CIOs Role in a M&A

An international survey done by PwC of hundred CEOs involved in the recent M&A activity threw up some very interesting facts.

It was found that more than half (58%) of CEOs interviewed did not measure or use any tool to control integration costs. Half the CEOs affirmed that in their next acquisition, they would give added attention to expectations of employees and planning of operational integration including integration of people, processes and IT.

Further, CEOs mentioned that high costs faced by an organization in IT integration post deal apart from the existence of un-controlled priorities between critical and non-critical IT investments lead to overlooking IT associated risks and expenditures during the M&A process. CEOs also talked about the lack of alignment of management softwares (like ERP) to meet the needs associated with changes arising from a M&A situation.

Research consistently shows that integrating information systems is one of the top integration challenges for large transactions. IT involves the highest volume of activity over the longest period over time, hence, defining the total time span of the merger. This volume alone increases the complexity of IT integration. The enormous dependencies which IT has with other functions to execute its plan further adds to this already high level of complexity. IT plays a key role in determining the level of integration complexity in a merger.

Given the implications of IT in M&A, it is of utmost importance to establish the role of IT through the deal cycle, right from the early stages of due diligence all the way through to the end of the integration process. The involvement of IT in the early stages of a deal can help identify magnitude of the integration challenges and hence, help in developing a better valuation. Since IT represents between 30-50% of total merger synergies, effective integration of IT post merger becomes one of the top determinants in the overall success of a deal. Efficient IT integration adds speed and value in delivering the synergies outlined during a merger.

Key Challenges

Considering that all organizations have their own individual operating methodology with their own set of processes, policies and practices, it is important that post merger the merged entities work as a single entity with consistent operating models. This results in another challenge for an IT organization. To further complicate the problem, a merger also results in an increase in the total number of operating locations to be managed.

One of the foremost challenges in merging two separate entities lies in merging their IT systems. Each organization is equipped with a full set of applications, IT infrastructure, technologies and complexities. However, post merger, one set of systems and infrastructure becomes redundant. Greater the amount of duplication, higher is the redundancy leading to an increase in costs and complexity of an integration.

The role of IT in M&A starts with the pre-deal due diligence and identification of key IT risks, costs and synergies; and stretches the deal process into the integration phase. Furthermore, IT integration involves a plethora of activities starting with Day 1 activities including creation of IT integration roadmap, establishing clarity in cross functional dependencies and ownership, defining key IT deliverables, IT transition plans, and old systems phase out plans. To add to a vast amount of ground that the IT integration team has to cover in a compressed amount of time, it also has to maintain functionality so that the business as usual is not affected negatively by the post merger integration of systems. This makes IT integration the most complex, lengthy and critical process during the entire merger process.

Before an organization ventures into the unknown waters of post merger integration, it makes sure that a consensus is established regarding the acquisition rationale and all key people involved in the integration. However often it is seen that due to difference in defining the success criteria, IT management and business have conflicting priorities. While IT team focuses on completion of the integration and achieving an operational stability, business management team concentrates on achieving revenue and profitability synergies. This poses as a major challenge in the success of the integration and acts as a key hindrance in managing the IT integration during M&A.

During a merger, an organization faces loss of key people in all departments including the IT department which can be detrimental to the success of an integration process.

A Big Responsibility

Before M&A, one of the biggest mistakes that most organizations make in terms of a M&A deal, is that of not involving IT soon enough. CIOs must make it a point to become a part of the pre-deal team. This team is involved in the assessment of various companies to choose the right fit for their M&A goals. This team evaluates a company on various aspects before deciding on valuation of the company.

CIO must be present for this assessment so that he can evaluate the target company from an IT perspective, highlighting IT related synergies as well as risks. His presence at this stage is crucial to help the organization reach at a more thorough valuation of the company. Also, his presence at this stage gives CIOs the chance to plan ahead and better prepare for the level of system complexity that they shall be dealing with while integrating the two companies.

The involvement of CIO at the pre-deal stage enables him to better understand his organizations motives and goals behind a particular merger or acquisition. By grasping a panoramic view of the deal and its business intent, he becomes better suited to create an IT integration plan that shall be in complete alignment with the organizations goals. His knowledge of the bigger picture is essential in assigning priorities and developing an effective Day 1 plan. If a CIO is not aware of the deals business intent, it may result in confusion, delays and loss in time dependant synergies.

Pre-merger

CIOs involvement in the pre-deal stage is critical. CIO can also use this opportunity to bring his IT department up-to-date with existing systems. Further, he can also develop M&A principles and templates for the due diligence and planning phase. This can help smoothen the process of integration and make it more time-efficient.

Once CIO has managed to become a part of the pre-deal team and assess the IT risks and synergies at that stage, it is important for him to become actively involved in due diligence of the acquired company. CIO should carefully assess the acquired companys IT, validate the synergies identified and develop an integration strategy for merging the acquired companys IT systems with the acquirer.

An in-depth assessment of the acquired companys IT enables a CIO to shorten the integration phase as he can chalk out a detailed integration plan, establishing costs, deadlines, requirements and priorities. It reduces confusion and delays at the time of integration and helps achieve synergy goals faster.

At this stage, a CIO must also define the decision making structure and fill key organizational positions. This decision making structure along with key people in charge of the decision making process shall help in breaking through any roadblocks that the IT team faces during the integration process. This is a crucial step as a CIO must make sure that he appoints a strong steering committee that has the expertise and experience in managing an integration process and is capable of troubleshooting difficulties that the IT team may face.

Finally, a CIO must form an IT integration team at this stage. This must be done during the due diligence phase itself, so that the team can familiarize themselves with the acquired companys IT systems and structure.

Post-merger

In the post merger scenario, IT must be ready with the Day 1 plan. This involves all activities that have to be completed immediately after the deal is closed. This involves all critical infrastructure related activities such as common network set up, email, Internet and help desk setup. At this stage, a CIO must ensure that the IT team prioritizes all Day 1 related critical work and defers all non critical IT work. CIO must ensure establishment of connectivity and consolidation of key infrastructural aspects is given the utmost importance.

Another important activity that must be done on Day 1 is the revalidation of the due diligence assessment. This revalidation helps in further scrutinizing the plan developed during the due diligence assessment to make sure that no aspect or activity has been overlooked. Once the revalidation is completed, the IT team must prepare a detailed project charter setting deadlines and priorities for all activities involved in the integration. The critical milestones in this charter should be planned to the lowest level of detail in order to provide complete clarity of the task.

Once the Day 1 plan has been implemented, a CIO must concentrate on monitoring execution of the project charter for the integration. CIO should drive the team to prioritize completion of any data migration and system integration before venturing into other activities.

The CIO along with the IT integration team should define integration goals and give them a specific deadline. Further, they should also define strategies and plans they would follow in order to achieve their goals in the stipulated time frame. He should also pay special attention to consolidation of vendor agreements and also to the completion of business process and system improvement.

Skills Needed by a CIO

In todays M&A environment, the role of a CIO has become integral in the success of a deal. Given the complex nature of his involvement in each stage of a M&A deal, a CIO must possess a wide spectrum of skills to be able to execute his responsibilities successfully. A Gartner Research done on M&A confirms that given the rise in cross order M&A activity and the key role of IT in M&A, CIOs must develop world class M&A capabilities.

A CIO needs to have business acumen, leadership skills and innovative thinking coupled with strong influencing, networking and negotiating skills to influence key deal decisions from the pre-deal stages. Along with a thorough understanding of technology (applications infrastructure and processes), he must understand the role of IT as a key enabler for business strategy.

The CIO should also be driving innovation in businesses and aligning IT strategy to support business initiatives. He should realize that he is no longer simply the custodian of the technology a company uses and is expected to have a robust understanding of the business and cross functional areas such as finance, marketing, sales, HR, operations and supply chain, along with high level organization decision making skills to take key IT decisions that directly influence a deal.

The CIO must also possess strong people and cross cultural skills to deal with cultural and people integration issues and motivate staff members during cross border M&A integration. In addition, he must have strong vendor relationship skills to leverage the IT outsourcing partner for integration, minimize risks, maximize flexibility and derive value out of any merger or acquisition. It is very important for a CIO to have strong program management capabilities to achieve a M&A integration within the desired costs and time-frame, and achieve desired synergies. A CIO should be able to re-direct work time from trivial and ritual task oriented actions to strategic leadership and must-guarantee accountability. A CIO must take the lead in setting the course and be at the helm, and not in the engine room.

Salil Agrawal
The author leads the delivering deal value practice as part of the consulting team at PwC
maildqindia@cybermedia.co.in