the IT team. In the case of a full absorption,
there will inevitably be a major increase in the number of projects the IT team must
contend with, likely for a significant period of time. The added costs and potential for
risk that this brings must be considered when weighing the value of integration.

More successful
integration planning
One of the most common sources for failure in M&A is ineffective planning and execution. Many
companies fail to understand or properly prepare for the immense change that the transition will
bring. This inevitably leads to significant problems when the reality of the merger or acquisition
demands action from business leaders. Proper planning is key to achieving the desired outcome.
IT and business leaders
should work together
In many companies, IT
is not treated as a core
department and often does
not align its own goals with
those of the business.

At the heart of successful M&A planning is a close collaboration between IT and
business leaders. In many companies, IT is not treated as a core department and often
does not align its own goals with those of the business. This is an ineffective model
during normal operations and can be disastrous during times of transition. For effective
integration another company, IT and business leaders must work closely together.

IT should be involved
from the beginning
Given the importance of IT to modern business, and the very real risk that technology
integration can fail, it is absolutely critical that IT leaders be a major contributor to all
M&A decisions. Many business leaders are apt to ignore the real implications of systems
integration and service contracts when the deal is being made, leading to potential problems
in the aftermath. By considering how the merger or acquisition will impact IT from day one,
plans can be made and the deal can be structured in such a way as to avoid issues.
IT must consider
business goals
Of course, this collaboration must go both ways. IT should align
its approach to integration with the broader goals of the business.
Every decision should be made considering factors such as how
it will affect the efficiency of employees, the company’s service,
its ability to generate revenue, its effect on the company’s brand,
its risks, and its costs. By examining each element using these
metrics, technology executives can assess what will have a
positive or negative impact on the business as a whole.

Key considerations for
technology integration
Several elements should be considered when planning for a technology integration following a
merger or acquisition. This framework will help form the foundations of an integration effort that
builds on the strengths of both companies to drive the business goals of the unified whole.
Synergy
The integration should combine pieces of
each company to form a more complete,
more effective whole. This involves the
maximization of revenue streams through
embedding key products from the target
company into the parent company, or
vice versa. It also involves recognizing
that some elements should be left
segregated in order to achieve maximum
cost effectiveness or efficiency. Elements
that should be considered include people,
operational elements, applications and
services, and enabling technology.
Time to market
As a combined entity, a variety of factors
will change the time to market for
products and services. Leveraging skills
and resources from both companies can
help expedite development, testing, and
production, allowing products to be created
faster and less expensively. In some
cases, this can also work in the opposite
direction, as integration problems can
cause inefficiency and other problems.
Cost
The costs of any integration efforts will be
a major component of developing effective
strategies. Companies must examine the
expenses of a chosen integration roadmap,
as well as the savings it will allow, in order
to make better decisions about what to
keep segregated and what to combine.
Innovation
Bringing together the varied talent and
resources of two companies can lead to a
dramatic increase in innovation. Companies
may have the ability to develop new
products faster, combine technologies to
create more effective solutions, and benefit
from an influx of ideas. However, it is also
important to take steps to make sure that
innovation is not stifled by incompatible
culture changes or processes that aren’t
effective in a new environment.

Creating an
integration plan
In order to agree upon an integration model and ensure that the IT
organization is ready to carry out the necessary changes demanded
by that model, careful evaluation and planning is necessary.
Start with a baseline assesment
Designing an effective plan for technology integration that meets broader business goals
should involve careful assessment of both companies. This assessment should identify any
redundancies in people, systems, infrastructure, applications, vendors, capabilities, and
costs. It should also identify opportunities to add value through integration or collaboration
and look for areas in which there are gaps that need to be addressed. This process should
be broken down into the examination of several distinct components for each company:
People and organization
Assessments must evaluate the skills, capabilities, and overall organizational structure
of both companies. Look for overlaps in employee capabilities, potential power-
structure problems, and any issues that could arise from cultural mismatches.
Processes
Each company has processes in place of particular maturity levels and
other characteristics. Learning how to mesh the way both companies
accomplish goals is a critical step in achieving a successful union.

Infrastructure and applications
A careful inventory of each company’s applications, systems, and infrastructure must
be made to look for areas of overlap and to allocate resources in the most effective
way. Other issues to address include relative scalability of infrastructure, the suitability
of adopting resources to new tasks, and adherence to industry best practices.
Strategic alignment and governance
During a merger or acquisition, there should be mechanisms in place to ensure
each company is aligned in terms of its goals and accountability. This will help avoid
conflicts of interest and problems in the power structure of the new organization.
Financials
There should be a careful analysis of IT costs by function and activity for
each company. This allows the company to identify items that do not provide
a positive value and to integrate in the most cost effective way.

Create a timeline and
project portfolio
After making an assessment and deciding on an integration model, companies
must begin creating a plan that includes a structured timeline with milestones and
metrics to judge progress. This allows IT to prioritize projects according to the needs
of the business and allows for a more organized approach to integration.
Address risk mitigation
Technology integration inherently involves
risk. IT leaders should look at every
decision in terms of the potential costs
and pitfalls compared to its benefits.
This allows for planning that is based
on logical analysis of the facts and
reduces the chances that the integration
will fail due to unforeseen outcomes
Develop a
structure for
execution
Planning is only half the battle. Companies must also put solid structures in place to
ensure follow through on any projects that have been delegated. This involves ongoing
dedication to the integration process and requires substantial commitment on the part of IT
management to ensure that early work is not undone by later mistakes or lack of will.

In summary
Integrating IT after a merger or acquisition is a delicate process that must be handled
with great care. In order to ensure that both companies thrive after the transition, it is
important to understand overarching business goals, what the best integration model
is for the situation, and how to effectively implement the model. This takes thorough
planning, assessment, and strong executive will to ensure a smooth transition.
• Most mergers and acquisitions fail.
• IT integration is challenging.
• Avoiding failure requires a commitment to creating a viable integration plan
and the means to follow through on it.
• IT transition efforts must be aligned with business goals. Business leaders
should involve IT leaders in M&A decisions from the beginning.
• The integration plan is dependent on the integration model. Every company
must carefully choose what to integrate and what to keep separate.
• Each IT organization must be thoroughly assessed prior to integration to
look for opportunities, redundancies, and potential gaps
• Companies must work across organizations and departments to drive
productive change.
Key takeaways:

References
[1] Harvard Business Review, March 2011. “The Big Idea: The New M&A Playbook”
by Clayton M. Christensen, Richard Alton, Curtis Rising, and Andrew Waldeck.
[2] PwC’s 2014 M&A Integration Survey Report

Drive Your Business
Founded in 1995, WGroup is a boutique management consulting firm that provides Strategy,
Management and Execution Services to optimize business performance, minimize cost and create
value. Our consultants have years of experience both as industry executives and trusted advisors
to help clients think through complicated and pressing challenges to drive their business forward.
Visit us at www.thinkwgroup.com or give us a call at (610) 854-2700 to learn how we can help you.
301 Lindenwood Drive, Suite 301
Malvern, PA 19355
610-854-2700
ThinkWGroup.com

Business Driven M&A for IT

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