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Forrester View - Mergers, Acquisitions and Saving IT Dollars

Forrester View - Mergers, Acquisitions and Saving IT Dollars

Your company has just bought a major competitor. The good news: you've been named CIO of the new company's unified IT organisation. The bad news: it's your job to merge two unacquainted IT organisations and start producing the benefits that your CEO promised the financial community. If "postmerger synergy" is going to mean anything more than new golf partners, you need to make plans about personnel, technologies and managerial styles -- fast.

But before rushing headlong into meetings, assess your situation. Companies acquire or merge with other companies for specific business reasons that fall into four categories based on companies' relative sizes, industries and roles.

For each type of merger, there is a distinct strategy for recasting the IS organisations and infrastructures. Each strategy addresses the degree to which managers should plan to merge personnel and architectures. In every case, postmerger or acquisition savings come from the elimination of system or workforce redundancies in the new business entity.

Four Merger Flavours

1. Marriage. In corporate marriages, companies are of similar size and play similar roles in the same industry. The resulting company resembles both of the two previous organisations. The business objectives of corporate marriages include building market share and taking advantage of economies of scale. IS should merge workforces as well as infrastructures and application portfolios -- there's no reason for redundancy in either area.

2. Acquisition. The acquiring company is usually at least twice the size of the acquiree, and both companies are in the same industry and perform similar roles. The acquisition creates a larger version of the acquiring company. The IS group of the acquiring company should absorb the valued parts of the target company -- its people and products -- but replace the acquired IT infrastructure.

3. Vertical Integration. The companies are in the same industry but perform different roles. Companies vertically integrate to make more money by closely linking different business processes -- for example, a manufacturer connects its inventory system to a distributor's order fulfilment system. Since the two companies' IT systems support different industry functions, there won't be much redundancy, except in administrative applications like e-mail, office suites, HR and financials. Ultimately, one IS group should be able to operate and maintain this linked set of systems with fewer people maintaining the combined systems.

4. Conglomeration. In a conglomeration, companies are in different industries, and the acquired company often becomes a separate division within the resulting conglomerate. Companies form conglomerates to increase their aggregate economic stability or to help mature businesses fund growing businesses. The merged companies' IT systems are unlikely to warrant integration beyond a common, thin layer for administration of such ongoing operations as financials, groupware and software for HR. Separate IS groups should run these disparate systems, integrating them at the top level only via an IT council chaired by a corporate CIO.

General Principles for Merging

Since all four flavours of IT mergers require swift action in terms of vision, money, people and technology, executives should adhere to the following broad guidelines:Be ruthless with technology. The siren song of combining best-of-breed technologies is a dangerous temptation that turns out to be illusory. CIOs most pleased with their IT integration processes have chosen one of the two merging companies' application portfolios in its entirety -- and dumped all the other company's systems.

Be kind to people An IT application doesn't feel bad if it has no place in the merged company, but a worker does. Be careful to characterise the merged organisation as new and better than both of the previous IS groups-not the victory of one culture and staff over another.

Spend money to save money. The average merger results in a 19 per cent savings of the merged companies' combined IS budgets, but the new enterprise generally has to spend an additional 12 per cent on one-time charges for new desktops, servers, network gear, severance packages and retention bonuses to save money.

Maximise premerger planning by seeking advance warning. The enemies of a smooth merger are time and the absence of clear direction. Only one-third of CIOs are party to the corporate merger decision process -- the rest have to start planning after the merger announcement. Impress upon senior executives that postmerger is not the time to start planning the IT transition that should have been thought about in premerger considerations.

How to Combine Technologies

Though every merger or acquisition is undertaken for business reasons, chances are the first demand of the IS shop will be to ensure that systems stay up and that the planned efficiencies are realised. Although at first glance combining organisations seems to offer an opportunity to choose among diverse systems to find an optimal combination, the best-of-breed approach is a trap. A person might think winnowing the best systems from each of the premerger companies would produce an all-star portfolio; however, players on all-star teams don't always play well together. As one CIO put it, "Perhaps a Toyota's wheels don't belong on a Mercedes."To maximise the new efficiencies offered by a merger or acquisition, strive to pick a single, intact technology suite from one of the premerger companies as the basis for the merged companies. When choosing the best technology suite for the merged organisation, look for one that can support the postmerger business strategy, can grow, is year 2000 compliant, can migrate to an Internet computing model and is economical to maintain.

Exceptional Treatment

In the search for the best technology suite, evaluate exceptions to your methodology, but don't let exceptions drive the process. When truly immovable objects are met, the overall goal of selecting a single technology suite must occasionally yield to the higher goal of preserving value in the merger-typically when your customers, suppliers or business partners can't tolerate changes to a process or product. For example, incompatible manufacturing approaches may preclude manufacturing or enterprise resource planning (MRP/ERP) systems, just as regulatory requirements may interfere with some possibilities for redundancy elimination. Similarly, though purchasing processes for maintenance, repair and operations items like light bulbs could be consolidated, in the manufacturing sector the direct materials purchasing process for items integral to finished products tends to be industry- or function-specific. Because of that fact, those purchasing processes will resist consolidation.

Finally, it usually doesn't make sense to change underlying systems when IT is integral to the product, such as with insurance, which is pretty much a creature of the systems behind it. Rather than change the IT systems, a postmerger insurance company would be smarter to discontinue an old product, place legacy subscribers into storage mode and try to lure customers into subscribing to a newer product.

Remember that these exceptions are reasons to reject individual applications from your technology suite -- not an endorsement of a widespread best-of-breed selection process. When considering exceptions, in addition to being wary of customer requirements, watch out for exceptions that may prevent an intact technology suite's adoption.

Once a technology is selected, follow the natural order of the rollout to accomplish the merger of systems. Get everyone communicating about how to operate the new system via voice mail, e-mail,ÊgroupwareÊandÊscheduling software. Allow automatic access to corporate data so that applications can enhance financial consolidation and other mandatory reporting requirements only after having provided access for people via a corporate intranet. The final stage of a rollout blends business processes. After the new organisation is populated, the move to a common technology suite is completed.

Management Style

CIOs who have survived mergers advise colleagues to allocate resources to the most difficult tasks, such as merging applications that involve business rules or management preferences (see "Degree of Difficulty" at left). In other words, pick your most important fights carefully. They also recommend avoiding being distracted by desktop exceptions because desktop decisions are complicated by a swamp of pirated software, games and umpteen different mail clients. Despite departmental pleas, successful CIOs vigorously impose unified desktop standards to move on and get about the business of managing the newly combined enterprise's systems.

Communication and incentives are your most powerful tools, so it makes sense to overcommunicate with end users to dispel uncertainty. A compelling vision for the new IT organisation is the best weapon against fear and rumour. Build a strategy to augment a merger that uses e-mail, voice mail, Web sites, face-to-face meetings, newsletters-the more vehicles, the better. But it's not enough merely to talk. To lock key talent in place in this booming market for IT skills, slap golden handcuffs on both medium and high performers that sweeten salary, benefits and responsibilities.

Remember, too, that investment bankers aren't basing much of their "synergy-related" merger valuation premiums on IS savings. Although a 19 per cent IT savings rate is significant, the impact of IT savings on a merger's overall value isn't usually a primary consideration, since IT costs are a single-digit percentage line item for most companies. On the other hand, these same investment bankers overlook the potential for IT-related mismatches to undermine the value of business combinations. The message for CIOs whose companies are contemplating merging with or acquiring another company is clear: one way or another, make sure someone isn't underestimating the IS-related issues of a potential merger or acquisition. And what's in it for you? As one CIO said: "The reward for a successful merger is that some fine day you get to do it again."Bob Chatham, senior analyst in Leadership Strategies at Forrester Research Inc in the US, can be reached at Bob_Chatham@forrester.com

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