Plugging IT Into the Merger Equation
- 24 April, 2000 12:01
SAN MATEO (04/24/2000) - Wall Street loves a merger: Consolidation increases shareholder value by restoring the balance of supply and demand, creating synergy among products, and opening the way for ever-popular efficiencies and any number of other benefits -- or so the thinking goes.
Despite such rosy scenarios, mergers and acquisitions frequently fail to deliver the promised boon. Whether by gutting firms' assets -- human and otherwise -- or by tangling companies in unworkable integration schemes, mergers and acquisitions often produce results that are substantially less than the sum of their parts. Yet both the number and scale of mergers and acquisitions continue to skyrocket.
As this economic tempest intensifies, IT departments find themselves in the eye of the storm -- as agents of change and as those faced with the task of accommodating change on a massive scale. In fact, the escalating pace of merger and acquisition activity, along with the increasing importance of IT in all facets of business, are among the dominant features of the present economic landscape.
It would seem axiomatic, then, that IT considerations should get high priority in merger and acquisition deals. However, the majority of companies still do not take stock of their IT situations when forming their merger strategies. Why is it that IT, despite being commonly regarded as a critical element of just about every businesses' foundation, is rarely drawn into the first merger blueprint?
Although there are signs of improvement, business leaders often consign their systems organizations to picking up the pieces -- or making the pieces fit together -- well after the key business decisions have been made.
"It's common that IT is more of an afterthought," says Rob Austin, professor of technology and operations management at Harvard Business School. "It's often left out until [the] integration stage."
Shifts in such institutional behavior can be slow in coming.
"We're seeing a clear indication that smart acquirers are getting IT involved much earlier in the game than they have [before]," says C.D. Hobbs, senior analyst and vice president at Meta Group Inc., a Stamford, Connecticut-based market research company. "But we recently polled a group of about 80 CIOs and asked them how many were at the table from the get-go. We got two hands. We asked them how they got a seat, and it was because of a disaster."
In the most dramatic cases, mergers have been scuttled and the projected benefits of others pushed back years because of incompatible or irreconcilable IT systems.
Whatever one's opinion of the merger frenzy, it stands to reason that the fusing of enterprises can be made easier and quicker if IT and business concerns are handled in a coordinated fashion. Whether or not that coordination occurs usually depends on how IT is viewed by the senior management within a particular company.
Cost center baggage
Technologically forward-looking CEOs (a description that Meta Group estimates to fit only about 5 percent of corporate bosses) will most likely factor in IT for all key strategic considerations. Another 25 percent are likely to get IT somewhat involved. But a full 70 percent of CEOs see IT as a support function and budget line item, according to Hobbs.
"Technology is still a difficult area for operating officers to deal with," Hobbs says.
The view of IT as an expensive version of the facilities department can leave IT managers on the outside of strategic planning meetings, and can lead companies to undervalue their IT assets in general. This is partly due to the fact that many companies assess the value of their IT operations using outmoded criteria, Austin says.
"Valuing IT assets is a messy problem, because you have to value IT systems in terms of the results you get out of them. But what you have are input metrics.
It's not always a matter of cost justification," Austin says."You need to build learning mechanisms into integration plans. [A merger is] more a process of creating a new venture."
But to be assigned a key role in launching that new venture, the IT department must have influence. It's unlikely that a group that lacks political entree to management's upper echelon will suddenly find itself in on the earliest stages of planning for a merger or acquisition. So the prospect of merger activity adds to the impetus for IT to build a solid partnership with the business side of the house.
IT input provides strategic advantage
When management buy-in is complete, IT's role is central to the entire endeavor.
"The IT integration effort has to occur within the context of the overall business effort. IT's gotta be at the party to contribute to new value creation after the merger," says Mike Oakley, a director in the transaction services group at KPMG, in Chicago.
Benefitting from previous merger and acquisition experience, and enjoying the support of business management, the systems organizations at Keyspan Energy, in Brooklyn, New York, and Boston Gas are squarely in the middle of their utilities' pending merger. Keyspan's acquisition of Boston Gas is slated to be completed this summer.
"It gets easier with practice," says Keyspan CIO Cheryl Smith, who participated in Keyspan's acquisition of Boston Gas' parent company, Eastern Enterprises, last fall.
Prior to the final bid on that deal, Smith and Keyspan's CTOs were brought in during the due-diligence phase to review Eastern's operations and to meet with its CIO and senior vice president of finance.
After reviewing the systems architecture, network, and applications, both technical leads drew up a systems inventory and report identifying the key application and platform decisions they were likely to make. This was added to Keyspan's calculations of a final bid.
"Within two weeks [of the successful bid], IT was the first group that went back up to Boston. We went through [Eastern's] data centers, talked to application managers, and produced a detailed white paper of all systems and the overriding assumptions of how they would be operated," Smith says. "Then we created a spreadsheet of applications from both sides, and figured which would survive. When the companies put together integration teams across departments, they had the white paper from IT."
Merger value requires concerted effort
But drawing a merged company's systems blueprint is not a straightforward process, Smith says.
"[When looking at] scheduling software for gas and electric businesses, because they do the same thing, those packages apply well [to both businesses]," Smith explains. "Now, if you talk customer systems, with possible deregulation on the horizon, why take 20-year-old systems that are accurately calculating bills and risk replacing them with new applications? So we surround them with Web software: You get a call center with a nice front-end Web application, and the back end is [still] specific to different geographies. You don't want to create additional chaos, but you do want the synergies of consolidated call centers."
Armed with the IT white paper, the business integration teams were able to compare their respective plans with that of the systems department and note any contradictions or necessary changes.
"When we met with senior management of both companies, our assumptions held, the integration teams were comfortable with the plan, and we knew where the issues were and what it would take to fix them," Smith says.
Boston Gas employed similar tactics in a number of recent acquisitions, although their IT counterparts were often absent from the proceedings, according to Gene Zimon, CIO and vice president of information systems at Boston Gas.
"Once we determined that we'd pursue a bid, IT was brought in. At that point, you do a preliminary assessment and architecture," Zimon says. "What we found was that in a lot of cases, the other company's IT was not involved. [But] when we were acquired, I was talking to potential buyers during due diligence -- very early on. The company was aware of the importance of systems in any merger integration strategy."
Avoiding costly pitfalls
Why bring IT to the table so early and completely? Having weathered the merger of Brooklyn Union and Long Island Lighting, Keyspan's Smith says: "We learned a lesson. No other teams can begin to operate as a single cohesive unit until systems are together. IT drives the process. Once we're on a single platform, organizations can change their processes."
"We created templates. We can go through the [complete business] integration process," Smith explains. "For example, HR [human resources] knows when they'll have a consolidated system so they can know when they'll be able to negotiate with the union."
The current integration strategy even allows for the deal's possible rejection.
In the Eastern Enterprise-Boston Gas merger, the companies reached an agreement under which Keyspan would act as an IT outsourcing company should the merger be called off.
One important success factor in shepherding mergers through to completion, according to the CIOs at both companies, is open and frequent communication with IT staff.
"People want to know what the answer is. They don't like surprises," Smith says. "The very fact that we published the white paper with the list of surviving systems -- and everyone understands the time frame -- brings down the anxiety level. But we have winners and losers, so we had to look at retention plans for people with a bonus program [from] day one [of the merger's completion], and not sooner."
Managers also need to identify those systems for which they can count on finding consulting and outsourcing help, such as packaged applications, vs. those that can only be maintained by key staffers who understand the organization's data structures, Smith says.
Although companies shouldn't necessarily rule out outsourcing simply because it can cloud merger details, such arrangements can add a layer of complexity to combining IT operations.
"If you let a company run as a subsidiary, and you're not going to absorb its systems, it may be fine to have parallel or redundant outsourcing, but I've seen deals stopped by outsourcing contracts," KPMG's Oakley says. "But in some cases, it's a factor in cost-effectiveness, keeping the business running daily until you can transition to your end state."
For Harvard's Austin it's less a question of whether to outsource than whether to freight the merger with additional IT changes.
"There's a lot of good you can do on the back of something like this," Austin says. "I might use the merger as [an] impetus to get my IT house in order, although it is an additional thing to tackle. But you're going to be forcing some infrastructure change anyway. Then you could think about outsourcing if something is not core to your business. But getting the legacy infrastructure sorted out first seems critical to me."
Addressing IT organizational changes
Aside from hashing out the technical requirements of a merger, IT managers also need to scope out their organizational needs as early as possible, according to veterans of the process.
"When there's a merger, people want to know what's the likely endgame, organizationally. It's important to be honest with people," Boston Gas' Zimon says. "You need to make sure people are aware of where the jobs are."
After the Brooklyn UnionLong Island Lighting merger, and counting additions for Y2K projects, Keyspan's staff topped out at 500 employees by the end of last year. Although Y2K no longer figures into the Keyspan IT budget, the pending Boston Gas merger has pushed this year's allotment higher.
"With first-year merger efforts, [and] existing and new projects, so far we have not seen a staff decrease," Smith says. "But in mid-2001, assuming no new mergers, we will probably cut back to 300 people. We will eliminate contractors, then look at people and skills and applications. Along with some early-out programs, [there will be cuts]. The biggest thing is to inform people early on."
Laying the groundwork
Apart from securing a central role in planning and carrying out a merger, can an IT organization do anything to prepare for a possible merger or acquisition?
"Sort of" seems to be the answer.
"It doesn't seem to me [to be] separable from what you ought to be doing anyway," Austin says. "It makes sense to go with a standards-based architecture, [or] business process interfaces -- things that are going to serve the business."
At the same time, Austin cautions, the IT organization shouldn't be viewed as infallible.
"You could be [the] greatest CIO and still wind up frustrating others in the organization, because IT inherently involves driving stakes in the ground -- and you're not always going to get it right," Austin says. "IT's not only an enabler, [it] can be a constraint."
The consensus advice includes such staples as focusing on systems scalability, middleware platforms, component-based applications, open interfaces, XML, and thorough documentation.
Girding for turnover is also key, adds Scott Cooper, vice president of the knowledge management products group at Lotus/IBM.
"Getting people up to speed is important. Fifty percent of employees [in some companies] are in their first or last year of employment, so you need to be able to rapidly and consistently educate people," Cooper says.
Although there are common-sense IT measures that can ease merger and acquisition deals, organizations can't risk losing sight of day-to-day business, Boston Gas' Zimon says.
"Mergers can be all-encompassing," Zimon explains. "It's very important to balance merger integration with other projects that move the business forward.
If you don't, two years later you could find that you've completed a successful merger and you're two years behind the competition."
Send comments on this story to Ted Smalley Bowen at firstname.lastname@example.org.
Merger-happy Deutsche Bank keeps IT busy at the front line of planningGermany's Deutsche Bank almost gave Ray Goldberg, managing director of global human resources information systems at the bank's branch in New York, yet another front-row seat for one of the industry's largest mergers: the proposed, then failed, Deutsche acquisition of Frankfurt, Germany-based Dresdner Bank for $30 billion.
However, Goldberg is taking it in stride because he believes that every working day holds a distinct possibility that the institution he works for could make another merger or acquisition that would likely affect the IT systems he and his staff have worked to put in place.
Merger talks unexpectedly broke off earlier this month over problems related to tintegration of the investment banking businesses of both banks, said officials from Deutsche. The combined institution would have had $1.2 trillion in assets.
Several solutions were proposed by Deutsche but rejected by Dresdner. Both sides failed to resolve the management of the very lucrative investment banking operations of each institution -- illustrating that business integration decisions come before IT infrastructure discussions.
Even though it fell apart, Goldberg says the potential merger "has affected us in two ways: It has pushed scalability and location high up on the list of what we think about."
This wouldn't have been Goldberg's first merger. He rode out the Deutsche takeover of Bankers Trust last year. And when working at Bankers, Goldberg helped the company absorb Alex Brown & Sons, and parts of the United Kingdom's NatWest Markets.
Consolidation in the financial services industry is being fueled by regulatory changes and the needs of a mature industry to show better margins, says Diogo Teixeira, managing director at the Tower Group, a Needham, Mass.-based market research company.
Banks are acutely aware "that they're takeover bait," Teixeira says. As a result, many institutions think twice about making major new investments in IT that might be made redundant by an acquisition or merger, he says.
"Are they going to make major investments -- hardware projects with long-off ROI?" Teixeira asks, adding that IT managers at banks often compare their proposed projects to what they might get as a result of a merger.
But before co-joining, banks spend little time weighing IT compatibility issues, Teixeira explains.
"The amount of due diligence is cursory at best," he says.
The thinking is that the incompatibilities can be gotten around or replaced.
However, for many cross-border, multinational mergers, the IT infrastructures of disparate business units may be so different that they will never be combined, Teixeira adds.
Merging technologies does not necessarily result in a centralized IT infrastructure, Goldberg says. At Deutsche and Bankers, numerous IT decisions were made on a case-by-case basis -- with many IT systems either discarded or kept with the hope that a bridge could later be built.
"I think it's a question of the business value," Goldberg says.
Once a decision has been made, IT management has to articulate the reasons and the vision behind it to the IT staff members who will implement it.
"If you can explain why, people will sign up for that," Goldberg says. "The people-management issues are more important."
That's because an IT brain drain needs to be avoided, he adds.
"We definitely tried to get in front of those people we wanted to retain [during the Deutsche-Bankers acquisition]," Goldberg says. "[But] it hasn't always been easy to hang on to staff. HR is unfortunately something looked at after the deal is closed."
The key to remember is that IT staffers are "driven by cool projects, so make certain they know their project will continue," Goldberg explains.
As it turns out, Deutsche and Bankers are both PeopleSoft customers. Even so, there were more than a few hurdles to get to a standard global implementation of the package, Goldberg says. And when the inclusion of Dresdner staff was pending, the unified PeopleSoft database was likely to be overhauled again, or replaced.
Deutsche would have faced a similar experience with Dresdner even though both were SAP customers. Deutsche recently agreed to jointly provide financial and trading services via a MySAP.com marketplace, say bank and SAP officials.
"[Integration] doesn't faze me," Goldberg says, adding that Deutsche would have figured out how to adjust the two installations. "It's clear to me every morning that we're not done."
IT flexibility is essential to support an ever-expanding financial services empire.
"You just keep at it," Goldberg says. "It's a matter of staying nimble. I think it's increasingly a critical skill."
Do start-ups need merger-ready IT plans?
For start-ups angling to cash in by selling the business, does it pay to try to craft an IT strategy that makes such a transaction easier and more appealing?
Although there may in fact be ways to simplify your infrastructure for integration into a larger organization, the issue seldom occupies the agenda of budding technology entrepreneurs -- if one Silicon Valley hothouse is indicative.
Members of the Business Association of Stanford Engineering Students (BASES), which cultivates would-be "next big things," tend to be more focused on the task at hand, according to Guido Appenzeller, vice president of operations and a Ph.D. candidate in the computer science department at Stanford, in Palo Alto, Calif.
"[Integration's] not something that people think about very much," Appenzeller says. "Usually, it's a matter of what technology will allow the business to scale quickest."
For Web software start-ups, the systems issues normally center on product, rather than internal IT, Appenzeller notes.
"It probably depends on what kind of business you have. If it's Internet plays, people tend to build more and more on top of open standards; for example, a Web component that can integrate with any site," Appenzeller says.
In advising BASES members on their IT strategies, Appenzeller would give the nod to technologies that keep options open and platform-independent, such as XML and SQL.
"I would tell them to go with open standards as much as possible," he says.
Of course, many start-ups rely on outsourcing to speed their growth, especially when other venture-funded outfits are racing to corner the market.
But adding the task of anticipating a potential buyer's systems requirement to the job of launching a business can be self-defeating, says Mike Oakley, a director in the transaction services group at KPMG, in Chicago.
"Trying to predict the best technology or what's most flexible is difficult to do," Oakley says. "And the acquirer, in the rationalization process that goes on, often throws out everything that the organization has and puts the business into its own systems."
"I think adherence to standards, open systems, [and] open and high-performance networks is all right and good stuff, but I don't know whether it makes you a more attractive target," Oakley adds. "What is attractive is to have a cost structure that's at least in line with industry standards."