Joined-up IT

The elusive synergies of a takeover can be lost through techno-incompatibility. Systems issues must be addressed at the outset of a merger. Ron Condon reports.

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Last Updated: 31 Aug 2010

The merger negotiations are finally over. The ink is barely dry on the agreement and the champagne corks have been popped. Then some bright spark ventures a suggestion: 'We should probably mention it to IT some time soon. They'll need to connect all the cables together. Or whatever it is they do.' It's enough to take the fizz out of the bubbly.

Any merger done that way - and many are - is likely to throw up some nasty surprises and, at the very least, will severely reduce the benefits you were hoping for. You will have two of everything - financial systems, customer files, HR systems, e-mail and phone networks. The odds are they will be different and incompatible, and it will take a lot of work to get them to mesh together.

Getting them to intermesh is probably a waste of money, anyway. The whole point of most mergers and acquisitions is to achieve greater economies of scale and better efficiencies. Running two parallel IT systems is no way to do it.

But according to Chris Digby, a consulting partner at consultancy Deloitte, attitudes are now changing. 'Where once the IT dimension of an M&A deal was often an afterthought, it is now one of the keys to success.'

With the rise of the internet and on-line businesses, a growing reliance on e-mail and increased automation of processes, says Digby, 'it is essential to know exactly what impact IT will have on the transaction and what the implications of the transaction are for IT'.

By definition, any merger involves two sides, and companies need to understand the potential and efficiency of their own systems first. If you have a lot of complex bespoke systems, built using non-standard technology, a merger is going to be a difficult process in IT terms.

For example, the software giant Oracle undertook a radical restructuring of its global systems five years ago, going from 40 data centres and 40 different HR systems to just one data centre and a single HR system to handle worldwide staff. So when it swallowed up its arch-rival Peoplesoft in a £10.3 billion deal in December 2004, the process was immeasurably easier than it might have been.

According to Dave Callaghan, head of European alliances for Oracle, the move was possible only because the company had done that preparatory work. 'Because we had already simplified our systems when we integrated Peoplesoft, we had only to enter the employee details once. That gave them a car-park pass, security pass, payroll number and an identity to procure supplies in a self-service way,' he says.

'HR migrated relatively easily, although others took longer and had to run in parallel for a while. The key is to understand this before the merger takes place, to spot the quick wins and where you'll need to run in parallel.'

Assuming you know the strength of your own systems, it is essential to use every opportunity to get a true picture of the target company's IT.

Says Digby: 'Our experience at Deloitte is that simple questions - such as what business continuity plans are in place or how new systems are built and tested - can often yield revealing answers.

'As an example, IT staff at an on-line travel company disclosed during a pre-deal investigation that their disaster recovery cycle would mean the company's systems could be down for as long as 18 hours. The business managers were unaware of this - having been reassured that a recovery plan was in place. This clearly shows the IT department was not interacting with the business in the way it should - a critical factor when considering an M&A purchase.'

In another example, Ross McAlister of Atos Consulting says the takeover of a German manufacturing company hit problems when the acquirer realised that in order to use the highly efficient enterprise resource planning (ERP) system that had made the target company so attractive, the purchasing company would have to change all its business processes.

'So they carried on with their own systems and left the acquired system running its own. They missed the expected synergies, until they could finally make the transition to the new ERP system much later,' says McAlister.

If the acquired company has outsourced its IT, you will need to know the length of the contract and penalty clauses for early termination. Again, this can reveal a nest of vipers, with open-ended arrangements or heavy cancellation fees.

But, assuming you have done your research and the deal goes ahead, most experts agree that the first 90 to 100 days are key to making things happen and reshaping IT for the new integrated business. Dr Simon Rawling, global head of project management company PIPC, cites the takeover of TSB by Lloyds: 'Integrations should not impact the customer - LloydsTSB is a good example of how not to do it. The company worked off two systems for ages, delaying counter services and losing business as a result.'

By contrast, HSBC's many takeovers during the past few years have sharpened its skills, and the company normally ships in its own systems as a 'bank in a box', enabling the acquired bank to become an instant member of the family.

With proper planning, it should be relatively easy to rationalise basic IT infrastructure - data centres, networks, e-mail systems, helpdesks - thereby finding some instant economies. But integrating applications (HR, finance, CRM, production) may take longer.

Even so, most people suggest setting aggressive targets to get the process moving. 'Don't leave it to IT to decide priorities,' says Atos' McAlister.

He advises having a dedicated IT project team working on the merger and helping other business units as they uncover problems or opportunities during the due-diligence period, and telling them what can or cannot be done.

'IT often see the merger as just another project - which it isn't,' he says. 'It moves a lot quicker and the focus is very different. Where it works well, IT can advise as you go along, explaining what needs to happen.'

Finally, although most takeovers result in staff cuts, IT staff have transferable skills and will often see a successful merger project as a bonus on their CV. Says Dave Hill, a consultant with Perot Systems: 'The IT industry is one of the most experienced at managing change. IT staff are professional people and will respond positively if they are treated as such. So be honest from the start, no matter how tough or brutal that message might be.'

STRONG PLATFORMS EASE THE PAIN - Simon Osborne, Informa

Publications and conference company Informa was born from a merger in 1998 when LLP and IBC joined forces. Chief technology officer Simon Osborne recalls that the two companies carried on much as before, running their own IT systems. They even ran different e-mail platforms.

That situation persisted for nearly two years, until in the UK they got rid of the IT management of both teams and Osborne arrived as a relative neutral. 'We chose the best staff from each team, and then invested heavily in basic infrastructure and in back-office applications - specifically SAP,' he recalls. 'That has served us well and created a cohesive IT department. The new systems bear little resemblance to the two they replaced.'

Key to the change was a different way of working, with IT centralised and communication to outlying offices via a resilient wide-area network.

'Before, they had services in local sites - now it is just two data centres, one for back-up. A single environment is easier to keep reliable. E-mail systems and phones don't go down any more. If you don't have that infrastructure, you can't look at subsequent mergers.'

That view was tested when Informa merged with another publisher, Taylor & Francis, in 2004. 'We were able to assimilate them quite quickly into the SAP system. If you build a decent IT platform, it's much easier to absorb acquisitions. And it can make the savings in back-office much faster.

With two mergers under his belt, Osborne took the £768 million acquisition of IIR last July in his stride. 'We have a stack of work to do in the States to bring the back-office systems together. But to absorb the IIR business in London is just a question of putting a couple of wide-area network links in. We then roll out our voice-over-IP platform in a weekend.

We can also migrate their e-mail over the weekend, and file storage.'

Other applications, such as sales order processing and marketing, take longer. But, says Osborne, 'if you have the infrastructure in place, and decent networks, then it makes it easier'.

COLLABORATION IS THE BEST PATH TO SUCCESS - Adrian Bagg, P&O Nedlloyd/Maersk Sealand

Now on his third merger, Adrian Bagg has made quite a career of pulling together IT systems. In 1997, he was involved in the creation of Diageo from Guinness/Grandmet; then, at Amersham International, he oversaw the takeover by General Electric. Now as CIO for P&O Nedlloyd, he is going through the process with Swedish container shipping firm Maersk Sealand, which completed its takeover of his company in August.

Both firms had written their own systems. P&O Nedlloyd's was slightly older but worked very efficiently, while Maersk's had just reached completion and was in the process of being introduced. 'Maersk's technology was slightly more modern, but the systems were similar in intent,' says Bagg.

However, the Maersk system had been built with acquisition and growth in mind, with the potential to handle higher levels of traffic, whereas the P&O Nedlloyd system had been built to handle only organic growth.

'It was a reflection of the companies as they were,' says Bagg. Both companies had outsourced development of their systems, so neither had teams of programmers to integrate.

The merged organisation will adopt the Maersk system. 'Maersk was twice the size of P&O Nedlloyd. As the acquiring company, it had the ultimate call,' explains Bagg. 'It had just put in a lot of work into redesigning its processes and systems globally, and was a long way through rolling that out across the globe.'

The new company is now planning the integration, although the two businesses will operate separately into the new year, until business alliances run their course.

The P&O Nedlloyd system might not go to waste. Some functions may be transferred to the Maersk systems, and the software could be sold on.

'The system was giving us competitive advantage, and there may be others who want to take advantage of that,' says Bagg. 'It will allow us to realise some value from the asset.' Bagg has worked closely with his opposite number in Maersk, but he will take another role in the organisation once the integration is complete.

The Grandmet/Guinness merger was different. It was essential to establish the new Diageo brand quickly. 'The real business driver was to provide a single face to the customer in each market by a given date. Any customer would see Diageo as a single entity in the market by July 1. It was not appropriate to do one global joined-up system - we would not have made it in time. So we chose a single system for each country.'

This meant going around each country to see which of the two systems worked best and killing off the other. 'So we had about half and half from Guinness and Grandmet. Then we did the string and Sellotape in the middle to make sure we had one set of financial figures out and we could get all products going through a single system, delivering a single invoice and a single ordering system to customers in each market.

'It was a very pragmatic approach - we kept the confusion away from the customers, although it was more complicated for ourselves.' Once the new business was established, it was possible to work on a properly integrated system, based on a global installation of SAP.

GE's acquisition of Amersham in 2004 was different again. 'The company laid down how it wanted things done from day one. There was no debate.'

The Amersham team warned this could cause problems. 'We said that in some parts of the business, you won't be able to make that work - pharmaceuticals are very different from medical products. But they insisted.' According to Bagg, within a year, GE had realised it was 'too difficult to impose the GE cookie-cutter' and reverted to using the Amersham systems.

The best mergers, he says, happen where the two sides genuinely choose to work together from the start. 'If I compare the GE attitude coming into Amersham to the collaborative attitude we have with P&O Nedlloyd and Maersk, there has been a much better outcome for the business as a whole.'

HOW TO MERGE YOUR IT - AT A GLANCE

- Involve IT as early as possible in the deal. The first 100 days are critical for a successful transaction.

- Set priorities and achieve some early wins.

- Simplify systems and adopt standards.

- Conduct IT due diligence and identify the full IT implications of the deal (see right).

- Align IT strategy with the rationale of the deal.

- Appoint an integration team to work with the IT teams of both acquiring and acquired companies. Make sure other IT teams keep the existing systems running.

- The IT workload is likely to increase during the integration, so do not look at reducing the IT headcount until this has taken place.

- Design and migrate to an IT architecture that supports the target business model.

- Communicate the business plan, associated IT plan and organisation structure that is to be in place during transition, and communicate throughout the process.

DUE-DILIGENCE CHECKLIST

- What short/medium term IT investment is required, and what is the impact on cashflow?

- What are the critical business processes and how does the technology support them?

- How robust are existing applications, systems and infrastructure?

- How scaleable is the existing technology? Can it handle the increased workload?

- What are the current IT team capabilities and external support provisions?

- Are there any potential cost-savings?

- What third-party relationships exist?

- How many software licences do they hold? Do they know?

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