M&A activities tend to follow cyclical waves. However the recent drop in the oil price triggered a new wave of activity. But whether businesses can be acquired “cheaply” remains to be seen. It is also uncertain whether M&As can add value for stakeholders.
Strategic mergers and acquisitions will strongly re-position a business during an economic downturn. For example Shell has sought to reposition itself as a leader in LNG and to potentially reduce E&P costs with the takeover of BG. Shell’s goal is to maximise synergies and thus cost savings. But this is true in any acquisition – how do you ensure value is achieved and what can IT do to help? More than 50% of acquisitions actually reduce shareholder value, so it’s no wonder boards are now demanding better M&A outcomes.
Synergies and Benefits
In any integration the roles of IT include: guarantee regular business operations; enable business side synergies; and realize IT synergies. But there are some severe challenges to realizing IT synergies. There may be duplicated applications and infrastructure as each entity is likely to bring its own platform. So a new landscape needs to be defined; two distinct IT organizations with their own processes, policies, and practices – the ability to manage/operate as one organization is thus essential to maintain service quality and control costs; and divergence of IT and business objectives – IT focusing on operational stability – business aspiring immediate revenue and profitability synergies.
In every acquisition, benefits are identified prior to the sale…but these may be difficult to realize post-sale. So understanding the pre-sale benefits should provide the focus and strategy for the post-sale integration.
A benefit is a financial benefit that can be realized when an enterprise is created from two or more separate entities. Therefore, synergies are a key driver for profit growth for the resulting enterprise emerging from the transaction. In this context two main types of benefits can be identified:
- Revenue Enhancing (soft synergies), where the strategic opportunity of a combined corporate entity to generate more revenue than its two predecessor standalone companies would be able to generate. Opportunities include: Cross-selling; New markets, and Product enhancements.
- Cost Savings & Cost Avoidance (hard synergies) where the opportunity of a combined enterprise is to reduce operating costs. Opportunities include: Process changes; Organizational changes; and Technology changes – thus IT cost savings are a critical part of all integration programmes and provide a substantial part of the realizing pre-sale benefits.
The Value Gap
In most industries, transactions are becoming more complex but a well-executed transaction may increase value by attaining expected benefits, identifying additional sources of value and mitigating risk. But as most acquisitions don’t achieve the expected value, the key challenge is to reduce the so-called value gap: the difference between the Targeted Transaction Value and the Actual Value Achieved.
This means paying particular attention to three things: capturing all the costs and savings, and calculating estimates consistently; not losing sight of pre-sale benefits when there is considerable change in progress and when these benefits are not planned and measured; and realizing benefits when other cost fluctuations are masked in a business.
The value of pre-sale benefits will reduce if they are delayed. This might happen due to momentum loss or failing to take advantage of the currency of the acquisition or any slow-down in the integration programme. Lost value can also occur because of poor change management, which is why it is so important to anticipate and mitigate for resistance to change from key stakeholders, organizational confusion and culture clashes.
The Solution
There’s a solution to ensuring M&As add value. From an IT perspective, the solution lies in three possible integration approaches: standardisation, best-of-breed or co-existence. Each approach has variations, and the right choice is determined according to the integration needs of the business and the potential for the IT organisation to leverage synergies.
The IT post-merger integration team will focus on the following hard synergy benefits. In the IT organisation itself, savings of 10-20% can be made in terms of personnel and transaction costs. In IT systems and data, savings of 25-45% can be made in terms of personnel and operational costs. In the IT infrastructure, savings of 10-20% can be made in terms of operational and maintenance savings. With licences, SLAs and sourcing, savings of 10-25% can be made in terms of hardware and software costs. And – if this is not a step too far in the initial integration programme – the IT post-merger integration team may consider moving to the cloud to make further substantial savings.
It’s clear that integration synergies may not be leveraged all at once. Instead, they are likely to be realized step by step following a business-driven transformation path. The message here is that, no matter the path, companies will only to achieve full M&A benefits by completing every aspect of this integration work.
Many organisations never truly complete an integration and, as a result, they begin to question the actual value obtained from the merger or acquisition.
Once an integration journey has started, it must be completed. Problems typically arise because of low prioritisation of the IT integration, or an underestimation of the required IT integration effort. So more often than not, integration plans are rarely completed. This leaves the organisation to deal with running duplicate processes, applications and services, and never realizing the true added value of the merger or acquisition. Worse still, an incomplete integration increases the complexity and cost of the IT landscape.
So make sure to follow the plan and guarantee completion. Another hard fact is that merging companies often increases IT expenditure by up to 15% in the first few post-merger years. But after that, the IT budget can be reduced to 60% or even 80% of the combined pre-merger costs. It’s well worth completing the integration to make sure M&As add value!
About the Author:
Phil Robinson advises clients on business strategy alignment and securing rapid business value from IT transformation. He works collaboratively with senior leaders in a trusted-adviser role to understand issues, shape solutions, build business cases and deliver benefits. He has held senior management positions in the USA, SE Asia and Europe and is excited that we are living in the biggest time of change where everything about how technology is bought, consumed, paid for, is changing and client’s need to respond. The increasing challenges facing clients needing to re-position in the digitally-enabled world means a new style of IT.
Source: BVEX
