M&A Survival Kit: Relearning Enterprise Addition and Subtraction

Commercial enterprises must continuously balance the need to increase market penetration of current products and services against available opportunities to expand offerings and broaden geographic reach. In response to shifts in market condition both real and perceived high-performing, adaptive CIOs prepare and often test the competencies of the information systems organization to support merger, acquisition, divestiture, and buyout efforts from inception through completion.

META Trend: By 2005/06, 50 percent of IT groups will move beyond cost center status to dynamic planning, enterprise architecture development, IT asset management, and business relationship management. By 2006/07, world-class IT groups (less than 1 percent) will have merged IT and business processes completely into one set of “business” processes, supported by an appropriate, melded organizational structure.

The need for commercial enterprises to demonstrate consistent improvement in financial and operating performance prompts key decision makers to consider routinely adding to or subtracting from the portfolio of business holdings. Such activities stem from initiatives that include:

• Extending the base of current offerings into new markets or territories
• Securing new customers
• Acquiring complementary capabilities, products, and technologies
• Leveraging efficiencies of scale
• Streamlining operations

Whether applicable to the entire enterprise, a single operating unit, or a specific functional area, more of these efforts will be undertaken, and an increasing percentage of them will be completed as economic conditions improve. Therefore, savvy CIOs must ensure that the information technology organization (ITO) is prepared to support and facilitate merger-and-acquisition (M&A), divestiture, and leveraged-buyout (LBO) activities from inception through completion of requisite transition processes.

During the dot-com boom, the number of deals undertaken and completed to acquire or divest entire businesses or segments increased steadily. During this period, ready access to funds and high availability of workers adept at integrating cultures, processes, and information systems fueled steady growth in both deal initiation and completion. Total activity grew year over year until 2000 when the effects of global macroeconomic downturns reversed the positive trend (see Figure 1). Although most enterprises have continued to evaluate the feasibility and potential impact of various M&A, divestiture, and LBO opportunities, few have actually completed the process.

A recent survey conducted with IT executives from commercial enterprises located in North America and Europe shows that, though more than 80 percent of respondents were involved in at least one M&A, divestiture, or LBO effort from January 2001 through June 2003, only 18 percent of these were completed. However, since mid-2003, various central banks have forecasted positive, moderate growth (for example, 3.5 percent to 5.5 percent CAGR) in the world’s largest economies (for example,

www.worldbank.org, www.federalreserve.gov, www.ecb.int). As conditions improve and such growth is shown to be sustainable, it is likely that enterprises will ramp up efforts to acquire or divest enterprise assets in accordance with longer-term goals.

Because most ITOs have lost personnel with the experience required to undertake and complete such efforts, have allowed such skills to erode in the retained staff, or have not been able to shore up their legacy environments in the wake of budget cutbacks, CIOs will be faced with significant challenges as they are called upon to craft and manage acquisition/divestiture projects, directly fulfill obligatory transition requirements, and complete required process, system, application, and data integration efforts. Organizations that have fared well and retained individuals with successful M&A experience will face different challenges, because the new deals may vary in size, complexity, or allotted time to complete necessary integration steps. In either situation, CIOs will take the following steps to position the ITO to ensure success in anticipation of an increase in M&A activity:

Build cross-cultural consensus and capability: As practicable, CIOs should engage functional heads, customers, suppliers, and business partners to identify likely impacts that may result from various M&A activities. Such discussions should be based on multiple likely scenarios so that key requirements can be surfaced and evaluated across initiatives. They should also serve as advocates for constructing and incorporating integration activity plans into the overall planning process to stage activities, resources, and timetables as required to complete acquisitions and divestitures.

Build a flexible workforce: Due to cutbacks in staffing and the lack of critical skills (for example, infrastructure planning and management, software, security), CIOs should strive to ensure that IT staff members are technically and functionally cross-trained. Methods to accomplish this include job and duty rotations. Analysis of the ITO staffing mix (e.g., in-house versus selectively sourced) should be broadened to verify that key pools of knowledge are balanced and capable backup personnel are made available as required to respond to business opportunities as they arise. Individuals qualified to serve as an “M&A readiness team” (such as, four to five persons who collectively know the industry trends and risks, business practices, and processes, technical strategy, IT trends, and risks and nuances inherent in the technical environment) should be routinely engaged via actual and test cases to leverage their experience and skills to provide a rapid response to M&A initiatives.

Standardize rules of governance and control mechanisms: Our research shows that fewer than 20 percent of Global 2000 (G2000) firms have a governance committee with formal members, charters, and policies. During 2004, we believe the G2000 will establish such oversight mechanisms in response to regulatory and legislative pressures (for example, Sarbanes-Oxley, HIPAA, Basel II) in light of the challenges inherent in integrating processes, systems, applications, and data residing in multiple, disparate business units and platforms of newly acquired enterprises. Relative to M&A activity, the methods used to gauge levels of compliance and the results they provide will directly impact acquisition price and affect the pace of integration.

Identify and mitigate vendor contract risk: Vendor contracts for hardware, software, and services should be routinely reviewed with regard to fees, usage, and terms. In most cases, acquisition/divestiture activities will have direct impact on the conditions stipulated in contracts. Proper planning for the need to add to or deplete numbers of users, service points, or usage will be critical in facilitating transition and cutover to new or combined environments. As part of the strategic planning process, implications regarding acquisition/divestiture scenarios should be determined with appropriate levels of vendor involvement and in light of capabilities required to support the restructured enterprise.

Ensure accurate and consistent reporting: The passage of legislation requiring increased oversight and due diligence relative to financial reporting and operations controls (for example, Sarbanes-Oxley) necessitates CIOs playing a pivotal role to ensure that mechanisms used to meld or divest business entities are consistently applied and do not compromise process or data quality (see Practice 2116). As a result, CIOs should have experienced greater levels of scrutiny in current processes and procedures relative to security, controls, and reporting integrity. Methods used to safeguard key interests in the current environment (e.g., COBIT) should, at the very least, be readily applied to verify the capabilities inherent in acquired entities or improve the value of entities to be divested. CIOs should also foster system life-cycle approaches to ensure that accurate documentation is generated and stored appropriately.

Much of what is required to facilitate and execute acquisition/divestiture programs remains within the realm of good practice. However, due to recent levels of inactivity and a loss of personnel, CIOs must take pre-emptive action to heighten organizational and partner awareness relative to the tasks and the responsibilities regarding such initiatives. CIOs must also secure and reinforce such skills, methods, and tools required to ensure that the ITO is an enabler of (rather than a hindrance to) acquisition/divestiture activities.

Bottom Line: Forward-thinking CIOs will ensure that management approaches and disciplines required to anticipate and plan for M&A activity are incorporated into core ITO policies and procedures.

Business Impact: The ability of an ITO to anticipate and react quickly to M&A, divestiture, and buyout activities will directly influence the costs, pace, and quality of the efforts required to undertake and complete such initiatives.