When Horizon Pharma PLC bought Crealta Holdings LLC for US$510 million in January, it took only six weeks to merge Crealta’s financial information into the biopharmaceutical company’s back-end software. In the past, that same integration could have taken a year or more.
According to a report by KPMG, more than 40 percent of synergy deal making is fueled by IT consolidation; smoothly transitioning new systems and IT service while appropriately allocating IT resources to avoid redundancies. But while technology can streamline mergers and acquisitions it also can derail those deals if not executed properly.
The DealRoom takes a closer look at the role of IT in the deal-making process.
Before considering a deal
Look, technology moves fast, we get it, but any company entertaining the notion of going on a mergers and acquisitions tear should seriously consider getting their back-end in order. With the endless march of technology solutions, many companies run their business through a series of different systems. While a holistic approach is, of course, the ideal situation, there’s a business case for even just having the IT department look at what’s currently used, what’s redundant and how the systems can be streamlined.
This will put any would-be acquirer in a good place to execute a deal should it come out of left field.
As a CIO of a global retail business whose acquisition activity had grown over the past three years told EY in a survey on the role of IT in mergers: “Data uniformity and systems similarity are often the most challenging post-deal objectives to achieve. These are the things that need to be considered even when identifying targets.”
During due diligence
There’s no question the strategic rationale varies from deal-to-deal, be it cost synergy, market expansion, boosting product offerings. But inevitably, IT will be the underpinning. It affects all other departments and plays a collective role in opening the lines of communication between those departments.
Getting a clear picture of what that infrastructure looks like, including a proper audit of what technologies fuel those lines of communication and the free flow of information, is critical before companies even get towards a merger. Especially given that IT costs can make up anywhere from 30 to 40 percent of a business’s operational costs and are a serious factor while assessing the transaction costs, says KPMG.
Having the Chief Technology Officer or someone from the IT team as a designated player on the deal-making team can supply valuable insight on the cost and practical realities of integration.
In EY’s survey of more than 220 c-suite or directors involved in deals, nearly half (47 percent) say they felt “in retrospect that more detailed IT due diligence could have prevented value erosion.” The biggest challenges were business continuity and data migration.
Deciding what IT systems needs to be upgraded to support sustainable growth, identifying potential IT limitations and risks and assessing the impact of IT on revenue and expenses during the due diligence process will put you on track once you’re caught up in the merger itself.
Specifically related to the tech audit, virtual data rooms can also be a useful tool during the deal-making process for collecting, exchanging and auditing both companies pre-existing agreements with software vendors to look for overlap as well as trading information about software licenses.
IT’s role during and post-deal
Well before the paperwork is signed, the IT integration team needs to have a clear strategy for deciding which systems will be a part of the new consolidated entity, which data will need to be migrated in order to ensure business continues as usual during the transition and what the merged organization will look like – including the hierarchy – from an IT perspective.
While the emphasis post-deal is often put on value creation to justify the merger to stakeholders, IT again underpins this success. Businesses need to optimize back-end integration and avoid disrupting employees or inconveniencing customers at all costs. Failing to do so can cost customers.
In some cases, companies may choose to hold onto the target business’ legacy systems in order to avoid disruption during the first 100 days. There’s nothing wrong with that provided the company pursues a pulse-check of its IT architecture once the new entity is up and running. Granted, these sorts of things fit into a longer-term integration that can’t be streamlined. In the meantime, the due diligence should give the IT team enough information to develop workarounds before the deal has taken place and invest in the appropriate tech solutions to carry them in the interim.
As IT infrastructure eats an increasingly large piece of the operational cost pie, don’t be surprised if CTOs and IT professionals become a major player on the deal team. After all, they’re already powering the integration.