Co-author:Jatin Singhal
According to a recent report, the global cumulative value of merger and acquisition (M&A) deals topped $3.7 trillion in 2019. Growth through acquisition remains a lucrative option for companies when compared to organic growth.
Merger and acquisition programs have, over the years, played a crucial role in helping organizations expand their portfolio of existing products and services, gain access to a larger market share, and acquire a new talent pool. Today, however, merger and acquisition deals serve a larger purpose in digital transformation for acquiring companies. It provides an avenue for updating and modernizing technology-driven operating models without having to invest resources into pursuing an in-house digital transformation strategy. A company can simply integrate the target company’s IT solutions, i.e. IT systems and IT platforms, into its own and leverage the transaction as an impetus for digital transformation.
Vital IT Considerations in an M&A Program
Even as the COVID-19 pandemic continues to upend global markets, studies reveal that mergers and divestitures will continue. In fact, M&A activities may even grow in the short term. However, the question remains whether all M&A activities will ultimately see fruition. As per a recent report, it has been reported between 50-85% of all mergers fail at various stages with almost 83% of mergers failing to bring positive returns to shareholders.
While many factors lead to these failures, often the successful integration of IT platforms and digital assets becomes one of the major challenges. In most cases, IT integration is not given due importance at the early stages of an M&A program, leaving the IT teams with very little time to migrate existing digital assets and technology infrastructure at an advanced stage of the merger.
IT transition is fraught with challenges, and as a result, an iterative approach is the most suitable. There are several critical IT aspects that enterprises must consider when initiating an M&A deal. Based on our experience, we are elucidating a few of them below.
- IT Due Diligence and Role of IT in Legal Structure
M&A deals rely on a legal framework that determines a seamless change of controls. However, it is often seen that IT is not involved in the initial stages of the deal which hinders the quick turnaround of M&A deals. IT must be involved from the onset to ensure due diligence and greater clarity on how the deal can be progressed and ultimately closed. Sometimes, companies fail to agree on the IT framework of the merged entity, leading to deals falling apart at the final stages. This can be avoided by proactively involving IT in the initial stages of the deal and predicting the IT bottlenecks that can threaten the program.
- Data Ownership
Data fuels new-age businesses and often drives competitive advantage for organizations. It is therefore paramount for all mergers and divestitures to determine who controls the data and what data changes hands. The sheer volume of data generated nowadays makes data ownership and sharing a problem. Organizations must be pragmatic when asking for the data ownership as not all the data of the divested organization is of importance to the merged entity and vice versa. Further, various data protection regulations dictate the nature of data that can change ownership. Hence, IT plays a critical role in the M&A program to seamlessly transfer data between systems without compromising guidelines while ensuring business continuity.
- Common IT Policies
One of the key areas of contention in every M&A initiative is the IT policy to be followed by the merged entity and when in time it should become applicable. The seller is often in hurry to cut off the divested entity from their systems but the buyer may not be ready or may not have coherent IT policies with the divested entity, leaving things in complete chaos. And, while mergers often see a short period of confidential data exchanges, the objective should be to establish a robust set of IT policies that ensure operational optimization and watertight cybersecurity.
- Third-Party Contracts Transfer
Third-party IT contracts split during an M&A program is a gruesome task due to them being immensely complex in their nature and is often underestimated. Imagine a case where the seller and the divested entity are using the same parent contract with no separate transactional agreement. It becomes both operationally complex and financially overwhelming to sort out these contract splits and transfer. It is here where organizations realize the importance of robust Software asset management and its importance in IT.
- Industry- and Vertical-Specific Knowledge
With time, we are seeing companies from completely different industries and verticals merging and divesting. Companies are looking for purpose-driven mergers and divestitures, and the focus is on specific capabilities that can result in greater revenue generation and business growth. In such a scenario, the IT team needs to acquire vertical-specific knowledge that is crucial to the merged entity. A poor understanding of the industry vertical will invariably lead to various IT latencies and lags, resulting in delays and subsequent losses.
- Simplified Cutover for Employee productivity and User Experiences
In a typical M&A deal, the systems and processes of both entities can continue without overhauls. In the backend, the platforms are gradually combined and data is merged. Once the IT team has successfully merged all platform- and data assets, the systems are also gradually integrated. This cutover must be simplified to ensure business continuity and optimized operations. It is important for the enterprise to set a timeline for the cutover and meet the targeted date of completion to maintain business continuity. In several cases, complex systems like CRM, SAP, and HCM are not properly integrated and employees have to record data on two different systems for a longer period leading to diminished productivity and poor employee experience.
For a seamless IT environment, the IT governance structure must be similarly redrawn. With several IT leaders and suppliers moving to the merged entity, decision-making authorization takes a few months to iron out. But, for IT to drive the operational needs of a business, IT governance must be crystalized swiftly and seamlessly.
- Public IP Address
Public IP addresses due to their uniqueness are dear in nature, and hence, segregation of these addresses, once two entities get merged, is a painstaking process. IP addresses are often hardcoded in the system, specifically in legacy monolithic systems and configuration applications and a split of IP addresses often leads to application downtime. Though long and arduous, it is an important responsibility of the IT team, and enterprises need to address this on an ongoing basis to the extent possible. Organizations need to be pragmatic in splitting and working with these prized possessions during the M&A activities.
- Upstream and Downstream Integration
Organizations have multiple stakeholders, and mergers can often cause serious IT glitches. Every change made by the IT team of the parent company can impact the suppliers, dealers, and partners of the acquired entity as well as for the buyer. It is therefore critical for companies to ensure thorough upstream and downstream system integration and plan for the key interfaces early in the process.
In Conclusion
Seamless IT transition is a bedrock for every successful M&A program. And, as industry leaders embrace the idea of using technology to see their M&A initiatives succeed and sustain, a key consideration for them is to onboard IT solutions specialists and digital tools for seamless system integration. In-house IT teams can sometimes be parochial and too closely associated with the internal processes, systems, and it can be an arduous task to analyze the IT needs of the merged entity and most of the times organizations need an outside-in point of view from the external specialists who are best suited for these transactions and comes with clear priorities needed to make the program a success.
As we embark on a journey to the future of enterprises, mergers and acquisitions will be redefined in no small measures by digital tools. And, IT will be more essential than ever.
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