After what was undoubtedly a quiet year in 2009 - at least in terms of buy-outs - mergers and acquisitions are firmly back on the agenda as business confidence returns. Data from research firm Mergermarket in the United States shows that the value and volume of deals fell significantly last year, but the final quarter was the most active since before the global financial crisis struck and there are signs that this momentum is set to continue.
Food giant Kraft announced in January this year that it would pay $US19 billion for chocolate maker Cadbury, AMP and National Australia Bank are involved in a $13 billion tug-of-war for Axa Asia Pacific Holdings, and a number of industries including property and resources are braced for a fresh round of M&A activity.
Forrester Research principal analyst George Lawrie says chief information officers risk being consigned to mopping-up duties unless they can contribute at a strategic level to merger and acquisition deliberations.
And yet despite the growing importance of information technology in business, few firms involve their information chiefs sufficiently in pre-deal analysis.
Rival research firm Gartner uses a three-by-three strategic game board for CIOs to position themselves in, where one dimension is the likely goals of a potential merger or acquisition and the other addresses the style of integration.
It lists three main drivers where M&A can make sense:
1. Cost synergies through economies of scale, scope or specialisation.
2. Revenue synergies that enable greater sales volume through cross-selling.
3. Acquiring a specific brand, assets or capabilities. Some organisations acquire innovative companies around their space.
There are also three styles of integration that CIOs need to be prepared for. These are:
1. Stand-alone, where there is no attempt to integrate business processes or IT systems.
2. Absorption, where a decision is taken to throw away one company's processes and systems.
3. Best-of-breed, where you pick and choose different processes before trying to integrate them.
Horses for courses
Depending on where an organisation sits on this game board, the CIO needs to do different things to be prepared.
For example, if it is going to do an absorption-style merger, the CIO needs flexible systems and processes that can accommodate different types of businesses.
If a best-of-breed integration is on the table, also known as a merger of equals and undoubtedly the most difficult route to take, it requires very flexible architecture.
"Some CIOs who are preparing for M&A think about technical scalability, which may or may not be the right answer," Gartner's head of CIO research, Dave Aron, says.
"The place to start is to gain a deep understanding of the purpose and style of likely mergers.
"We see a wide range of CIO involvement ranging from not hearing about it until the deal is done all the way through to a couple we have met in financial services who have a veto on M&As.
"They are by far the minority but because IT is such a tough part of the integration, there are a couple of companies where the CIO can say no to the board if they believe it will be too hard to integrate."
Computershare is one such company. It has acquired a number of other financial services companies during recent years including EquiServe, Alamo, Flag, Post Data, Busy Bees and QM Technologies.
Computershare's technology group has a seat at the table when the company is considering an acquisition and no deals are approved without consent.
"The most important thing is to be part of the process upfront so that you truly understand the goal of the acquisition," Computershare CIO Stuart Irving says.
"It is critical for an organisation to have a defined process for any potential acquisition in which the strategy of the acquisition is defined and understood.
"To get a seat at the table you have to be able to demonstrate IT value to the acquisition so we can achieve the corporate goals."
Aron says CIOs must be prepared to see opportunities rather than problems, think about the bigger picture in terms of what the acquisition is trying to achieve, and position IT as the glue that keeps everything together rather than as a specialist function.Failure to do so makes it a formality that information chiefs will be relegated to bolting systems together after the fact rather than playing a strategic role in the process.
"A lot of CIOs and IT people have a naturally inside-out approach and start thinking about any potential change in terms of what they have now," Aron says.
"They talk about how challenging it would be to change that environment but it can be very helpful to take an outside-in approach that starts with the big picture of why their organisation is interested in doing a particular acquisition.
"The CIOs who get involved early have typically positioned IT as an integrator as opposed to a specialist function. The CIO is the only one who has a view of the integration across the whole piece because the CEO and CFO are only really looking at the numbers."
While mergers and acquisitions are confined to the private sector, similar activities take place in the public sector and can often be more challenging for the CIOs involved. In the Australian federal government, there are currently moves to bring together the IT systems of Centrelink, Medicare and other agencies within the Department of Human Services.
Aron says such projects are usually subjected to much more external scrutiny and higher public reputation pressures than they would be in the business world. Public sector agencies also have complex formal procurement processes in dealing with suppliers and unionisation of staff issues to deal with.
"Quite often there are lots of extra considerations that can make things slower than a CIO might want and also make the risks of getting something wrong higher," he says. "There are also high-level political initiatives, particularly during an election campaign where there might have been some promise of cost reduction, that have to go on. You can't suddenly slow that down because you are doing an M&A."
Tony Talbot has been a CIO for more than 25 years - with Dairy Farmers, Colgate-Palmolive and Goodman Fielder - and during this time has been directly involved with many acquisitions.
Back in the 1980s, Talbot was involved in a string of Elders IXL acquisitions engineered by former Liberal Party president and prominent businessman John Elliott. "Elders IXL was buying companies all the time so we set ourselves up like an inter-corporate bureau to take on the IT component of the acquisition, find synergies and manage rationalisation. We became quite good at it."
Talbot says the role of IT in mergers and acquisitions has changed over the years because it can no longer be an afterthought. "It has to be part of strategic thinking beforehand - how are we going to take this company on, how will we effectively merge them, what systems should we be keeping or disposing, how are we going to train users on the agreed corporate way of doing things?"
Talbot says it is a fine balancing act because there are typically lots of possible mergers for every one that finally goes through. He says it would be a huge drain for a CIO to be involved in every one of those talks but that they should be involved once a deal looks probable.
"It then becomes a question of viability. Can we make this happen by the deadline and in a way that's advantageous to everyone without incurring hidden costs such as long-standing agreements? If the company being acquired is locked into a contract, the penalties of changing or terminating the contract can be huge. All of those things need to be looked at very carefully."
Hunter becomes hunted
Having been involved in so many situations where his employer acquired another company, Talbot got a taste of life on the other side of the fence in November 2008 when the milk co-operative Dairy Farmers was acquired by National Foods. Talbot left National Foods in November last year after playing an active role in the integration.
"The differences [between acquiring and being acquired] are mainly emotional," he says. "People being merged into a larger group often feel very parochial about the systems that they have developed and have a great sense of loyalty to the team that has helped them do that."
Talbot says that a CIO, whether their organisation is acquiring another or being acquired, needs to assess the situation unemotionally and avoid getting caught up in the blood, sweat and tears of systems that they think are best because they know more about them.
They also need to be prepared for decisions that they might not like, understand the overall strategy of the new company and appreciate that there will be some decisions made that will take a while before they deliver benefit.
"One must be truly professional in every way, shape and form. If it's a done deal then you need to be actively helping rather than being a passive participant.
"CIOs have to look past their own feelings and help employees transition. If you treat people with respect, it's setting the project and you up for success."
Computershare's Irving says retaining the most talented staff within the IT department of a company that is being acquired is one of the most critical aspects of any deal.
Understandably, many employees are tempted to quit before the integration begins rather than getting involved in a stressful process without any certainty about their future at the company.
Irving and his team work through a three-step process designed to help retain critical IT staff whenever the company is working through an acquisition. This consists of identifying top performers during the due diligence phase, offering targeted incentives to retain them and providing clear leadership that helps them settle in to their new working environment.
Computershare has also taken a very strict approach to simplifying its systems wherever possible, something that has proven to be a major benefit as the company grew. It now has more than 10,000 employees at more than 90 offices in 22 countries. "We believe in trying to centralise the development of core technologies and having a standardised set of infrastructure," Irving says. "This gives us a fundamental advantage in an M&A strategy as we have repeatable and scalable infrastructure and application deployment.
"This takes away the time spent on wondering what to do for a lot of core applications and infrastructure. It is important to focus attention on the applications that you need to take on or rewrite."
Having racked up more M&A experience than most CIOs, Irving is also able to share some thoughts on pitfalls that his counterparts should be aware of. First, he notes that a merger of equals is difficult to make work in the IT space and some tough calls need to be made early on with regard to which systems will be used.
He says best-of-breed strategies are complex, and speed is again of the essence in determining what the remaining system will look like, what gaps must be filled and which applications can be quickly shut down.
Smaller acquisitions are not necessarily easier than larger ones and can require additional effort in establishing relationships with remaining staff. Egos can come into play, especially within infrastructure.
Finally, always put staff into the newly acquired office once the deal is done. "Start with a financial controller and then somebody from the technology group to build relationships and provide a key communications point," he says. MIS Australia
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