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Monster deals

Monster deals

It can make or break a deal, and a smooth integration is crucial for success. For CIOs, grasping the prize at the end means starting early.

Alinta chief information officer Cathy Bibby arrived at the company just as it was finalising its first big acquisitions. For her, the scenario back in 2003 was pretty clear. The company was undergoing its first major expansion, emerging from state ownership to become a player in the national energy market. Through a series of transactions, Alinta was to run about $4 billion worth of electricity and gas assets in Victoria and its home state of Western Australia, taking major ownership positions in United Energy and Multinet Gas.

But for Bibby, the acquisition program carried significant personal risks. "I took the job a month out on the understanding that if the deal fell through, I didn't have a job," she says.

That she was playing a high-stakes game with her own career before the mergers had even begun may have been unusual but across the country and in every industry, the challenges brought about by mergers and acquisitions are among the greatest - and most rewarding - any CIO can face up to.

Nowhere is this more apparent than in the banking sector. The four-pillars structure of Australia's banking industry means big mergers are comparatively rare. But when they do come along - most recently in Westpac's $18.6 billion tilt at St George Bank - the challenges in forging a single IT environment are magnified in the headlines.

A merger between Westpac and St George would be "one of the most significant IT projects in Australia", director of analyst group S2 Intelligence Bruce McCabe says.

While a deal had yet to be finalised at the time of writing, the enormity of the IT integration project was clear.

"It's impossible to exaggerate the scale of the work involved if they decide to go top-to-bottom, rationalise everything and eliminate duplication," McCabe says. "It would take many months just to do the auditing, and to work out your priorities, let alone start the work."

Westpac chief executive and former St George boss Gail Kelly is on the record as saying a smooth IT integration is central to a successful outcome.

The numbers sketch out the size of the undertaking. Westpac told investors it was expecting about $700 million in integration and transaction costs.

ABN Amro had earlier put the IT integration price tag at about $225 million.

But the potential savings are huge. Estimates on the savings Westpac could make out of St George's IT operation vary between $36 million and $46 million.

Westpac has also announced its plans to make big savings on IT procurement, putting big suppliers such as IBM and Telstra on notice that they are now targets of cost cutting.

The combined scale of the two banks, and the negotiating power that would deliver, could produce a saving on St George's computer and communications costs of 10 to 20 per cent, ABN Amro analyst Jarrod Martin says.

While the merger might be daunting, it is also possible, former St George CIO ¿John Loebenstein says. It has, after all, been done before.

"None of these things are a walk in the park, but they are all manageable, and I'm absolutely sure that Gail and the team would have thought it all out," he told The Australian Financial Review recently.

"It has been done before. All those years ago it wasn't a walk in the park to do Advance Bank and St George, and Bank SA and Barclays, but you think these things through, put a strong team together and you do them because there is a fantastic prize to be gained at the end."

Grasping the prize means starting early. But even CIOs who are experienced in the merger and integration game say that no matter how well things are planned, there are always surprises.

IBA Health CIO Martin Wilkinson says planning has to start well before an acquisition reaches the due-diligence phase.

"Particularly in our market, where we know about the various companies we may or may not acquire," he says.

The health software sector is relatively small, so most of the players have a good grasp on their competitors before they make an approach, Wilkinson says.

IBA has been an active player in consolidating the health software market; last year it bought British rival iSoft for $411 million after a protracted corporate battle that lasted most of the year.

Like Wilkinson, Melbourne IT chief operating officer Andrew Field, who steered his company through the integration of WebCentral in 2006, likes to get an early start.

"Our generic approach is that pretty much at the point that we start thinking about buying a company, we start thinking about integration," he says.

"We start thinking about how we are going to structure ourselves as a team, and from that point on we start thinking about gathering information about the target.

"The due-diligence planning is running in parallel with our integration planning. We like to get to the settlement period, if there is one, knowing exactly what we are going to do."

The lessons learnt from the WebCentral integration have recently helped with the company's $53 million buyout of US group VeriSign's DBMS business in April.

"The DBMS acquisition was about the same dollar size [as WebCentral], but it is spread all over the world, so it is difficult for a different reason.

"The WebCentral business was reasonably involved. This business is certainly not straightforward, but its major complexity is dealing in jurisdictions in which we have never dealt before as a company."

Alinta's Bibby says the acquisitions her company has made in the past five years, which have included AGL distribution and Duke Energy assets, shows that having a chief executive conversant in IT is crucial; it helps put technology issues at the forefront of acquisition planning.

"Historically, my CEO would ring me and say we are thinking about this, can you think about how you would do it," she says.

"If your CEO understands how long it can take, and that IT can actually kill a deal, then that's where it starts."

Alinta's acquisition run came to an end when the company was divided and sold last year. Bibby moved, along with a number of the old Alinta assets, to the Singapore Power International (SPI)-owned business known as Alinta Management East.

In between her joining and the break up, "we looked at dozens of other deals, both in Australia and internationally", she says. "We are now looking at other acquisitions."

CIOs agree that once an acquisition is under way, information gained during due diligence is vital, but seldom paints the full picture of the target's IT.

Melbourne IT has learnt that the way a system is described during due diligence and the way it exists in reality can be quite different. Field says the company has realised it needs to ask more "show me" questions.

"So, if we ask a question on a particular system and get a particular answer, we might ask the people on the other side to actually show us, so we can see for ourselves," he says.

"There are a couple of things that have come up already where if we had seen for ourselves the situation, we might have been better prepared."

Not that such problems are unusual. "You do expect some skeletons to fall out of the closet. You just have to be really good at catching them", he says.

Wilkinson says IBA is good at the "show me" questions. "We don't tend to take people's word for it." He says he has seen deals fall over because due diligence was too thorough. "People tend to get bit annoyed when they think you are delving too deep," he says. Getting enough information without killing the deal can sometimes be like walking a fine line.

Meanwhile, Bibby says that even if you can't be as blunt as you'd like during due diligence, you can get answers if you ask the right questions and speak to the right people. Alinta developed a process for mergers. "We had a standard set of questions, and we had the same set of people," she says. It very much became a cookie-cutter approach - we knew what we were looking for."

IT people on the other side of the deal don't usually stand in the way, she says. "The IT guys just seem to get on with it. I've never come across anyone that tried to make life difficult. The IT community as a whole knows how hard some of these things are."

Similarly, Wilkinson says IT people usually aren't shy about making their achievements known. "One good thing about dealing with techies is that they do tend to like blowing their own trumpets. So, if they think they have done something good, they are not shy about telling you," he says.

Far more crucially, the people managing the systems can often be a good guide to the company's infrastructure. If they have no idea, it's likely the infrastructure is in a bad way. "To me, if the team is good, it's a good sign and a good indication about what the infrastructure is likely to be like," Wilkinson says.

"A classic example is that you might have a good systems team but you might have a perception, and it would only be a perception at that stage, that the network team is a bit weak. So, you would spend more time dealing with the network side and getting under the covers of that."

Wilkinson says he looks at the way systems are built. He says capacity planning is one area where companies up for sale frequently fall down. "That is quite a common failing when people want to dispose of their business; they have not built any capacity into their infrastructure," he says.

"I would then focus on reliability, management of the 'real estate', service contracts, and then have a look at any possible opportunities for integration."

With due diligence done, and a deal in the bag, practical issues of integration come into play. CIOs say that early momentum is vital and plenty of time is given to "people" issues.

Broader merger strategies concentrate on bringing new staff into the fold with welcome packs, executive meetings and even, in Melbourne IT's case, webcam-connected "buddy" systems used to unify teams around the new structure. Early IT work revolves around getting people connected with email and phones.

Arriving at a company where IT has had a poor reputation can be particularly challenging, Bibby says. "It can be really hard when you take on all these people and they all have a perception of how IT should be," she says. Remedying the situation requires a lot of one-to-one and communication around the projects.

Wilkinson says it is far better to get cracking early, before people have time to dig in their heels and decide they were more comfortable with the way things were. "The longer you leave it, the more difficult it gets, and the more resistance to change you get as well," he says. "It's much better that you get on with it."

Not getting the infrastructure going can have major consequences. For example, a planned staff cut may not be able to go ahead if the HR systems are not there to cater for it.

Wilkinson says his pet merger problem, a lack of capacity, can have a major effect on a project's momentum. CIOs need to understand as much as possible about the capacity and real estate of the target. "That really determines what you can and can't do and how quickly you can do it. If it's old real estate and it's filled to the brim, you don't have enough flexibility in the acquired infrastructure to do the things that you want to do," he says.

The fear of creating turmoil is probably one of the main reasons some acquiring companies decide not to integrate, preferring to leave acquisitions running along as stand-alone entities for a while or, in some cases, permanently. Wesfarmers is one company known to prefer leaving its disparate business units to run their own IT operations.

But Melbourne IT's Field says deciding not to integrate is fraught with risk. He says it's far better to bring businesses together early than to wait for the market to force your hand.

"There are organisations out there that choose not to fully integrate," he says. "I think that is okay in the good times. But when the bad times come, and they will, if you haven't squeezed out the synergies - in effect, the cost duplication - you are not going to be able to do it in a rush at the end.

"Our view is to work hard at the front-end, to integrate it tightly into the organisation culturally, systems-wise, people-wise, and on every level," he says.

Once the early work is finished, the focus usually turns to the back-end. And with cost savings often a prime motivator of the acquisition, the pressure to rationalise can be great.

Wilkinson says the iSoft deal revealed plenty of opportunities for application rationalisation. "There are a lot of in-house and legacy applications within the business, and it all needs to be brought together," he says. "It's not a good thing to have four views of your customer database.

"I'd start with customer systems, finance systems, payroll systems and HR systems, and I would move very rapidly to integrate those areas of the business."

Having common systems from the same supplier

can make things easier, "but what you tend to find is that they are running different versions, and everybody customises to their own workflows and their own working arrangements", Wilkinson says. "But there is no doubt that moving, for example, two SAP systems to a single SAP system, is easier."

A merger is also a good time to conduct a data-hygiene exercise. "I think it's essential to do it at [the outset]," he says. "I think if you try to merge two sets of old data into one set of old data, you're heading for disaster in the long term."

As well as ensuring data integrity, a data-cleansing program can also feed into rationalisation, freeing up resources that can either be redeployed or pensioned off. "You will find lots of legacy customers that disappeared 10 or 15 years ago, records that should have been archived off that haven't and are just using disk space," Wilkinson says. Other areas where savings can be made are telephony and printers, he says.

The iSoft acquisition provides IBA with the opportunity to run a global network and the company is moving to a worldwide IP voice and video capability that will cut its international phone bill by about 35 per cent. Similarly, a program to reduce the number of printers from about 650 to 300, and possibly even 200, should save $150,000 a year on consumables.

On a larger scale, IBA also needs to tackle the proliferation of servers across its new global business, which now spans 17 countries. Wilkinson says the company has 1000 physical servers and 3000 virtualised serving 13,000 clients and only 3500 employees. All but three of the 17 offices have some sort of date centre or data services arrangement.

"The major task there is to try to establish regional data centre capability and to virtualise as much of the legacy stuff we actually do need to keep on board," Wilkinson says.

Bibby says Alinta's string of acquisitions gave the organisation a lumpy applications profile. After the first acquisition, the company had more than 1000 applications on its books. That number was cut to 150. However, the next acquisition took it back up to 550.

"In between we rarely took on new people," she says.

But Bibby says the IT team rose to the challenge, to the point where it has evolved into a group of "change junkies". "They are really open to change," she says. "They are very different people, not just stock standard keep-the-lights-on type guys. The funny thing is, when we stopped doing deals, we almost lost people at that point in time because they said it had got very boring."

Even so, Bibby says there is a continual assessment of talent within the company. Merger strategies have to evolve.

"Even though we might have a strategy or a standard that has worked really well up to a certain point, once you get to a certain size, things don't work any more, whether it's people, processes or systems," she says.

Field says one lesson from the WebCentral deal that was applied to DBMS was getting the resourcing right. This means structuring the program of work more effectively.

"In some cases it means more people, in some cases it means the right people," he says.

This time around, Melbourne IT accepted that it needed to have more people involved and that cutting integration costs was not a guarantee of saving money in the long run. The company advised investors it was spending $2.8 million on the DBMS integration.

Skimping on integration can be false economy, Field says. "It just means that stuff will drag out and you put your existing business at risk."

Another area in which it pays to invest is reporting and management information tools. Wilkinson says it is critical that CIOs have a big picture view during a merger.

"It doesn't matter what the data source is, but getting that data, understanding it and turning it into proper reports is absolutely vital," he says.

"You should do it as soon as you can in any integration process."

Bibby says that as well as learning lessons in technology management, running a merger will also teach a CIO about commercial agreements, negotiation and legal issues. But it is important to keep a perspective, she says.

While IT has a major role to play, it is not the only consideration in a deal that is worth hundreds of millions of dollars. That said, IT can make or break a deal, she says. "I'm not sure many people understand that."

But the CIOs we spoke to say they relish the challenge of bringing companies together. They say it is rewarding on both a personal and professional level.

"It's a blast," Bibby says. "It's a high in terms of problem solving, in terms of trying to work through how the deal will unfold and how you have to then deliver it."

The merger also gives a CIO an enormous opportunity to establish his or her credentials as a business leader. Those who cannot position themselves as thought leaders probably will not be able to pull it off, Wilkinson says.

"If you can do it and do it well, not only are you personally satisfied, but you actually establish yourself as more of a thought leader within the organisation," he says.

"The CIO who isn't regarded as a thought leader will struggle to bring the two companies together. It's very important that the CIO establishes that role very quickly in any merger process."

Friendly takeover

CIOs say while the technology can throw you some curly ones, in some ways, people represent the biggest challenge for merger integration projects, in IT as in the rest of the business.

When Melbourne IT acquired VeriSign's DBMS business in April, it not only had a new group of people to deal with, but a group that lived overseas - mainly in the United States.

In a novel solution to make the new people feel at home, the welcome pack contained not only a Melbourne IT T-shirt and a jar of Vegemite, but a microphone and webcam.

"Each employee in the new business will be buddied up with someone in the existing Melbourne IT business," Melbourne IT COO and integration manager Andrew Field says.

The webcam and microphone allow newcomers to make direct, personal contact with their buddy. "The idea is to get on the webcam, say 'hi', and put a face to the name," Field says. "It's for all those questions that you have got, where you are not quite sure who to ask or what to do about it."

But the video calls needn't be all work related. "If you just want to call up on the webcam and have a chat about how things are going and what the weather is like, then feel free to do that too," Field says. "We think this will help, based on our experience at WebCentral, but time will tell."

The webcams are one way Melbourne IT can bring its culture to a new operation on the other side of the world, Field says. "It's about starting to inject our culture, directly at an individual level, across to the new members of the organisation."

Corporate culture is also one of the main reasons the company is keen to integrate its acquisitions, rather than allow them to remain as stand-alone ventures.

"That is the biggest risk that we find in acquisitions," Field says. "It's how the hell you maintain your culture? How do you guard against being diluted? We work very hard on that."

Mergers and integration - top tips

  • Watch the capacity of systems you are acquiring. If they are filled to the brim, your options may be more limited.
  • Be prepared to make tough calls and maintain momentum. Change comes even harder the longer you leave it.
  • Build a team that relishes change, and adapt it to suit tasks at hand.
  • Look at the people. A lacklustre team could point to infrastructure issues.
  • Seek advice. No one organisation has a monopoly on the best way to perform integrations. Look around and see what others have done.

Fairfax Business Media

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