By David Tyler, Founder and Director of Outlier Technology
In any competitive marketplace there are lots of drivers for companies to merge and acquire each other. Sometimes it’s about expanding market reach by tapping into markets that a competitor has better footings in, or it could be about being better positioned to succeed against bigger competitors.
The benefits are very often easy to explain, from cost savings and removing duplicate teams, processes or capabilities to driving economies of scale associated with higher production rates.
But the stakes are high and none of these benefits are guaranteed. All businesses are unique – even franchises and chains – because of the people, the customers, geography, laws, timing and all manner of other constraints, meaning the process of merging businesses is not at all straightforward.
It’s easy to get caught in the trap of believing that if two companies work in closely related fields, use technology from the same vendors and follow the same legal requirements for accounting and financial practices, that merging their operations should be straight forward. Unfortunately, nothing could be further from the truth.
M&A teams will be formed on both sides, and external advisors will be brought in to help with the process, but very often people’s eyes are firmly fixed on the commercial prize – the upside, the potential, the excitement.
Integrating processes and systems is very often given a back seat in the process. It’s something that rears its head after the deal is done, and that’s where the uncomfortable truths start to appear: those systems from the same vendor have been configured completely differently by both companies, and the processes they support are totally incompatible. At this point, the costs of integration can easily skyrocket because we’re no longer talking about reconfiguring some systems or tweaking some processes, we’re talking about complete and fundamental change to how one or both organisations operate. And that was never part of the acquisition plan!
This sounds almost too absurd to be true, but it happens more often than many would like to admit. Technical and operational due diligence are some of the easiest cans to kick down the road, but the impact of getting it wrong can be massive. The level of risk being ignored can be huge and it can mean the difference between being able to recognise those commercial benefits or not.
That’s exactly what happened following a $10 billion deal which saw Goldcorp Inc acquired by Newmont Mining Corp. The newly formed Newmont Corporation became one of the world’s largest gold producers. But SAP Insights reports that the acquisition was soon beset with problems, including multiple duplicate and different IT systems that somehow had to be combined, as well as varying cybersecurity policies which increased exposure to risk for the new company.
An early tech focus
What if things were different? What if the M&A processes brought technology leaders to the table at the earliest opportunity, to work in partnership with the rest of the deal team?
This would enable them to undertake a thorough assessment of the existing technology resources across both companies, including all of the policies and processes, the hardware and software used by both, and the skills of the people within each department. While it takes more time, it’s time well spent.
In many cases these are some of the biggest transactions companies will ever do – far bigger than any individual client deal or property purchase, so using tools like targeted PoCs to identify fundamental issues with compatibility of systems as early in the deal as possible will pay dividends.
Being able to assess the work involved in creating unified cyber security policies, training plans for staff who will need to use new technology, how to rationalise and consolidate cloud and on-premise technologies – these are all critically important to successful integration.
Ultimately it’s about being realistic, honest and responsible about what is achievable and what the costs are likely to be. And those assessments need to be given the weight and importance they deserve in the deal making process.
It’s a concept supported by the BCS, the Chartered Institute for IT, which states: “In order for the merger to be a success, IT leadership needs to be involved earlier in the M&A journey to better equip organisations in realising success earlier and at a lower cost.”
When tech becomes a stumbling block
We don’t have to look very far to find examples of M&A deals falling apart quite dramatically. And it’s not just about financial penalties – there can be serious regulatory, reputational and even political impact when things go wrong.
When Banco Sabadell bought TSB, customer bank records were moved on to a new system – a project costing £450 million which was expected to save £160 million a year. But the process was rushed and the technical due diligence was largely skipped. The result was customers locked out of their online accounts for days unable to pay their bills, not to mention being able to see other customers’ accounts. These issues cost TSB Chief Executive Paul Pester his job and added more than £176 million in costs to the acquisition deal in compensation, lost income and additional resources (Raconteur).
Sprint hoped their $35 billion majority stake acquisition of Nextel Communications would help them become the third largest telecommunications provider in the US at the time. The upside was clear – gaining access to each other’s customer bases would see both companies grow exponentially. However, the two companies had no overlaps in terms of the technology – their networks were fundamentally incompatible, making it incredibly difficult to merge operations and resulting in a huge market share loss (M&A Science).
But it’s not always like that. One example where technology teams had been consulted early in the process was the proposed acquisition of the Williams & Glyn bank branch network by Santander. The technology teams found that ‘unpicking the existing technology’ was simply too complex, and the whole deal was halted (Raconteur). Whilst it was no doubt a blow to those who’d spent time and money on investigating the feasibility of the deal, it would ultimately have much more costly had they not stopped the process at that point and proceeded without realising the tech issues they were facing.
This is a rare case of technical and operational experts being given the time, understanding and priority to make an honest assessment – this assessment revealed the problems involved which put a stop to a potentially disastrous deal.
How to avoid the pitfalls
While the process may not be simple, the concept of mitigating risks surrounding merging technologies is straightforward enough. But to mitigate or accept a risk, you have to know it exists and then understand it: this is what due diligence is for. We’re more than comfortable performing financial due diligence, so adding technical due diligence shouldn’t be an alien concept.
Technical leaders need to be given time and resources to identify risks and consolidation opportunities and, once you have the results of their investigations coming back, they need to be taken seriously.
History has shown us time after time, once the deal has been signed and the process of merging the two companies, or assimilating one company into the other, has begun, it’s too late to highlight any red flags which may have stopped the M&A process had they been discovered before the ink on the contract dried.
