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Secrets of the Merger Monsters

Secrets of the Merger Monsters

To stitch businesses together for profit, IT resources must be valued correctly Read this article to learn:- The three stages of a merger - Best practices for IT management at each stage - Why all executives need to be alert to IT considerations during the process Compared with a mergers and acquisitions team, Dr. Frankenstein had it easy.

Frankenstein hoped only for a creation that might live, but executives dream of creating an enterprise that from birth moves like the offspring of a ballerina and an NBA forward. Doc F. could use whatever parts Igor dug up, but the parts of a business acquisition rarely fit together even roughly; they may not even be from the same species. Frankenstein's monster slept through his surgery, but executives are required to keep their subject conscious and functioning, even while amputating and rejoining major parts.

The key to creating a final entity that will be up and running swiftly with grace and power is to perfectly splice the tendril-thin nervous system of the living organism. If corporate nervous systems are to work as well as they should, every executive needs to understand the networks and systems that can move data and ideas around the world as fast as thought itself. Information technology (IT) may be a small item on a finance report, but if you neglect the basics of IT management in a merger, one dark and stormy night you will be sure to have an angry mob of stockholders marching on your office waving pitchforks and torches.

A 1998 study of IT's role in mergers and acquisitions conducted by Edward M.

Roche, vice president and research director for the Kingwood, Texas-based Concours Group, in conjunction with Professor N. Venkatraman of the Boston University School of Management, found that the vast majority of mergers go through three major stages: strategy, valuation and transition. Each stage's main goal is to prepare for the next. And at each stage best practice IT management of people and systems calls for different approaches.

Managing in the Strategy Stage

At the strategic stage of any merger or acquisition, one company will be quietly eyeballing another, and discreet, oh-so-tentative initial contacts may be made. "A target company might not even know this is happening," says Roche.

No one breathes a number - general interest, general talk, general visions are shared. When a company identifies a target for acquisition and begins risk assessment and readiness verification, that is to say, when broad round numbers start to flash on calculators, principals need to keep their lips sealed until the final hour - or risk botching the whole deal. Larry Freedman, senior vice president and legal counsel for PlatinumTechnology Inc., an Oakbrook Terrace, Ill.-based company that has acquired more than 70 others, tells of a case (not involving Platinum) where a deal evaporated because of loose lips. The premature announcement of the existence of talks by the target company's executives precipitated a mass exodus of its software developers. That intellectual asset - those developers - had been a major driver for the deal, and in an environment where IT staffing is a headache, the premium to be paid dropped by 90 per cent. The deal fell through.

With dollar figures that make your telephone number, including area code, look like petty cash, mergers and acquisitions have gotten a lot of ink even outside the financial pages. But if you think that the high stakes in the M&A game mean the players have the processes down to a science, think again. Stratos acquired whole companies or parts of other companies five times in the past year, but the only thing that Derrick Rowe, CEO of the Toronto-based satellite communications company, is sure of is that no two mergers are alike. There are just too many variables of personnel, suppliers, customers and IT systems.

Rowe formed his company's strategy to consolidate existing communication channels on either supply or distribution sides of the business. "You're buying either a product source whose price is right or a valuable customer base," he says and, as an example of distribution-side strategic acquisition, points to Stratos's recent purchase of a company that specialised in communications systems for yachts. That's just one of the deals that has changed Stratos from a two-way radio, ship-to-shore utility for oil rigs off the Newfoundland coast to an integrated telephony, satellite and digital communications company; it also helped boost its revenues from $ US 62 million in 1997 to $ US 72 million in 1998. Rowe has full faith in his company's technical ability to make telephone, radio, e-mail and even Telex communications work seamlessly with each other, but he observes, "The big problem is integrating the backroom operations." Rowe fears that if customers perceive even a slight decline in such services as billing or support systems they will bolt to a competitor; thus he will not engage in negotiations without John Mackey, his vice president for technology, beside him at the bargaining table. No matter how appealing the financials may be, if Mackey declares a target candidate's systems will take too long to modify, Rowe will kill the deal. If the backroom operations can't mesh quickly, capturing the projected profits presented by a merger will prove formidable.

While subteams conjecture about how plants, labour, vendor contracts, legalities and government regulations will interact in the mix, only a top-notch information executive can say with certainty whether plug A will fit socket B. In short, CIOs need to be at the table early.

Elf Atochem North America Inc., the Philadelphia-based chemical subsidiary of multinational French Elf Acquitaine, accomplished three acquisitions during nine months in 1998, which totalled between $ US 300 million and $ US 400 million in activity. Executive Vice President Jean-Claude Rbeill headed teams of five to seven executives for each deal - one chemical plant from DuPont Co., one chemical plant from Air Liquide in Canada and the total acquisition of four plants from Rohm and Haas Co. Rbeill recalls that five years ago, when Elf pursued an acquisition, IT personnel were not at the table when money guys calculated discounted cash flows, analysed labour contracts and scrutinised vendor agreements. "We assumed that once a deal was made, when it came to integration, all the rest that needed to be done in IT would follow." He purses his lips and smiles. "Mais non. That, of course, proved not to be the case." Now Elf Atochem's M&A teams always include Robert M. Rubin, senior vice president and CIO.

Managing in the Valuation Stage

The prospective acquirer can dominate the strategic stage, but once into valuation, both players need to put cards on the table to identify risks, evolve a budget and find the best opportunities for synergy - the magical combination of processes, customer bases or suppliers that will yield something greater than the sum of the parts.

This stage is touchy, touchy, touchy. Naturally, the content of these meetings is highly secretive, and they can be nerve-racking (see "Been There, Done That," below). Remember, everyone at the table is wondering about his or her personal future - the person sitting across from you might be your replacement, your colleague or your boss. "This is not the place to show ego. Be conciliatory, calm, low-key and secretive," Roche advises. "A blowup here has repercussions throughout the process. People, not balance sheets, decide whether the process will be friendly or hostile." Also remember that some kinds of information simply cannot be pooled at these early meetings. Exchanging pricing data, for example, can get the Justice Department alarmed about restraint of trade; if the parties at the table decide not to go through with the deal, that conversation starts to smell a lot like price fixing.

Executive teams from each side prepare discovery questionnaires for their counterparts - HR prepares a questionnaire for HR, logistics for logistics, IT for IT, finance for finance. Of course, internal organisations of the two companies may not always be identical, and sales folk may find themselves across the table from marketing folks. The idea is not to champion one organisational chart over another but to ready everyone for smooth integration down the road. Companies that have established themselves as M&A leaders guard the specifics of those questionnaires closely. They know the right questions asked the right way will elicit the best information. But typically an acquiring company's IT experts (or both, in a merger of equals) ask for a list of the most critical applications used in the target company, details of the reporting structure for personnel in the IT shop, the nature of recruitment procedures and hard questions about the company culture, vendors, budgets and current projects.

Once an initial offer is made, all the rest is dickering - it's called due diligence. Beans must be counted and figures firmed up.

Staff morale is especially tender during this stage. Once word of a proposed merger or acquisition is out, rumour mills start to grind while the photocopying machines run out of paper producing staff rsums. If key people hit the bricks, they take with them everything they know. In a hot labour market for IT personnel, massive defections can happen quickly - and that can be fatal to the deal. The valuation stage, when the secret is out but the content of talks is still shrouded, "must be the end of rumours," says Roche.

People have to know with reasonable certainty how long they will have their jobs. For example, Roche recommends guaranteeing employment for a year - anything to avoid the danger that the business will grind to a halt as the organisation is gutted. The best way to manage that problem, says Roche, is "to have an expanding group of people beyond the core teams [implementing the merger]. Invite more and more people in. Of course, this has to be managed delicately." Frank Donovan, a senior account manager for IT at Texas Utilities Co. (TU) in Dallas, says, "If you can get your IT people out front on due diligence, you'll do better." It's a lesson TU's Donovan learned too well during a 1997 $ US 1.3 billion merger with Enserch, an integrated natural gas company also in Dallas.

The deal suffered delays because the SEC and Department of Justice faced a backlog of regulatory reviews due to the huge number of merger announcements in 1996. Then the government's degree of apprehension about TU's case came as a surprise; TU officials thought it would be less concerned with a strictly in-state merger. Rank-and-file IT employees at Enserch and TU acted as though they were in a shutdown. Who could say which projects would go forward and which would die? "We gave retention bonuses and longevity commitments [to keep the business functioning]," but Donovan adds with regret, "we could have done more." Managing in the Transition Stage Donovan now manages his merger teams with an eye toward a smooth transition.

Having representatives from each IT application development team meet once a week along with key business unit clients "avoids all the 'gotchas,'" he says.

No one wants to learn too late that HR insists on an e-mail system for which marketing has no use. Donovan limits meetings to one hour. Team members draw up issues lists and examine scheduled implementation problems for ripple effects.

Best IT management practices in the transition stage require flexibility, but interrupting ongoing IT projects can precipitate opportunity losses and minor morale problems. For example, when Elf Atochem bought a hydrogen peroxide plant in Memphis, Tenn., from DuPont, naturally the factory was hooked up to DuPont's networks and systems. An acquisition might be legally accomplished at the stroke of midnight on a certain date, but if you pull all the plugs at once, the site will go dark. Ben Vitesse, Elf Atochem's director of SAP applications, slowed Elf's enterprisewide SAP project while it set up "SAP-Lite" at the Tennessee site. Accounts payable, tracking payrolls and other financial functions were piped back to the mainframe computers at Elf's Philadelphia offices, but shipping, for example, which can be better handled on the scene, was left down there. That quick and dirty temporary fix allowed faster movement from DuPont's systems to Elf's. What's the big deal? During the transition period, DuPont charged Elf a monthly fee in the mid-six-figure range for use of its IT systems, notes Rubin. The faster the acquired plant was put online with Elf's systems, the more money was saved. Making the effort to explain to a frustrated staff that reallocating their time is tactically necessary is well worth the trouble.

Speed is always important. If a company doesn't capture profits in the crucial first five or six months, it may not be able to at all. Markets change. It's one thing at the strategic stage to project savings - it's something else during transition to respond to a drop in the cost of oil. Or of ships, shoes or sealing wax. The more distant the time horizon, the less accurate predictions about profit will be.

And beware of all sorts of wolves that lurk in the forest ready to prey upon your plans. Rubin tells how a software vendor presented Elf with a bill for several million dollars three months after another merger was closed on the theory that the new corporate entity had never contracted for the software in operation at the acquired site. "He claimed that the change in [company] name invalidated the contract," Rubin explains, "so I picked up the telephone, called his home office and told them if they wanted to continue to do business with us, we required a new rep." Chances are you won't make or break a deal based on the IT factor. That's absolutely appropriate - business logic should always come before systems considerations. But any executive who goes forward with M&A strategic plans without understanding the management techniques necessary for IT risks meeting the fate of Dr. Frankenstein. You'll recall that the monster, the doctor's own creation, returns to throw him out the window of a burning windmill. With doom like that staring you in the eye, be sure the living entity you build is happy with your management at each stage of its creation. Senior Writer Perry Glasser can be reached via e-mail at glasser@cio.com.

Been There, Done That

Once the word was out on the merger, IT had to be involved. At the time, it was the biggest merger ever in the drug industry.

Right off, we disengaged a number of projects in a way that did not affect the immediate operation of the business. Some IT projects got moved up front; some were dropped. We put our initiative for marketing systems on hold, for example.

Nobody knew what marketing was going to look like anyway.

The first meeting between the merger teams was a meet-and-greet session, 30 or so executives from both sides. Then we exchanged a lot of e-mail and letters. At our second meeting in Chicago, we got down to the hard business of disclosure. Eight or 10 of us from IT were there, the top people from each side. Both teams laid out in detail what kinds of hardware and software we used, how many people had what skills and where our IT shops were located. It was like playing poker or sparring at boxing. Our enterprisewide system was SAP; theirs was a combination of Baan and J.D. Edwards. Then late one night my hotel room phone rang and I got the warning: "Don't even have a cup of coffee with those guys at breakfast!" The Justice Department had become interested because of monopoly and restraint-of-trade issues, so we had to halt talks. In disclosure, conversations about vendors and pricing can be considered exchanging information that would hurt the business of our mutual suppliers if the merger never happened and we remained separate companies.

The deal was on hold for three months, though we had gotten the basics out of the way. Our side couldn't do any work on the merger, but we could do a lot of analysis. The government required Sandoz to divest a lot of its business in animal health and agriculture, and since it was working with a decentralised client/server system, Sandoz basically lost its infrastructure. As Sandoz was forced to lose sites, it lost key network components. So you could say that our mainframe system, which was all in one place, "won" because of government intervention.

It all shows that an executive has to be proactive. Keep people informed so that key personnel don't bail out as soon as they hear a rumour. When they ask questions, if you don't know the answer, share your ignorance. You have to be accessible to staff and keep information current so that no one feels as though they are being played with.

Senior Writer Perry Glasser can be reached via e-mail at glasser@cio.com.

Editor's Note: William Lauterbach now works as a senior consultant for the Kingwood, Texas-based Concours Group.

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