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Making the deal work

M&A Consultative Services

Wired for winning?


Managing IT effectively in M&A
Dear CIO,

Whether you are involved in your first M&A transaction or are a seasoned pro, we believe
this compendium has something for you. It contains insights, approaches, tips and
recommendations developed as a result of the consulting services Deloitte* has provided to
clients of all sizes and across all industries. IT professionals, at all levels of experience, should
find useful ideas to consider as they address their current or pending IT-related M&A due
diligence, planning, and post-transaction integration activities.

To us, the role of IT in business has never been more significant than it is today. IT is a
critical enabler of virtually every operating element in contemporary organizations, and
timely access to information is unquestionably of paramount importance. The ability to keep
one’s company “on the rails” while simultaneously executing a complex merger, acquisition,
or divestiture is a skill which needs to be part of every contemporary CIO’s repertoire.

As the second installment in our Making the Deal Work series, each article in this
compendium can stand alone. But taken together, these articles offer an in-depth look
into M&A IT issues, ranging from the overall role of IT in M&A transactions to effective
construction and execution of a Transition Services Agreement (TSA). Whichever topic grabs
your interest, we hope the information we present here can augment your thinking. And,
if you’re looking for a broad perspective on M&A, check out the introductory issue of this
series, Making the Deal Work – Perspectives on driving merger and acquisition value.

Whether this is your first acquisition — or your hundredth — Deloitte is here to help. As
acknowledged by many industry analysts, our experience in assisting clients across the full-
spectrum of IT-related M&A activities is unmatched. If you’re looking for a seasoned advisor
with real-world experience, we’re ready to help.

Peter Blatman Mark Walsh John Powers


Principal Principal Principal
Deloitte Consulting LLP Deloitte Consulting LLP Deloitte Consulting LLP
+1 415 783 6169 +1 617 437 3069 +1 973 602 5555
pblatman@deloitte.com marwalsh@deloitte.com jpowers@deloitte.com

*As used in this document, “Deloitte” means Deloitte Consulting LLP, which provides consulting services; Deloitte & Touche LLP, which provides audit and enterprise risk services; Deloitte Tax LLP, which provides
tax services; and Deloitte Financial Advisory Services LLP, which provides financial advisory services. These entities are separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed
description of the legal structure of Deloitte LLP and its subsidiaries.
Making the deal work

Wired for winning?


Managing IT effectively in M&A

Edited by Amy Booth and Gregg Geller


Wired for winning?

Table of contents
1 Introduction

M&A IT – The IT landscape


5 Will you sink or swim? Can you pull off this deal without outside M&A IT
consulting support?

11 Don’t forget IT! Eight simple ideas to help reduce IT-related M&A risk

13 A new house begins with a blueprint: Day One and end-state IT blueprinting

16 Where in the world is IT? During M&A is a good time to ask old questions, again

20 Raising the stakes of information: Effective information management for mergers,


acquisitions, and divestitures

24 Hedge your bets: The importance of IT risk management in M&A

27 Built to last: Using an M&A event to build sustainable IT business value

M&A IT – Synergy capture


31 The role of IT in M&A

35 Leveraging IT’s ability to drive post-merger business value

38 Ignorance is not bliss: IT due diligence is fundamental for effective post-merge


synergy capture

41 M&A IT benefits with no deal involved: Simple ideas for realizing M&A benefits
without a transaction

VII
Wired for winning?

VIII
Wired for winning?

M&A IT – Integration
45 Walking the M&A IT tightrope: Establish a safety net of M&A capabilities before
integration begins

47 Virtual fences: Five ways to retain IT people when you need them most

50 Building an integration roadmap: Key questions every CIO should ask

53 Managing your data tightly through an M&A event

55 Cooking lessons: A CIO’s guide to leading a first merger integration project

58 Give IT a fighting chance: An M&A information technology


integration framework

M&A IT – Divestiture
65 Time to leave the nest, kid: 13 tips that could ease the transition of a carve-out

69 Fast break: A way to design and manage TSAs to achieve a fast and
clean separation

73 Breaking up is hard to do: Five questions for every CIO whose company is
divesting a business

Appendix
79 About the contributors

83 Deloitte’s M&A Consultative Services

84 Deloitte’s M&A IT Methodology

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Wired for winning?

Introduction
In 2007, Deloitte published Making the deal work — Perspectives on About this book
driving merger and acquisition value. This compendium of 22 articles
The perspective that Deloitte brings to this compendium is both broad
was written by practitioners from Deloitte’s Mergers & Acquisitions
and far-reaching. As a premiere global IT consulting firm and a leading
Services service line — professionals with a wealth of experience in
provider of M&A consulting services, we brought to this effort an
helping companies of all sizes and across all industries, in their efforts
unusual ability to see and to identify ways to address the complexities of
to achieve meaningful results in an often volatile and unpredictable
M&A IT across multiple dimensions: strategic, operational, technical, and
landscape of acquisition and divestiture transactions.
financial. We believe it is from this integrated perspective that the CIO
Making the deal work focused on a simple, but disturbing observation: can benefit as they develop their approach to managing expectations
The majority of, M&A deals fail to achieve the intended outcomes for and performance and, in doing so, enhance IT’s contribution to overall
the participants! As the introduction to the book says, “acquisitions M&A results. Here is a brief synopsis of the articles in this collection:
are complex, difficult undertakings…Even the most sophisticated M&A
M&A IT – The IT landscape
teams may be just one deal away from a major misstep.”
• Will you sink or swim? Can you pull off this deal without outside
To give companies something to consider in support of their efforts M&A IT consulting support? introduces critical transaction-related
to achieve their intended results, Making the deal work laid out a and organization-related factors to consider when deciding whether
disciplined, integrated M&A methodology that addressed all aspects of a to engage outside M&A IT consulting support, and includes the
complete M&A transaction, beginning with strategy and due diligence, M&A IT Intelligence Quotient Assessment Tool™ that you can use to
continuing through transaction execution, and ultimately to the help assess your organization’s ability to complete a current M&A IT
complexities of post-merger/divestiture integration and reorganization. transaction.
To cite just a few of the titles in the compendium — Avoiding merger
failure, Putting synergies to work, Navigating a global merger, Leading • Don’t forget IT! Eight simple ideas to help reduce IT-related M&A risk
practices for an effective transition, and Post-merger indigestion — hint discusses the importance of involving IT early in the deal process.
at the wealth of information between its covers, information both In fact, it presents findings from a Deloitte study that shows a clear
provocative and practical. correlation between Day One effectiveness and IT involvement in due
diligence and integration planning.
The compendium was very well-received by executives, who asked
• A new house begins with a blueprint: Day One and end-state IT
for more information, especially in one area of universal concern: IT
blueprinting discusses the importance of planning in achieving synergy
integration. So, we decided to assemble another compendium, this
and illustrates the use of blueprinting as a useful tool for rationalizing
one addressing the particular opportunities and challenges inherent in
technology so the new company’s IT profile can support its strategic
trying to bring together or carve out an IT organization. The result of
goals while eliminating IT redundancy and waste.
our effort is the book now in your hands, Wired for winning? Managing
IT effectively in M&A. Herein, you’ll find 20 articles, again authored • Where in the world is IT? During M&A is a good time to ask old
by seasoned practitioners, who are well-versed in the importance and questions, again urges the CIO to use the M&A event as an excellent
complexities of M&A IT. opportunity to ask an old question, again: Which service delivery model
is most appropriate for the new business? Old decisions — about
The articles — covering the intricacies of planning for and achieving outsourcing, offshoring, near-shoring, and onshoring — can take on
value from the “new” IT organization, completing purposeful IT due new dimensions when an organization changes its size or shape.
diligence, exploring the ways to capture synergy after the deal is done,
and detailing the complexities of bringing two IT organizations together • Raising the stakes of information: Effective information management
or breaking one apart — share a common premise: as IT goes, so for mergers, acquisitions, and divestitures discusses the many ways
goes the deal. IT’s role in the effectiveness of a merger, acquisition, or that IT can help enable the four primary drivers of enterprise value
divestitures is, simply put, critical. in mergers, acquisitions, and divestitures: revenue growth, cost
reduction, asset efficiency, and governance/risk/compliance.
Our hope is that this compendium will provide the CIO with ideas,
• Hedge your bets: The importance of IT risk management in M&A
approaches, perspectives and other information to consider as they
challenges the CIO to be assertive in addressing and resolving the
position their IT function for active participation in every stage of the
many threats to a deal’s value. The IT risk management framework
M&A lifecycle. In the long run, we believe much of the onus for achieving
presented here covers four primary areas of risk — integration,
post-deal synergy and value rests on IT’s shoulders. Consider this book the
technology, information, and business.
barbell you need to build enough “muscle” to carry the day!
• Built to last: Using an M&A event to build sustainable IT business value
recommends that IT facilitate its on-going value by aligning IT and the
business, rationalizing technology, and retaining knowledge workers.
These activities can help drive efficiency, effectiveness, return on
assets, and shareholder value.

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Wired for winning?

M&A IT – Synergy capture • Building an integration roadmap: Key questions every CIO should
• The role of IT in M&A discusses the essential role that we believe ask includes a checklist for IT to consider to help them achieve
IT must play in the full cycle of M&A activities, from pre-merger synergies within the desired timeframe, facilitate an issue-free Day
integration planning to post-merger integration, with the goal of One, and keep the impact to key stakeholders inside and outside the
helping to increase shareholder value from the deal. organization low.

• Leveraging IT’s ability to drive post-merger business value presents • Managing your data tightly through an M&A event describes ways
a framework for IT to position itself to capture the full range of to plan for and manage the risks and impacts associated with data
benefits from an M&A opportunity through three levers: resource integrations, from understanding critical data, through assessing
management, work management, and business-IT alignment. its quality, to maintaining controls through the use of tools and
methodology.
• Ignorance is not bliss: IT due diligence is fundamental for post-merger
synergy capture presents practical tips to consider for conducting due • Cooking Lessons: A CIO’s guide to leading a first merger integration
diligence along multiple dimensions: business, operational, delivery, project serves up a five-step” recipe” to consider in preparing for
financial, and people. By asking the right questions, at the right time, an IT integration, including conducting due diligence, crafting and
the CIO can increase the likelihood that IT will deliver the anticipated implementing an IT integration plan, improving synergies, and
synergy of the post-deal enterprise. preparing for future mergers.

• M&A IT benefits with no deal involved: Simple ideas for realizing • Give IT a fighting chance: An M&A information technology integration
M&A benefits without a transaction shows ways an organization can framework presents an IT integration framework from A to Z — from
create a virtual M&A event to help them realize M&A-like benefits alignment with the business direction, through IT architecture and
of improving financial and operational performance without actually organization, to funding and governance — with the intent of helping
completing an M&A transaction. IT achieve the “readiness” that’s so important to a smooth and
successful integration.
M&A IT – Integration
M&A IT – Divestitures
• Walking the M&A IT Tightrope: Establish a safety net of M&A
capabilities before integration begins stresses the importance of • Time to leave the nest, kid: 13 tips that could ease the transition of a
having a “safety net” of capabilities — specifically, knowledge, carve-out offers the CIO for a carved-out IT organization 13 light-
processes and tools, and experience — before tackling the high-wire hearted, but highly practical, transition tips to consider as you try to
act of post-merger integration. All types of activities, from training to make it without a “parent” and achieve long-term prosperity with
M&A integration simulators, can help an IT organization get ready to limited short-term pain and failures.
effectively make it to the other side. • Fast break: A way to design and manage TSAs to achieve a fast and
• Virtual fences: Five ways to retain IT people when you need them clean separation illustrates factors to consider in creating an effective
most presents a down-to-earth way to address employees’ concerns Transition Services Agreement (TSA), one of the most crucial elements
about a merger, acquisition, or divestiture to help earn their of a divestiture. An effective TSA can help both buyer and seller
confidence and win their commitment to the transformation ahead. accomplish their respective goals.
• Breaking up is hard to do: Five questions for every CIO whose
company is divesting a business poses five questions the CIO should
consider in preparation for segregating systems and services as a
result of divestiture.

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3
M&A IT – The IT landscape
In the world of deal-making, IT integration is often overlooked. And that’s as big mistake.

In nearly every case, IT is on the line for delivering synergy. The rewards of IT integration

are great, and so are the risks of poor planning or execution.


M&A IT — The IT landscape

Will you sink or swim?


Can you pull off this deal without outside M&A IT consulting support?

By Mark Walsh and John Powers

Organization-specific factors
Introduction • Level of M&A experience (buyer and seller)
Over the past five years, 1,955 M&A transactions greater than • Number of available experienced M&A resources within each
$500 million and involving a U.S. buyer and/or seller, were IT organization
announced. In aggregate, these transactions represented almost • Level of each IT organization’s readiness
$5 trillion in value.1 In nearly every case, the CIOs and Information
Technology (IT) leaders of the parties involved (buyer and seller) • Each organization’s M&A history
asked themselves: Can we complete the integration/divestiture • Each organization’s M&A track record (positive and/or negative)
by ourselves? Should we consider engaging outside M&A IT • Each IT organization’s M&A track record (positive and/or negative)
consulting support?
• Complexity of each organization’s operations
These questions rarely have obvious answers. Good consultants • Complexity of each organization’s IT landscape
will respond to the question of whether outside support is required
with, “It depends.” Consultants who says, “yes,” without any • Competitive position of each organization
knowledge of your organization, the target organization, or the • Volume and complexity of existing nontransaction-related IT activities
transaction are likely just trying to sell you their time. Beware! and projects (buyer and seller)
Knowing this critical information can help you intelligently analyze your
IT organization’s ability to complete M&A transactions without outside
For CIOs and IT leaders, the answer to these questions does, in fact, M&A IT support — i.e., your ability to sink or swim.
depend on many factors. Some of these factors are transaction related
and some are organization related, as listed below:
Transaction-specific factors
Case study 1: Consistent user of external M&A IT consultants
• Type of transaction
Client: Multibillion-dollar, global company
• Size of the transaction
Transaction history: Completed a few M&A transactions prior to
• Nature of the transaction (friendly or hostile)
the last five years.
• Global transaction footprint
Transaction track record: Completed multiple transactions in the
• Degree of required IT carve-out (if applicable) last five years.
• Desired degree of IT integration (if applicable)
Transaction profile: Transaction type (acquisitions, divestitures,
• Complexity of IT-related integration issues and joint ventures), size (less than $1 billion–$20 billion+), and
• Size, complexity, and timing of IT-related synergy requirements complexity (medium to very high) have varied.
• Degree of similarities between the buyer and seller External consulting usage profile: Use external M&A IT
• Similarities between the buyer and seller consulting support to help them develop their internal M&A
capability (e.g., M&A IT playbooks, processes, and tools, as well
– IT application footprints as internal resource training). Consistently use external M&A IT
– IT infrastructure consulting support for ongoing transactions.
– IT delivery models External consulting usage rationale: Use consulting in support of
• Existence of IT outsourcing contracts IT due diligence, IT integration/divestiture program office support,
IT synergy identification and capture, and IT functional planning
• Anticipated duration of the transaction close window (announcement
and execution support and to supplement its internal capabilities
to regulatory approval to close)
and capacity. This has allowed key operations resources to remain
• Level of pre-deal operations and IT due diligence focused on the day-to-day operations.
• Volume and complexity of Day One business and IT requirements
• Volume and complexity of IT-related integration projects

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Whether you are planning an M&A transaction or are currently engaged in a 2. Access to specific M&A IT techniques, lessons learned, and
transaction, carefully assess the potential need for outside support. One way to an independent third-party perspective. During an M&A
do this is to quantify your “M&A IT Intelligence Quotient” – Your M&A IT IQTM. transaction, there is always a need to complete transaction
Our M&A IT IQ Assessment ToolTM, included in this article, is designed to help
planning, analysis, and execution activities that are not typically
efficiently determine where a company’s potential transaction risks lay, where a
company should apply additional internal focus and resources, and whether a required as part of steady-state IT operations. Often, the
company should consider engaging outside M&A IT consulting support. resources, experience and skill sets required to complete these
activities do not exist inside the company.
A low M&A IT IQ score does not necessarily indicate that your
organization is doomed to failure if you do not engage outside assistance. As an example, you may have requirements related to integration/
It does, however, provide a quantitative assessment of the level of divestiture strategy development, IT organization design and
difficulty your IT organization will likely face in completing the transaction rationalization, IT synergy identification and capture, application
if you choose to go it alone. Many companies, and IT organizations and instance consolidation, system selection, legacy system
specifically, who have chosen to go it alone do effectively achieve their retirement, data center consolidation, network consolidation, IT
integration and divestiture goals. outsourcing contract setup, termination, or renegotiation, as well
You may be surprised, but our assessment tool consistently produces results as IT contract negotiations. Support from experienced consultants
that suggest companies should forgo or limit outside consulting support with an independent third-party perspective and access to time-
because the IT organization is prepared to effectively execute the transaction. tested techniques and lessons learned regarding these specific
While some IT organizations truly need help with specific transactions, others activities can be valuable to an organization.
can and should go it alone. Take 10 minutes and complete the assessment for
your situation. The answers and insights may surprise you. 3. Access to time-tested M&A IT methodologies, processes,
tools, and accelerators. Access to time-tested M&A IT
The benefits gained by engaging outside M&A IT consulting support methodologies, processes, tools, and accelerators cannot only
When indicated and appropriate, outside assistance can provide eliminate the need to reinvent processes and tools from scratch,
meaningful benefits to buyers and sellers. These benefits include: it can also facilitate faster execution time, shorter training
windows for resources, reduced overall cost, increased synergy
1. Access to experienced M&A IT practitioners and short-term identification opportunities, as well faster integration and
resource bandwidth. In most cases, companies do not have the divestiture. Access to rigorous and repeatable processes and tools
experiences from several hundred M&A transactions to draw from. are critical for M&A effectiveness.
Many consulting firms, however, do. Leveraging the experiences of
others, even on a limited basis, can provide significant benefits. 4. Personal career insurance. Your M&A transaction will likely represent
one your biggest career challenges. Many CIOs and IT executives believe
In addition, most companies do not have a bench of resources engaging outside M&A IT consulting support represents a logical, cost-
sitting and waiting for an M&A transaction to come along. effective project and personal career insurance policy. If the transaction
When a transaction does occur, companies often find it difficult achieves the desired results, nobody will question your use of outside
to respond to the short-term spike in M&A-related activities and consulting support. If the deal encounters problems, however, they will
requirements. Outside M&A IT consultants can often help fill the likely ask why you didn’t seek help.
gap with experienced M&A IT resources and advisors.
5. A good night of sleep. M&A transactions are one of the few
events in a company’s history where all functional, process, and
Case study 2: Serial acquirer – Occasional use of external organizational levers are at play. The transactions also often bring IT
M&A IT consultants organizations and their people to their breaking points. Engaging
Client: Multibillion-dollar, global company outside help that provides experience and a demonstrated track
record may be your only hope of getting a good night’s sleep until
Transaction history: Serial buyer and seller the integration or divestiture effort is completed.
Transaction track record: Completed more than 50 transactions in
the last 10 years. Outside consulting support cannot guarantee you a good
night’s sleep, but it can at least provide you with enough specific
Transaction profile: Transaction type (acquisitions, divestitures, experience, information, and knowledge to let you know when
and joint ventures), size (less than $1 billion–$25 billion+), and and why you should sleep well, and when and why you shouldn’t.
complexity (low to very high) have varied.
External consulting usage profile: Occasionally use external M&A
IT consulting support.
External consulting usage rationale: Occasionally use consulting
in support of IT due diligence, IT integration/divestiture program
office support, IT synergy identification and capture, and IT
functional planning and execution support and to supplement its
internal capabilities and capacity. This has allowed key operations
resources to remain focused on the day-to-day operations.

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M&A IT — The IT landscape

Don’t follow your instincts or the views of a consultant —


Case study 3: Serial acquirer – Consistent use of external follow your M&A IT IQ
M&A IT consultants
Every company and every transaction is unique, and the stakes are
Client: Multibillion-dollar, global firm typically very high. Even if you are a serial acquirer or would never
consider engaging outside consulting support, give the M&A IT IQ
Transaction history: Serial buyer and seller Assessment Tool a try. It will likely be an eye-opening experience, and
Transaction track record: Completed more than 100 transactions the assessment results may give you a few ideas and insights that could
in the last 10 years. help make your M&A experience a positive one.

Transaction profile: Transaction type (acquisitions, divestitures,


and joint ventures), size (less than $1 billion–$50 billion+), and Case study 4: Non-user of external M&A consultants
complexity (low to very high) have varied.
Client: Multibillion dollar, global company
External consulting usage profile: Consistently use external M&A
IT consulting support. Transaction history: Serial buyer and seller

External consulting usage rationale: Consistently use consulting Transaction track record: Completed more than 100 transactions
in support of IT due diligence, IT integration/divestiture program in the last 10 years.
office support, IT synergy identification and capture, and IT functional
Transaction profile: Transaction type (acquisitions, divestitures,
planning and execution support and to supplement its internal
and joint ventures), size (less than $1 billion–$20 billion+), and
capabilities and capacity. This has allowed key operations resources to
complexity (medium to very high) have varied.
remain focused on the day-to-day operations, accelerate transaction
close, as well as expand and accelerate value capture. External consulting usage profile: Rarely use external M&A
support for ongoing transactions.

The honest rule of thumb External consulting usage rationale: Typically do not engage
external M&A consulting support because the company has
You must evaluate how prepared your organization is for an upcoming developed and maintains internal M&A IT capability, experience,
M&A activity. The M&A IT IQ Assessment Tool is one method to help and staff.
assess your needs.
In general, if your overall M&A IT IQ score is less than 100, you should at
least initiate some conversations with a few outside consulting firms with
M&A IT experience. The conversations cost nothing, and you just might
get the key nuggets of information needed to jump-start your effort.
If your M&A IT IQ score is less than 80, you should seriously consider
engaging outside support. In addition, if you have a zero M&A IT IQ
score along any specific dimension, you may want to consider targeted
support in that area.
If your M&A IT IQ score is greater than 100, you probably would be
better off simply ramping up your internal team and getting them
focused on the job at hand. The worst type of consultant is one who
arrives at a client side with the meter running, watching a competent
client do its job.

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Wired for winning?

M&A IT Intelligence Quotient Assessment Tool™


To help you assess your organization’s ability to complete a specific M&A IT transaction, answer the following questions, add up your total score
(M&A IT IQ), and then refer to the scoring recommendations at the end of the assessment.

Assessment questions – Transaction factors M&A IT IQ score


1. What is the size of the transaction? <$50 million >$5 billion

W X Y Z [ \
2. What is the nature of transaction? Very friendly Very hostile

W X Y Z [ \
3. What is the global transaction footprint? 1 Country >50
Countries

W X Y Z [ \
4. What is the degree of required IT carve-out (if applicable)? No carve-out Significant
required carve-out
required

W X Y Z [ \
5. What is the desired degree of IT integration (if applicable)? No Significant
integration integration
required required

W X Y Z [ \
6. What is the complexity of IT-related integration issues? Minimal Multiple,
issues very complex
issues

W X Y Z [ \
7. What is the size, complexity, and timing of IT-related synergy Low $, low High $, high
complexity, complexity,
requirements? ample time limited time

W X Y Z [ \
8. What is the degree of similarities between the buyer and seller? Very similar Very different

W X Y Z [ \
9. What is the degree of similarities between the buyer and seller Very similar Very different
IT application footprints?
W X Y Z [ \
10. What is the degree of similarities between the buyer and seller Very similar Very different
IT infrastructure?
W X Y Z [ \
11. What is the degree of similarities between the buyer and seller Very similar Very different
IT delivery models?
W X Y Z [ \
12. Does the buyer and/or seller have existing IT outsourcing Neither have Both have
contracts multiple
contracts? contracts

W X Y Z [ \
13. What is the anticipated duration of the transaction close >12 Months <30 Days
window (announcement to regulatory approval to close)?
W X Y Z [ \
14. What level of pre-deal operations and IT due diligence did Extensive, No due
detailed IT diligence
you complete? due diligence

W X Y Z [ \
15. What is the volume and complexity of Day One business and Limited Large
scope, scope, high
IT requirements? limited complexity
complexity

W X Y Z [ \
Source: Deloitte Consulting LLP

Total transaction factors score (sum of questions 1 through 15): ______________


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M&A IT — The IT landscape

M&A IT Intelligence Quotient Assessment Tool™

Assessment questions – Organization factors M&A IT IQ score


1. What level of M&A experience exists within each IT No Both have
experience significant
organization (buyer and seller)? experience

W X Y Z [ \
2. What number of experienced M&A resources are available No resources Large
available number of
within each IT organization? resources
available

W X Y Z [ \
3. What level of readiness to complete an M&A transaction does Not Highly
ready ready
each organization have?
W X Y Z [ \
4. What is the past M&A history of each organization? No history Both have
significant
history

W X Y Z [ \
5. What is each organization’s M&A track record Both have Both have
history of history of
(positive and/or negative)? failure success

W X Y Z [ \
6. What is each IT organization’s M&A track record Both have Both have
history of history of
(positive and/or negative)? failure success

W X Y Z [ \
7. What is the complexity of each organization’s operations? Both are Both are very
simple complex

W X Y Z [ \
8. What is the complexity of each organization’s IT landscape? Both are Both are very
simple complex

W X Y Z [ \
9. What is the competitive position of each organization Both are Both are
struggling in market
within the market? the market leaders

W X Y Z [ \
10. What is the volume and complexity of existing Both have Both have
extensive minimal
nontransaction-related IT activities and projects non-M&A non-M&A
(buyer and seller)? workloads workloads

W X Y Z [ \
Source: Deloitte Consulting LLP

Total organization factors score (sum of questions 1 through 10): ______________

Your M&A IT IQ score (sum of transaction and organization): ______________

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Wired for winning?

Scoring your results


We hope that your completed assessment helps you understand the point of the M&A IT IQ Assessment Tool. There truly are no “silver bullets” to
achieve positive M&A results. Thoughtful questioning regarding a specific transaction and your specific organization, however, may highlight some
of the larger risks as well as potential areas that might benefit from heightened internal focus or outside M&A IT consulting support, ultimately
improving your chances of achieving positive M&A results.
The scoring recommendations below provide guidance related to your M&A IT IQ score. There are certainly no “one size fits all” answers, but we
believe that your M&A IT IQ score is a good indicator of whether, and to what degree, you may need outside M&A IT consulting support.
Regardless of your score, we hope that the M&A IT IQ Assessment Tool provides you with some meaningful insights, and helps better prepare you for
achieving positive M&A results. Good luck on your M&A journey.

Total assessment (M&A IT IQ) score >100


Recommendations

• If your M&A IT IQ score is 100 or higher, chances are that your IT organization is positioned and prepared to plan and
execute against your transaction.
• The limited complexity of your transaction, coupled with your organization’s level of readiness and experience with M&A IT,
should afford you a strong chance for achieving positive M&A results.
• If your score is less than 1 for any assessment question, however, consider placing heightened internal focus (potentially
supplemented with focused external support) on that particular area.

Total assessment (M&A IT IQ) score between 80 and 100


Recommendations

• If your M&A IT IQ score is between 80 and 100, chances are that your IT organization is positioned and prepared to plan and
execute against your transaction.
• The level of complexity of your transaction, coupled with your organization’s level of readiness and experience with M&A IT,
suggest that you should, at a minimum, initiate discussions with outside consulting firms with strong M&A IT experience and
capabilities. Although you may not elect to engage outside support, the conversations will provide you with valuable insights
and ideas that will likely improve your chances for achieving positive M&A results.
• If your score is less than 1 for any assessment question, you may want to place heightened internal focus (potentially
supplemented with focused external support) on that particular area.

Total assessment (M&A IT IQ) score <80


Recommendations

• If your M&A IT IQ score is less than 80, chances are your IT organization may need some help to plan and execute against
your transaction.
• Due to the complexity of your transaction, coupled with your organization’s limited readiness and experience with M&A IT,
discussions with and engagement of outside M&A IT consulting support will likely provide significant benefits and improve
your chances for achieving positive M&A results.
• Investigate external consulting support options carefully. Just because your M&A IT IQ score is on the lower end of the scale,
it does not necessarily mean that your outside M&A IT consulting budget must be large. In most cases, flexible, cost-effective
support options are available that will provide very strong benefits and help to better manage your transaction risk.
Source: Deloitte Consulting LLP

Note: M&A Intelligence Quotient, M&A IT Intelligence Quotient, M&A IQ, M&A IT IQ, M&A IQ Assessment Tool, and M&A IT IQ Assessment Tool are trademarks of Deloitte.

Notes
1
Deloitte Consulting analysis based on Mergerstat Data, all transactions <$500 million involving U.S.-based buyer and/or seller from January 1, 2003, to October 31, 2007.

10
M&A IT — The IT landscape

Don’t forget IT!


Eight simple ideas to help reduce IT-related M&A risk

By Mark Walsh, Janice Roehl, Anna Lea Doyle, and Nikhil Chickermane

Introduction
Case study 1: Incomplete IT due diligence
Based on our research, it is widely accepted that most mergers fail to
deliver their expected value. Countless studies have offered a variety of A large, global manufacturer purchased — and attempted to
rational explanations for this problem. Poor target screening. Insufficient integrate — a division of another large, global conglomerate.
due diligence. Lack of executive support. Large cultural differences. Role of IT
Poor execution.1 However, one important factor that we believe is often
overlooked is lack of early involvement by the Information Technology IT was not involved in due diligence and did not participate in
(IT) function. integration planning until after the deal was announced and closed.
Getting IT involved early and often throughout the M&A lifecycle Outcomes
is critical to an effective merger or divestiture. This shouldn’t be
• IT-related integration costs exceeded due diligence estimates by
too surprising, as most deal benefits rely heavily on IT systems and
more than $100 million
infrastructure. Yet many companies largely ignore IT during the
transaction, putting off detailed IT scoping and planning until the deal is • IT issues caused significant operational problems after the cutover
essentially done. And by then, it’s usually too late. • The TSA had to be extended because the buyer wasn’t ready to
The perils of ignoring IT operate independently

A recent Deloitte survey shows a clear correlation between Day One


effectiveness and IT involvement in due diligence and integration/ Getting IT involved early and often
divestiture planning. It also shows a strong correlation between IT due Integrating or “carving out” very complex information systems is entirely
diligence and the effective capture of IT-related synergies. Yet according possible — it just takes a strong focus on IT. Over the past five years, we
to the survey, fewer than 30 percent of companies get IT involved in have developed a number of practices designed to help companies avoid
pre-close planning.2 This lack of early IT involvement can have serious ineffective deals resulting from delayed IT involvement:
consequences, including:
Assign a senior IT executive to help with due diligence. Make the
Millions in unexpected integration/divestiture costs. IT-related CIO (or designee) a key member of the due diligence team, and keep
activities are generally the largest cost items in a merger or divestiture. the IT function involved until all key synergies have been captured. Most
However, because IT is a secondary focus in most deals, the of the effective M&A efforts we have seen had significant IT involvement
magnitude, complexity, and cost of these activities is often significantly in all phases of the M&A lifecycle, from preliminary due diligence to Day
underestimated. We have seen deals where Fortune 100 companies One and beyond.
were forced to spend an additional $50 million to $100 million to
address IT-related complexities that were not fully understood during Pair IT players with business players. Many of the most effectively
due diligence and deal valuation. run M&A programs operate within a structure that actively encourages
collaboration and teamwork between IT and the business/functional
Long delays in capturing benefits. Most M&A deals expect areas. One way to do this is by staffing key positions on the M&A team
significant synergies from economies of scale, cross selling, facility/plant with someone from IT and someone from the business to jointly drive
rationalization, and legacy system retirement. All of these synergies planning and execution. This “double boxing” team structure can help
have one thing in common — they require major IT changes. Yet many foster a strong working relationship and sense of ownership. We have
companies put off developing an IT strategy and detailed IT plans until even seen deals where the overall effort was effectively co-led by senior IT
the deal is essentially closed. This delayed IT involvement makes it virtually and business resources.
impossible for companies to achieve their aggressive Day One goals.
Identify detailed IT requirements before you sign the deal. Insist
Temporary IT solutions that are expensive, risky, and wasteful. that the due diligence team identify all IT investments that will be
Because of the long lead times associated with IT integration and needed to achieve the expected short- and long-term benefits. IT-related
divestiture activities, many companies are forced to develop and synergies often occur over multiple years. At first, the synergies may be
implement transition services agreements (TSAs) in order to close negative due to high short-term implementation costs; however, within
their deals on schedule. These short-term solutions for IT systems and a year or two they often facilitate a lion’s share of the deal benefits.
business processes can be difficult and expensive to set up and may cost Although it is generally not possible to define the exact cost and timing
medium to large companies $5 million to $10 million per month for of required IT systems and infrastructure (due to the speed of the deal
support. They also can increase a company’s security risks. and limited information available during due diligence), it is essential to
develop order-of-magnitude estimates for these critical IT projects. The
resulting IT estimates can then be used to validate the magnitude and
timing of the expected benefits.

11
Wired for winning?

Case study 2: IT integration planning done right Case study 3: Making the most of a difficult situation

A company acquired a smaller competitor in order to improve its This merger involved two large insurance companies, each built from
market position. The company expected to achieve $100 million a series of prior acquisitions that had not been fully integrated. In
per year in synergy benefits. Day One was set to occur just 90 days addition to the integration challenges, the merger was touch and
after the deal closed. go for a long time due to an extensive and prolonged regulatory
approval process.
Role of IT
Role of IT
The aggressive merger targets were feasible because the company
had done extensive IT integration planning during the due diligence IT was involved in pre-deal due diligence, as well as extensive pre-
phase. It had mapped out an IT integration strategy and identified close planning and preparation. Operational efficiency comparisons
the major IT integration issues. In addition, the company used “clean revealed significant improvement potential and a compelling business
teams” to get a head start on planning and execution before the case to fundamentally change the IT infrastructure delivery model.
deal was finalized. Key IT integration tasks included combining Savings opportunities ranged as high as 60 percent for various
the companies’ ERP applications, IT infrastructures, and voice/data technology components, with a total IT synergy target of $75 million.
networks. One of the main challenges identified during due diligence
was that the two companies were running on different versions of Throughout the process, the CIO remained deeply committed to
their ERP systems, which meant that one of the ERP systems had to be transforming IT and meeting or exceeding the synergy target, even
upgraded before the integration could be completed. when regulators initially rejected the deal and it appeared as if the
merger might fall through.
Outcomes
Outcomes
• The ERP upgrade and subsequent integration were completed
on time and at minimum expense, largely due to the company’s • The merger ultimately was approved and completed
advanced IT planning • Annual IT savings of $189.5 million were identified (well above
• IT integration was completed in only eight months, less than half the $75 million target)
the time typically required for a large-scale merger • An issue-free Day One was achieved
• Throughout the integration process, people from IT and business • The combined organization effectively shifted to an outsourced
operations worked side by side to achieve the desired results IT infrastructure

Factor in IT costs and timing when valuing the deal. Make IT Get your priorities straight. Regardless of the transaction size or desired
investments a mandatory part of your valuation model. Although IT-related degree of integration, every deal has an impact on IT. Because IT resources,
costs are not significant to every M&A transaction, in some cases they can funding, and time are limited, it is essential to immediately inventory and
be very significant. The valuation model must include estimated costs for all assess all IT projects (even those not directly related to the deal) to verify that
IT projects that are required for capturing the expected short- and long-term they are still required and align with the company’s future direction. Priority
business synergies, as well as costs for software licensing and TSAs. should be given to IT projects that 1) link to critical Day One requirements;
2) enable or accelerate large synergy opportunities; or 3) are essential to
Get a head start on IT projects. “Clean teams” are groups of
implementing the company’s future strategic initiatives.
specialists that are given special access to restricted information before
the deal is complete. These teams typically focus on competitive areas, Keep the pressure on. An effective Day One is only the beginning. IT
such as sales and marketing; however, they can also provide an early projects that are critical to synergy capture and long-term-deal results often
start on time-critical IT activities. For example, clean teams can be used require many months to complete. To maintain critical momentum for an
to compare business and data models, assess the impact of the deal on integration or divestiture, it is vital that management stay focused on related
the company’s future IT landscape, and conduct detailed scoping and projects until the majority of benefits have been captured.
planning. In our experience, some of the most effective integration and
IT: The missing piece of the M&A puzzle
divestiture programs identified IT scoping and planning as a critical pre-
close activity and used clean teams to involve business and IT resources In our experience, companies that place a strong, early focus on IT and
in an active cross-company dialogue focused on key IT solutions. take deliberate steps to elevate IT as a key M&A activity enjoy a wide
range of benefits, including:
Use the integration/divestiture as a springboard to improvement.
Many companies have had significant results viewing an integration • Faster decision-making
or divestiture as an opportunity to reinvent and dramatically simplify • Faster IT solution development
their IT organizations, solutions, infrastructure, and delivery models.
Implementing such improvements is often faster and cheaper than • Faster value capture
blindly dragging an acquired business onto existing systems. Other • Fewer customer issues at cutover
creative approaches include: “adopt and go” (picking whichever • Less “throw-away” IT work
existing IT solution is a better fit, and then adopting it for the new
entity — regardless of which company it came from), migrating to the Regardless of the size and complexity of an integration or divestiture,
acquired company’s IT solutions, implementing outsource solutions, or the IT team’s speed and effectiveness is likely to have a big impact on
implementing new applications/packages. These creative approaches whether the deal ultimately achieves the expected results. That’s why
often result in more timely and cost-effective results and, in many cases, it pays to get the IT function involved early in the deal and to keep it
produce cleaner end-state solutions. involved throughout the M&A lifecycle.

Notes
1
“Solving the merger mystery: Maximizing the payoff of mergers & acquisitions,” Deloitte, February 2000.
2
“Strategic acquisitions amid business uncertainty: Charting a course for your company’s M&A,”
Deloitte Research and EIU study, November 2007.
12
M&A IT — The IT landscape

A new house begins with a blueprint


Day One and end-state IT blueprinting

By Mark Walsh, Asish Ramchandran, Anna Lea Doyle, and Joseph Joy

In many cases, value capture targets (synergy or cost reduction) are


Introduction expressed for IT: Reorganize for optimal productivity; rationalize
applications and infrastructure to eliminate unnecessary redundancy;
During an integration of two organizations or a divestiture of a evaluate sourcing opportunities; and explore outsourcing/offshoring as
business unit, the risks can include hidden or unexpected costs, service delivery alternatives.
excessive complexity, and poor return on investment. What’s true
for the whole is true for the parts: The information technology (IT) But value capture is not the whole picture. IT also supports the
organization faces the same risks as the enterprise. Yet, IT is also achievement of business objectives. Just like the construction program
expected to enable solutions for the entire enterprise. That’s why manager receives pressure to complete the home on time or sooner,
planning for IT — for the function’s organization, applications, IT feels the pressure to deliver stable solutions to support the business.
infrastructure, and service delivery model — is so important. For example, in many organizations the order-to-cash (OTC) process is
critical (order in, shipments out the door, and cash in the bank). When
Think of forming the “new IT” as building a new house: integrating OTC, it is extremely important to collaborate with functional
• What will the house look like? (What will IT look like after the teams to maintain business continuity.
integration or divestiture?)
Let’s imagine the intent behind an acquisition is to enter a new market.
• What rooms will be in the new house? (What are the IT IT will have to plan for a larger footprint: Building this house could
requirements for Day One? Beyond Day One?) require new investments in facilities, applications, wiring, networks, voice
• In what order should the rooms be built out? (What projects will systems, sale support technology, and employee training. In this case, IT
get IT to Day One and beyond? What milestones would most blueprinting would include input from functions (such as finance, HR,
effectively track progress?) procurement, operations, and supply chain) and would be used to closely
• How might the builders reduce the house’s cost? (Where might IT manage those cross-functional dependencies (scope and timing).
find value capture opportunities?)
What rooms will be in the new house?
The answers to those questions can be explored and organized
What are the IT requirements for Day One? Beyond Day One?
through blueprinting, a comprehensive approach for planning the
ways IT will affirm the merger and acquisition (M&A) or deal strategy, As mentioned above, blueprinting helps address the organizational,
achieve Day One readiness, and execute toward end-state (also functional, and technical requirements for Day One and end-state.
referred to as Day Two). This approach is applicable to integration These requirements will drive projects, milestones, and timetables
and/or divestiture transactions. (for example, Day One, Day One +30, Day One +90). Day One
requirements should be highly focused on keeping the business
running, removing uncertainty for stakeholders, complying with
What will the house look like? regulatory requirements, and delivering the Day One “must-haves.”
Some typical examples of Day One requirements include:
What will IT look like after the integration or divestiture?
• Keep the business running: The company must be able to take orders,
Blueprinting should start with the end in mind and work backward to invoice the customer, and deliver products.
Day One. • Remove uncertainty for internal and external stakeholders: IT needs
• End-state – What will the house look like? What does IT look like to enable the communication of (1) short-term operating policies and
today and, what will it look like when the integration or divestiture is procedures to employees and sales staff; (2) new contact information
complete? How long will it take to reach the end-state (organization, and new phone numbers to customers; and (3) phone scripts to
infrastructure, applications, service delivery model)? What value will customer service representatives.
be captured as a result of the integration or divestiture? • Comply with federal, legal, and regulatory requirements: On Day One,
• Day One – What bare minimums must be in the new house? For licenses must be transferred, applied for, or in place, and contracts
example, on Day One will the organization have the IT equivalent must be assigned. Finance has to be able to produce consolidated
of a roof, running water, and electricity or merely a groundbreaking financial reports.
ceremony? These are two radically different examples of Day One scope. • Deliver Day One “must-haves”: IT has to establish e-mail connectivity
and some level of file transfer capability.

13
Wired for winning?

While the integration or divestiture strategy is being formed, IT should One of the biggest challenges for IT is working against a timeline not
be gathering and reviewing vital information about the budget, under its control. Nor is it under the control of the businesses. While
application inventory, asset inventory, organization/IT employees, everyone can pretty much agree on Day One requirements, the very next
projects, and contracts. How will the two IT functions come together? day the businesses will start wanting services. IT needs to be prepared to
(Or in the case of a divestiture, how will the altered IT function defend its priorities and prevent conflict. Blueprinting Day One and Day
continue?) How will applications be combined and rationalized? These Two strategies can help IT from getting pulled off track after Day One and
questions are multidimensional. For example, when planning for serves as a key communication tool with related functional teams and
infrastructure, IT needs to consider these variables: program leadership. (Figure 1 is an example of a blueprint of IT strategies
• Personal productivity (e.g., e-mail, handhelds, office automation, for Day One and Day Two.)
imaging, and collaboration) In what order should the rooms be built?
• End-user computing (e.g., client hardware, client operating system,
What projects will get IT to Day One and beyond? What
and terminal emulation)
milestones would effectively track progress?
• Security (e.g., audit/compliance tools, authentication, directory
services, encryption, network security, and virus protection) Building a house consists of many projects (e.g., lay the foundation,
build the roof, install the plumbing and wiring, plaster the walls) and
• Systems management (e.g., configuration management, asset
associated plans for completion — so does integrating two businesses after
management, change management, service/help desk, network
a merger or acquisition or separating two businesses after a carve-out.
management, performance monitoring, capacity planning, and
What projects will enable IT to achieve its Day One and Day Two strategies?
software distribution)
Against what milestones should each project’s progress be tracked?
• Storage (e.g., storage area network, network-attached storage,
direct attached storage, server backup software, backup hardware, Blueprinting can help IT identify and prioritize projects and milestones,
and storage management) as well as identify key dependencies and resource requirements.
Projects and associated milestones may also be driven by value capture
• Computing platforms (e.g., mainframe hardware, server hardware, requirements. Some may need to be completed by Day One, while
mainframe operating system, and server operating system) others may have completion dates of Day One +30, +60, +90, or even
• Telecommunications (e.g., firewall, wireless, voice, data, IP services, +365. We often suggest breaking up projects into 30-day segments
and protocols) the first year and quarterly segments after that. For the first year,
projects and milestones should be pretty concrete. (Figure 2 shows a
• Hosting (e.g., data center facility, disaster recovery, and
blueprint for the IT strategy to outsource data centers. In this sample,
maintenance services)
the project has expected synergy targets; by including this outcome in
In the case of an acquisition or divestiture, transition services agreements the blueprint, the CIO maintained visibility for this value delivered.)
(TSAs) come into play. By allowing the seller to provide services for a
specified time, a TSA can help enable business continuity, freeing IT to
focus on the immediate deliverables for Day One. For that reason, TSAs
are common for business applications and associated infrastructure.

Figure 1: A simple blueprint of IT strategies for Day One and Day Two

Process/Subprocess strategy Technology (application)


Sub function Day One to Day Application Day One to Day
Day One strategy Day One strategy
Two exit strategy Two exit strategy
Example: HR – Org. Performed manually N/A HRIS Transferred to buyer N/A
design and structure by buyer on Day One

Example: • Continue to use • Migrate to buyer Asset manager Transition services • Develop data
Finance – Fixed assets same processes processes and agreement (TSA) separation plan
and systems systems from seller system
• Identify assets • Train fixed • Migrate information
migrating to buyer assets resources to buyer system
and book value

Source: Deloitte Consulting LLP

14
M&A IT — The IT landscape

Figure 2: A blueprint for the IT strategies to outsource data centers

Transition work plan


Initiative Project type Key milestone Start date End date Owner Dependencies % Complete
x Integration
______
Disaster recovery and business
project continuity plan reviewed
x Value capture
______
Enterprises contract agreements
opportunities identified
For the benefit of:
Example:
Target software
Data ______
IT
center Cross-platform organizational
migration x Business
______
model implemented
(IT enables)
One-time costs, CapEx, and
savings qualified
Detailed implementation plan developed
Source: Deloitte Consulting LLP

How might the builders reduce the house’s cost? From foundation to roof: A blueprint makes for a better house
Where might IT find value capture opportunities? M&A blueprinting for IT is a comprehensive process, covering people,
processes, technology, and value.
Most mergers (and carve-outs) have value capture targets, and IT is
expected to contribute significantly to cost savings. Also, many business
functions depend on IT solutions to achieve their own synergies. In the People • Buyer (XYZ) provides IT support for all target (ABC)
blueprinting process, it’s useful to flag these synergies (as we did on enterprise/desktop/telephony support service
Figure 2) so that it’s clear whether the savings are IT-direct or IT-supported. • ABC IT staff are XYZ employees
For every synergy-driven project, IT should know the expected savings and
the cost required to achieve those savings: The net number is the amount Business • Desktops: XYZ standard (IBM hardware/Microsoft
IT can actually save the enterprise. Below are sample synergy questions that processes Software for Standard services) with ABC – specific
can be answered as part of the blueprinting process: (including startup screens for ABC employees
policies and • Applications: XYZ systems integrated with selected
• Do the two companies have the same functions and processes? metrics) ABC systems to support supply chain and sales
• Are some processes the same, but under different functions? force consolidation
• What are the applications supporting these processes? • E-mail: Lotus Notes, with @XYZ.com address for all
• Do the two companies have the same core systems? ABC employees
• Where are gaps and/or redundancies in contracts? • Telephones/voice mail/cell phones/pagers: XYZ
standard
• Should the two systems/applications be consolidated or kept independent?
• Desktop support: XYZ supplied
• Should one or both systems be retired?
• Servers: XYZ standard as refresh occurs
• What technologies are needed to achieve the new company’s strategy?
• IT policies: XYZ standard
• What are the current service delivery models and service level
agreements? Are they appropriate for the new organization? Systems, • A combination of XYZ and ABC systems
• What site services should continue or be stopped? tools, and • Shared services will be supplied by XYZ systems (HR,
data payroll, financials)
• Data will be backed up and stored on separate tapes
under XYZ contracts

Value • Cost synergies will be achieved based on quarterly


schedule: sourcing, data center consolidation,
application rationalization, etc.
Source: Deloitte Consulting LLP

A blueprint is a clear articulation of both the daily activities to get to Day


One and the end-state IT service delivery model. We believe blueprinting
can help IT, the business functions, and the enterprise be more confident
that what they’re building will be, an organization that’s really solid.

15
Wired for winning?

Where in the world is IT?


During M&A is a good time to ask old questions, again

By Tom Torlone, Marc Mancher, and Olivier May

But after that, the assessment process can quickly become complicated:
Introduction Emotions can run hot when one option is chosen over another, when
one company’s ways of working are deemed better than the other’s,
Usually when two companies merge, or when one acquires another, and when people have to give up a model they’re invested in and
Information Technology (IT) is challenged to reconcile two or comfortable with.3
more different service delivery models. Should IT be outsourced or
kept in-house (captive)? Should IT operations be located onshore, Do no harm on Day One: Who’s in control of processes that need
near-shore, or offshore? One company may have outsourced its IT to be integrated first?
processes, completely or partially; the other may have offshored its In preparation for Day One, IT has to be ready to support the new legal
IT function, again, completely or partially. Yet another possibility entity. Which service delivery model would most effectively enable a
is that either may have kept IT completely captive, onshore. Most smooth Day One? More importantly, which IT service delivery model
likely, each company has opted for some hybrid model combining would be most effectively suited to achieve efficient and effective
two or more of these options. ongoing operations? What level of integration — between both
Not surprisingly, the M&A event can suddenly make any or all of company’s existing IT organizations, as well as between IT and any
these arrangements wrong for any number of reasons, including offshore facilities or third-party outsourcers — is required for both a
redundancy (of processes, applications, or infrastructure), the smooth transition on Day One and ongoing operations after Day One?
voiding of contacts because of a change in ownership, or a poor The IT merger team needs to expose all risks to the integration process.
fit with the new company’s competitive strategies. Support value and stability: Which option most effectively
satisfies the needs of new enterprise?
So, as part of its merger mandate, IT has to ask, “What service
delivery approach is most appropriate for the new business?” While synergy in IT typically equates to cost cutting, in many cases
strategic opportunities or necessities come into play. Does the merger
While the task of answering that question can be daunting, there is or acquisition enable market expansion, cross-selling, increased
good news: The merger or acquisition can give the new company a flexibility, or better risk management? The IT service delivery model
second chance to get more service at the right cost. needs to contribute to those expectations, and IT’s consideration of
those variables can make all the difference in choosing a service delivery
model. What IT organization would most effectively support the
The context for choice company in achieving its strategic goals?
At the heart of the question “What service delivery approach is most One size does not fit all
appropriate for the new business?” is the significant role of IT in making
the merger or acquisition a financial success. In fact, IT is on the line Give three key drivers — cost cutting, post-merger integration, and
for three important results: synergy, Day One readiness, and ongoing value delivery — the company needs to choose an effective IT service
support of the new business. delivery model. While there’s no right answer, not all options are equal.
In fact, what’s right can and should vary based on the new company’s
Achieve meaningful synergy: Which choice will reduce costs unique objectives.
the most?
The first choice — to enter into an agreement with an external services
When a deal promises millions in synergy, the merger team is typically provider (outsourcing) or to keep IT part of a captive operation (in-
challenged to find those dollars in cost savings. The first place everyone house) — needs to fit advantageously with the new company’s scale,
usually looks is toward IT.1 The IT team might be expected to choose capital, and talent. For example, the CIO might ask, “Is outsourcing a
one company’s service delivery model over the other’s, or to combine viable choice?” IT Outsourcing (ITO) is a mature model and continues
elements from each, or to design a new completely new model for the to grow at a very impressive rate (Figure 1). Many different IT functions
new company. can be outsourced within a scalable solution (Figure 2). The key driver
The first step is to determine the relative merits of the many for outsourcing is typically cost savings or the ability to rapidly execute a
choices available by performing objective comparisons, analyses, strategy within the new company structure. If IT functions are not core
and assessments of the two legacy IT organizations. Usually, some to the business, retaining all of them in-house is typically not the most
redundancies become immediately apparent. Other times, the payoff effective answer.
in a substitution might be obvious: For example, one company might
already have a robust offshore facility or one company’s IT organization
might have the scalability and skills to replace the other’s outsourcer
(assuming no contractual penalties are triggered).2

16
M&A IT — The IT landscape

Figure 1: Growth in IT outsourcing

500
BPO
450 ITO
7.3%
400
5.3% 190
7% 177
350
13.8% 168
7.8% 157
300
USD billions

138
128
250 7%
7.9%
200 7.7%
7.8%
6.4%
150 290
271
233 251
100 203 216

50

0
2005 2006 2007 2008 2009 2010
Source: Deloitte LLP Analysis & Gartner (2006 Market Database)

Figure 2: Areas of IT commonly outsourced

Applications IT strategy and


Applications development Management processes
maintenance architecture

Application
Requirements Quality maintenance Architecture IT Vendor Financial
definition Build assurance IT strategy
and support and standards procurement management management
(breakFix)

Design Testing

Project
Databases IT infrastructure
management

Server Data center Disaster PC setup


Project Database Network – E-mail and
management, mainframe/ Service desk recovery and
management administration voice, data messaging
hosting midrange services maintenance

Less
Not typically outsourced Commonly outsourced
commonly outsourced

Source: Deloitte LLP Analysis

17
Wired for winning?

Once that decision has been made, the next question is, “Should we Real-world examples
locate IT operations onshore or offshore?” A site’s attractiveness depends
Outsourcing
on many factors. Labor arbitrage is the obvious driver in considering
locations (especially since IT compensation is highest in North America). Recently, a large health care service provider decided to outsource
But other geographical risks — political stability, talent availability, attrition the entirety of its IT infrastructure hosting to a service provider based
rates, language fluency, and time zone differences what might preclude in North America. This choice would allow the company to focus its
live interaction — need to be factored into the decision. energy and resources on core business needs aimed at growing its
market share. The company was growing rapidly and, for this reason,
A third option, called near-shore, is a relatively new option that combines
faced key decisions about the potential expansion of its existing data
some of the most desirable attributes of offshore and onshore locations
centers. Rather than trying to consolidate all of its aging computing
without some of the risks. For a company based in North America, a site
systems in a large data center, it decided to test the market for complete
in South America would be a near-shore alternative. While the command
IT infrastructure hosting. After a carefully led sourcing and selection
of English in South America might not be as high as it is in India, the
process, a vendor was selected and services were transitioned into the
closer geography could have some distinct advantages:
outsourcers’ data center.
• The ability to interact in near time is important for collaboration- The transition took less than six months from contract signature to
intensive projects or operations. go-live with no disruption of services. All systems and applications
• South America’s currencies are not as susceptible to inflation or were migrated to the new platform, thereby gaining the scalability
appreciations as compared to Indian currency (12 percent to 15 percent and flexibility needed to adapt in support of the anticipated market
increase, year after year).4 share growth. Additional efficiencies and substantial cost savings
• In South America, the job market for people with IT skills is less were also derived by leveraging virtualization, storage, and backup
competitive, so attrition is also lower. shared across platforms and by deploying additional technologies,
tools, and optimization techniques that had not been available within
As a result of these factors, many global companies have established the company’s existing environment because of lack of both expertise
captive centers in South America (mainly Brazil and Argentina), while and resources.
an increasing number of Tier 1 and other ITO service providers have
established, or are in the process of establishing, presence in these
countries and in surrounding ones (such as Chile). Figure 3 highlights
some key considerations in choosing between onshore, near-shore, and
offshore models.

Figure 3: Key considerations in choosing site locations

Onshore (remote) Near-shore Offshore


Attributes Illustrative examples Attributes Illustrative examples Attributes Illustrative examples
Wage scale 5% to 20% Wage scale 20% to 40% Wage scale 30% to 70%
savings savings savings
Real estate Low Real estate Moderate Real estate High
savings savings savings
Availability Moderate Availability Moderate Availability High due to labor pool
of relevant/ of relevant/ of relevant/ sizes and skills
enhanced services enhanced services enhanced services
and skills and skills and skills
Security and High, due to distance Security and Moderate, due to Security and Moderate, due to
business from current business proximity to current business geopolitical issues
continuity operations location continuity operations location continuity
Implementation High, depending on Implementation High, depending on Implementation Moderate, depending
speed operating model speed operating model speed on operating model

High Med Low

Source: Deloitte LLP Analysis

18
M&A IT — The IT landscape

Captive/offshore A methodical process


A large oil and gas company took advantage of its operational presence The process for deciding on a service delivery model should follow a
in low-cost countries to consolidate a significant amount of shared traditional phased approach, likely used in many other parts of the
services functions (in IT, finance, and accounting, procurement, and overall M&A planning and execution cycle:
even HR) in a strategically positioned mix of global and regional centers.
Due diligence. A detailed accounting of the current outsourcing
This approach enabled the company to remain focused on its aggressive
contracts and offshoring relationships should highlight the financial
growth, while enabling a sustained and significant lowered cost of
and strategic impact of potential changes. The outcomes might include
services and even improving some of processes by consolidating many
termination, augmentation (with greater scope) with a reduction in
variances into centralized locations with common processes.
total unit costs, or maintenance of the status quo. The output of due
Outsourcing/offshore diligence drives the initial targets of an IT assessment.
A large telecom company had outsourced all of its application IT assessment. The purpose of the assessment (which should take
development and maintenance (ADM) to several offshore vendors, about eight weeks) is to identify short- and long-term synergies (not
retaining in-house only a few IT applications/organization: just cost savings). At this time, the two IT organizations have their
first chance to work closely together. An atmosphere of trust and
• Governance roles to efficiently manage and leverage the
cooperation is necessary for the combined team to deliver the most
outsourcing partnership
effective results for the new entity.
• IT business liaison roles that translate the business needs of the
various internal stakeholders within the organization to the IT Comparative analysis. The two legacy models are compared along the
service providers, which then develop, test, and maintain the new attributes of costs, service levels, and operating strategy to expose the
applications in support of the company’s business needs most effective operating model and synergies for the merged functions.

As a result of a strong governance program, clearly established service Business case. No matter what the choice — outsourcing, offshoring,
level objectives and service level agreements, and a committed effort domestic, or any combination — a strong business case, qualifying and
from the executives within the company to leverage the outsourced quantifying synergies both cost and strategic, is required.
partnership, the large telecom company has saved hundreds of millions Operational assessments. How much of IT (processes, applications,
in ADM. Also, the company can now rapidly respond to shifts in the and infrastructure) should be performed domestically, at an offshore
marketplace and in consumer demands, without having to worry about facility, or by a third party? What model would work most effectively
retaining and managing the proper skill sets. in the short-term? In the long term? Above and beyond cost, other
Captive/onshore elements (such as risk, taxes, labor quality, flexibility, and market growth)
need to be taken into account.
When two large insurance companies agreed to merge, their IT
organizations worked together, under the direction of the new company’s Business impact analysis. Is IT a source of competitive advantage?
CIO, to evaluate each company’s model and decide on a going-forward Could it or should it be? The proposed delivery model has to support
strategy. In one company, IT was entirely outsourced (processes, the company’s product/service/customer strategy. Also, all IT investments
applications, and infrastructure); in the other, IT was entirely captive. have to be aligned with the company’s actual or implied promises to
investors and stakeholders.
During an eight-week assessment, the team discovered that while total
operating costs would be lower with a third-party outsourcer, other A window of opportunity
strategic priorities made an in-house service delivery model. Given the During a merger or acquisition, IT is under pressure; a lot can go wrong,
criticality of rapidly executing the integration of the two companies’ but a lot can also go right. The choice of a service delivery model can
portfolio of services, the CIO decided to keep the IT services in-house. have enormous consequences, not just on Day One but for months
Management felt that the risks associated with integrating all the and years beyond. An M&A event is a rare opportunity for a “do-over”
systems while, at the same time trying to outsource the combined IT — when the CIO organizes and leads the effort to redesign the IT
operations, were too significant and outweighed the savings associated service delivery model, the business benefits can make all the difference
with a third-party outsourcer. between a merger’s financial success or failure.
Hybrid (captive + outsourced)
Notes
Two telecommunications companies merged with the expectation of 1
The service delivery model is only one way IT delivers synergies — albeit a very important way. For more
substantial synergies through the renegotiation of several IT outsourcing insights about achieving synergy, look at “Ignorance is not bliss: IT due diligence is fundamental for
contacts. The merger team conducted an eight-week assessment of the post-merger synergy,” another paper in this IT Compendium Series.
two IT organizations and decided that some functions — those with 2
It’s worth mentioning that an offshore facility can move beyond the “cost reduction” play. For
immature processes — should move back in-house, while others should be example, in financial services, we have seen offshore sites that are large (thousands of employees)
revenue-generating operations.
outsourced (the choice of provider would depend on how two incumbents
responded to a new bid.) 3
This is a good argument in favor of asking an objective, independent third party to manage the
assessment process — a third party that can enforce neutrality and bridge the gap between various
The results of the analysis pointed to more than $200 million in potential points of view and invested interests.

annual savings. While the IT representatives from both companies were 4


“Impact of currency fluctuation and wage inflation on outsourcing,” TransWorldNews.com,
somewhat defensive in the beginning of the evaluation process — each January 2, 2008.

group was attached to its own model — the process itself united them
in finding the most effective approach model for the new business.

19
Wired for winning?

Raising the stakes of information


Effective information management for mergers, acquisitions, and divestitures

By Peter Blatman, Asish Ramchandran, and Julianna DeLua

What is at stake Information as a MAD catalyst


Merger, Acquisition and Divestiture (MAD) are complex and often chaotic Timely and accurate information is required to enable the four primary
undertakings for organizations. Gartner predicts that through 2010, the drivers of enterprise value in MAD transactions:
vast majority of its clients will be involved in some sort of M&A activity.1
Revenue growth. Cross-sell/upsell a new product/service portfolio for
The overall financial success rate of M&A transactions, however, continues
shared customer base, improve pricing, enter new market segment or
to be disappointing, as numerous market studies over the past 10 years
geographies, and use expanded channels and distributions
indicate that 50 percent to 70 percent of M&A transactions fail to
ultimately create incremental shareholder value.2 Ineffective integration Cost reduction. Develop a combined IT infrastructure, eliminate
planning and execution has been shown to be one of the dominant duplicate roles and functions, integrate operational structures and
factors associated with poor financial results. Other significant factors processes, and increase negotiation power over suppliers
typically correlated with poor M&A financial results include:
Asset efficiency. Improve inventory management, measure returns on
• Poor strategy and lack of formalized target and performance measures assets across a broader portfolio, increase efficiency across rationalized
• Bad deal-making caused by inadequate due diligence and equipment and facilities, and improve cash and treasury management,
transaction execution including payables and receivables
• Ineffective integration planning Governance, Risk and Compliance (GRC). Adhere to antitrust law
• Failed post-merger integration across all functions and other M&A-specific regulations, meet other applicable regulations
and advance enterprise risk model
Typically contributing to these “failure factors” are the following
information technology (IT) related issues: Clearly, each of these “value drivers” has an associated set of
required information and data. As a result, information management
• Lack of alignment of IT and business strategies
competency has become one of the key indicators for MAD readiness
• Lack of IT readiness prior to an M&A transaction and ultimate financial success. Information management competency
• Inability to handle the complex information requirements for incorporates six key elements:
integrations and divestitures Access to all enterprise data. Aggregating any data format, regardless
M&A transactions can add an additional degree of complexity to of location or date
preexisting and often already complex IT environments. Highly strategic Fit with integration architecture. Interoperability with enterprise
activities must be managed concurrently with smooth execution of architecture
day-to-day operations. Throughout the lifecycle of an M&A transaction,
the M&A teams are looking for answers to a range of key questions Data quality management. Quality metrics tracking and improvement
that include: What are the best acquisition targets in this geography?
Data transparency, security, and auditability. Certified data
How do we substantiate revenue forecasts to validate valuation
repository for visibility, integrity, and privacy; validation through lineage
calculations? Can the overlap in customer bases be quantified? How can
analysis
we exploit potential cost synergies in supplier relations? What additional
compliance requirements will we need to address and manage? Timely delivery to target users. Information for decision support at
the right time
Availability of accurate, reliable information is critical to the
ultimate financial success of MAD transactions. IT executives have a Enterprise-class deployment. Scalability, flexibility, and availability of
pivotal role in providing the mechanism for delivering critical information common data foundation
and data during the often tumultuous time-span of an M&A transaction.
Figure 1 summarizes how the four M&A enterprise “value drivers” are
Many savvy CIOs also view these events as opportunities to enhance/
enabled by the six critical elements of information management:
build staff and IT assets in support of creating increased “agility” for the
voyage across this MAD world.

20
M&A IT — The IT landscape

Figure 1: Impact of information management on enterprise value

Elements of
Governance, Risk and
management Revenue growth Cost reduction Asset efficiency
Compliance (GRC)
competency
Access to all Aggregate customer and Complete, merged Data access storage
Rationalized data inventory
enterprise data product data supplier data and archival
Fit with integration Synchronized CRM and Application-neutral
Integrated SCM and ERP Integrated treasury systems
architecture SFA data approach to data
Data quality Complete accurate and Quality-metric driven, Trusted data for capital Quantitative reporting
management consistent customer data loss mitigation readiness and notification
Data security,
Certified and securely Shared-cost model with Asset classification Data masking, encryption,
transparency, and
shared data cross-business context and prioritization and versioning
auditability

Timely delivery to Customer profile for Streamlining logistics Real time inventory On-time audit and
target users frontline workers and workflows management real time disclosure
Enterprise-class Flexible, integrated High availability and
Common data foundation Effective IT expenditure
deployment master data business continuity
Source: Informatica and Deloitte Consulting LLP

Following is a set of effective practice actions to consider for putting Case study 1: Seeking a broader footprint in life science
all elements of information management to work to achieve the four
In order to increase market share while maintaining economies of
identified enterprise “value drivers.”
scale, two life-science organizations merged. Both organizations had
1. Revenue growth centralized ERP models, and the merger brought them together. Thus,
resolving redundancies was the first order of business post-merger.
Aggregate customer and product data. Bring together historical data
Planning for the integration began with a “blueprinting phase” to focus
from combined customer, product, and other relevant internal records.
on resolving overlapping portfolios, including merging two data sets
Consolidate, retire, and maintain merged data with cross-business
across financials, Research and Development (R&D), Human Resources
visibility for upsell and cross-sell.
(HR), and other key functions, followed by mapping out the ERP strategy
Synchronized CRM and SFA data. Synchronize customer, alliance, with associated infrastructure and business changes. The activities were
and other sales related data through making Customer Relationship necessary to support both the Day One integration (the day the merger
Management (CRM) and Sales Force Automation (SFA) interoperate with was legally complete) and the eventual goal of integrating all people,
the rest of enterprise applications. Expand and accelerate sales efforts by processes, and technology proceeded with the guiding principle of
proposing solutions to the issues captured in customer support and inquiry integrating data to cross-sell and upsell effectively.
logs, as well as improving sales activities with alliances and channels.
This organization felt that, once it gained the momentum in merger
Complete, accurate and consistent customer data. Measure and activities, the actual efforts were easier than had been originally anticipated.
improve the completeness, accuracy, and consistency of customer data. The following factors contributed to the effectiveness of the merger:
Create targeted offerings, segment customer data, and its associated
• Refocusing the IT activities on revenue growth and involving the
product data, to understand purchasing trends. Focus on the customer
IT organization early in the process better positioned the company
segments with higher share of wallet.
to plan, manage, and deliver the changes necessary for M&A.
Certified and securely shared data. Use certified data for booking Connecting the dots from top-level imperatives to implementation
analysis, forecasting, and budgeting across applications. Merge through the use of relevant data kept the team focused on meeting
Enterprise Resource Planning (ERP) systems and make relevant data the objectives.
available for segment-specific and cross-divisional analysis. Validate • The company masked some elements of data for two reasons: to
revenue calculations by data lineage analysis across multiple databases, focus on the activities relevant for revenue growth through the
reporting, and application systems through the use of metadata. use of selected portions of data, and to maintain data privacy. The
Customer profile for frontline workers. Avoid losing focus on data masking solutions to obfuscate the data were used during the
maintaining customer loyalty and business momentum during the exchange of information across multiple divisions. This data masking
transaction and post-merger period. Empower the customer support approach made the data mining process of gaining insights on
and sales force with deep analytics real time. the divisional sales data, as well as the cross-divisional trend, more
efficient because it enabled the team to examine the selected data
Flexible, integrated master data. Develop a single, trusted version of segments germane to the growth objective.
“the truth” about organizational data through integrating master data
with business processes. Deliver context-rich reference data to manage • Data cleansing and matching solutions were employed to standardize
opportunities and pricing with expanded alliance and distribution networks. and merge the millions of transaction line items of combined product
data. Data analytics solutions were used to query and join highly
customized, product data into a standardized format.
• Adopting loosely coupled, modular information architecture helped
limit dependencies and expedited application and data consolidation.

21
Wired for winning?

2. Cost reduction 3. Asset efficiency


Complete, merged supplier data. Combine order processes and tasks Rationalized, data inventory. Build an information inventory so that
to reduce duplication and look for economies of scale. Leverage increased asset performance can be examined using current, accurate data. Utilize
negotiation power with supplier and distributors through making a combined inventory data to detect wastes and misuse of raw materials,
transaction history and associated pricing data available to purchasing finished goods, or work-in-process assets.
authorities from merged entities.
Integrated cash and treasury management. Reestablish an
Integrated SCM and ERP. Rationalize and consolidate supply chain integrated environment for financial transactions, payments and risk
management (SCM) and ERP to automate cost tracking and monitor cash management for merged entities. Use reports from the integrated
flows. Revisit vendor relationships, service level agreements, and roadmaps to environment to monitor asset efficiency and rationalize capital
build a better cost model. expenditures and other major items on the balance sheet.
Quality-metric driven loss mitigation. Understand how Trusted data for capital readiness. Monitor the conversion of
information is performing. Employ a quality-metric approach to working capital into revenues and productivity measures through a
detect underperforming data assets that are no longer in use or used metric-driven approach, including the use of threshold of managed risks.
incorrectly. Reduce multiple sourcing of data across disparate systems Manage payables and receivables from the combined customers and
using data quality scores. partners through integrated applications and data.
Shared cost model with cross-business context. Avoid manual Asset classification and prioritization. Combine and reclassify the assets
review and intervention through automating impact analysis of from merged entities, using pre-merger, contextual information. Evaluate
linked databases, reporting systems, and applications. Reduce which assets to divest and which areas to invest in for growth. Maintain
overhead and mitigate risks during audit and business reviews with data integrity and privacy through system-based security during the process.
privilege management and proper authentication.
Real time inventory management. Identify specific locations or
Streamlining logistics and workflows. Establish more efficient functional areas where real time data availability is crucial for improving
logistics and workflows by resolving duplication and inconsistencies management of inventory and other asset classes. Establish a service level
across functional groups. Free up redundant processing and storage agreement between data consumers and providers that includes specific
costs from IT. availability requirements.
Common data foundation. Build a new model, policy, and process Effective IT expenditure. Catalog IT application and system assets post-
to reduce data overlaps and promote reuse. Include information merger. Develop a phased plan to promote standardization and reuse by
management specialists in the requirement gathering, assessment, and subject areas, such as finance, HR, customers, and others. Protect and
prioritization process to leverage the existing knowledge base. effectively manage assets, including human capital, intellectual properties,
and other knowledge bases by integration of key data assets.
Case study 2: Divesting to acquire in global information service
4. Governance, Risk and Compliance (GRC)
An information service company divested one of its business units to
raise capital for another acquisition. The company’s IT team used this Data access, storage and archival. Classify and maintain sufficient
opportunity to reevaluate the information architecture and tool strategies granularity of data required for judicial and governance review. Integrate
because they foresaw that there would be multiple MAD projects taking place applications and control data movements so that any actions, including
on a 12-month horizon. At the same time, the company had a mandate “read” and “write,” are recorded automatically. Adhere to proper storage
to meet the stringent data quality and availability requirements, given that and archival policies.
information is the organization’s core offering to the marketplace. The Application-neutral approach to data. Establish an integrated
company effectively executed its strategies and enhanced its information performance management framework across GRC and the associated
management systems to better prepare for future initiatives. The following metrics. Take this top-down approach to drive business logic and
contributed to these results: workflows embedded across applications and systems. Take a service-
• The IT leadership teams worked proactively with the business to oriented approach to manage data so that the availability of information
understand the business rules and processes that would directly is not constrained by physical locations or functional boundaries.
impact customer support as well as booking and billing processes. This
Quantitative reporting and notification. Use quality-metrics to
reduced the risk of impacting the support activities and paved a way
demonstrate explicit adherence to regulatory compliance. Provide
for the organization to adopt a shared, service model.
historical compliance records, including real time disclosure logs, to
• The infrastructure group inventoried and segmented the data across quantify the level of compliance and deviation, if any.
applications and systems associated with corresponding entities.
This approach of creating a rationalized portfolio of data helped Data masking, encryption and versioning. As required, encrypt or
initiate negotiations with third-party information vendors and clarify mask data (to obfuscate data) for data integrity. To prepare for a possibility
the type of investments required while cutting costs on duplicate that a merger may not be approved, disclose data only to individuals
systems and functions. who are designated for information access and diligently maintain record
keeping and versioning. Develop an environment where buyers and sellers
• High-level architecture and metadata capturing contexts of data can selectively disclose information during the review and negotiation
relationships and properties were exchanged to perform root cause cycles while meeting regulatory and governance requirements. Implement
analysis of problematic data. This helped reduce rework and manual effective segregation of duties and use the automated system of records
intervention during the due diligence and separation process. for management certification.
A program management office established the cross functional team On-time audit and real time disclosure. Design the right-time architecture
of executives, stakeholders, and other key personnel from business to maintain timely GRC reporting as well as real time disclosure. It should be
units, finance, legal, IT, and HR. Information management requirements flexible and adaptable for future compliance and governance mandates.
across various functions were also specified during the early part of the
planning phase.

22
M&A IT — The IT landscape

High availability and business continuity. Architect a solution to 2. Secure access to information
maintain high availability and disaster recovery for the high volume of
Accessing information in any format over a multiyear period is not
data post-integration. Prepare for contingencies with systems that can
an easy task for any organization. But in many cases, valuation and
be co-located across regions and business units.
assessment of merger synergies require that an organization have a
Case study 3: Preparing for a high-tech merger fairly complete picture of customers, products, services, distributions,
and other key functions. The organization also must acquire this data in
Executing a transaction can be tricky when two large companies merge a secure, compliant fashion. This grasp of organizational health based
to create a new entity. In this scenario, a merger of two high-tech on supporting data is vital to the financial success of MAD.
leaders was proposed. There was increased judicial scrutiny to verify
that the new, merged entity did not end up becoming a monopoly and 3. Make data quality as part of key measures
violate the anti-trust act. The process was highly regulated. The M&A
Many organizations are adopting a metric-driven approach to monitor
team had to produce the required reports for the judicial committee
data quality. Data quality management is used to help track the progress
from information with strict access restrictions. At the same time,
of mergers and detects issues before they become too difficult to
the team was tasked with continuing to examine and rationalize the
resolve. The quality management should also involve an investment
business synergy after the merger. Despite the delay caused by the
in establishing an IT architecture that delivers consistently high-quality
regulatory proceedings, the project was effectively completed because
information from points of entry to destination.
of the following key factors:
4. Establish an extensible environment for information management
• Subject matter specialists in information management took the leadership
role in tackling the ongoing challenge of accessing and consolidating Speed is paramount to MAD projects. Timely decision-making requires
reliable data. timely data. Having the organization-wide infrastructure for delivering
• The team used frameworks and tools for go-to-market strategy and the required information promptly is fundamental to making the right
implementation around customer and product data that helped decisions at the right time. To address the cross-functional nature of
manage risks and duplicative work. MAD, the environment in which an information exchange would occur
must be extensible and have the proper access control to deliver the
• A certified repository of data with cleansing and transformation
necessary information to the right functional owners.
capabilities was built and shared in a controlled fashion.
5. Leverage information to keep team focused and aligned
• The team created new common-definition and business rules for
critical functions, such as revenue recognition, budgeting, and Critical IT personnel possess the knowledge and experience needed
forecasting, accelerated the due diligence process. for the integration or divestiture, as well as for keeping the business
Conclusions running. The loss of key personnel can slow the integration or
divestiture process, causing missed deadlines and unrealized synergies.
In light of recent market trends across most industries, a CIO is likely to be During the uncertain times, measuring and sharing the results of MAD
involved in MAD activities more frequently than ever over the next few years. efforts based on the reliable, accurate information would help maintain
A forward-thinking CIO must come to the executive table well-prepared to the employee productivity and morale. For instance, informal rewards
contribute to business innovation and the financial bottom line. CIOs are and recognition-based “measurable” achievements are often used as a
uniquely qualified to correct potential misconceptions of IT and educate means to reinforce the positive behaviors and keep the teams aligned
executive staff on how their respective organizations should most effectively throughout MAD.
invest in information management to achieve excellent business results. The
following five guidelines should be considered while charting a course for In summary, MAD deals are complex, and effectively tackling them is
effective MAD-related activities: more art than science. However, in this MAD world, there is a way to
deal with insanity. Having engaged in blueprinting, strategic design,
1. Get IT involved early in the cross-functional team and formalized monitoring of integration implementation through
information management, many organizations have been effective in
Gartner notes that, on average, CIOs meet fewer than five times a year with
delivering the intended value from MAD. Furthermore, these companies
CEOs. Frequent, ongoing communication between the CEO and CIO on
have positioned themselves for increased agility and competitive
strategic issues helps achieve and maintain business-IT alignment. If they’re
advantage in the long term.
involved early in the process, IT executives can help target selection and
due diligence and uncover potential issues, high-cost items, and additional
Notes
synergies. Through upfront involvement, IT can drive significant value during
1
an M&A deal. Mack, Robert, “IT Handbook on Mergers, Acquisitions and Divestitures,” Gartner Inc., G00130975,
December 16, 2005.
2
“Solving the merger mystery: Maximizing the payoff of mergers & acquisitions,” Deloitte, February 2000.
3
Raskino, Mark and Mahoney, John, “CIO Priority Resolutions for 2006,” Gartner Inc., G00136797,
December 13, 2005.

23
Wired for winning?

Hedge your bets


The importance of IT risk management in M&A

By Bill Kobel and John Gimpert

A lot to consider
Information technology (IT) is a critical component in achieving an Furthermore, international M&A transactions are likely to be
M&A strategy; without effective IT risk management, the value of the much more complex than domestic transactions. In international
deal could be threatened or even eroded. IT risk management is a transactions, companies must not only consider the regulatory
multidisciplinary undertaking and covers a variety of functional domains compliance concerns noted above, they must also take into account
— ranging from data protection to change management. (See “Common the potential risks to corporate risk governance, employee data rights,
IT risk management areas” below.) It is also a multifaceted and complex customer data expectations, cross-border data flow, as well as the risk
undertaking that also entails consideration of a wide array of compliance and compliance culture of the home countries of all entities involved in
requirements. As such, in a business environment with increasing the M&A transaction. Failure to adequately address these factors could
emphasis on regulatory compliance, the role of IT risk management scuttle the transaction.
becomes more important as an enabler of the M&A strategy.
In this complex risk environment, it is clear that IT risk management
Often, many organizations need to demonstrate compliance with several must be effectively implemented to effectively address the myriad legal,
overlapping requirements. A large financial company may need to meet regulatory, contract, and compliance requirements; otherwise, IT risk
Sarbanes-Oxley Act (SOX), Gramm-Leach-Bliley Act (GLBA), Payment issues left unaddressed could fundamentally affect the overall M&A
Card Industry Data Security Standard (PCI), Health Insurance Portability strategy and desired value creation.
and Accountability Act (HIPAA), and other mandates, such as those
from the Federal Financial Institutions Examination Council, Office of the
Comptroller of the Currency, and Federal Trade Commission (FTC), a global Requirements all over the map
transportation company may need to meet SOX, HIPAA, PCI, FTC, and An organization’s compliance requirements are usually determined
European Union and Asia-Pacific Economic Cooperation data protection by the industry in which it operates or its geographic operating
requirements. The effort to meet these regulations often further complicates locations. For example, health industry-related organizations
the efforts required to identify an approach and develop a strategy to normally need to meet HIPAA regulations, financial organizations
mitigate risks when consolidating or separating companies. are required to meet the requirements of GLBA, and organizations
issuing, processing, or using credit cards must meet the PCI
Data Security Standard. U.S. public companies must meet the
Common IT risk management areas provisions of SOX, and companies operating in foreign countries
• Architecture • Privacy and data protection must meet the local jurisdiction requirements that address a wide
array of requirements from privacy and data protection to system
• Asset management • Project management access management and availability.
• Business continuity management • Physical and environmental
• Change management • Problem management
Is the loss of business value real?
• Contracting and outsourcing • Operations
• IT financial control • Records management Based on Deloitte’s experience with M&A transactions, when IT risks,
especially those risks that are compliance-driven, are not fully addressed,
• IT human resources • Technology licensing
they can completely undermine the expected value creation of an M&A
• Information security transaction. Generally, IT risk tends to impact M&A deal value in four
primary areas: IT cost, earnings before interest, taxes, deprecation, and
amortization (EBITDA), technology, and regulatory and governance.
Although many of these regulations address similar requirements, such
as data protection, access controls, transaction auditing, data availability
and system monitoring; compliance with one set of regulations does not
necessarily translate into compliance with another. The specifics of each
set of regulations must be carefully evaluated.

24
M&A IT — The IT landscape

Integrated requirements establish the required IT risk management


Value destruction practices to be assessed during the M&A transaction. Assessment
• IT cost – IT risks that affect one-time IT capital expenditures and practices and criteria are established by identifying and aligning the
cash flows applicable IT risk-related business requirements for each of the common
IT risk management areas (see above). These should include:
• EBITDA – IT risks that affect recurring operating IT expenditure
costs and normalized income calculations • Industry common practices (e.g., International Organization for
Standardization (ISO) 27002, COBIT 4.1, Information Technology
• Technology – IT risks that affect the company’s ability to rely on
Infrastructure Library (ITIL), American Institute of Certified Public
technology to support the business
Accountants’ (AICPA) Generally Accepted Privacy Principles)
• Regulatory and governance – IT risks that affect the acquiring or
• Laws and regulations (e.g., GLBA, HIPAA, EU Privacy Directive, CA
selling organization
SB1386, FTC Standards for Safeguarding Customer Information)
• Industry standards (e.g., PCI Data Security Standard, BITS)
Examples of common IT risk issues that can have a serious negative • Acquiring and acquired organizations’ internal IT risk-related policies
impact on M&A transactions include: and standards for each of the common IT risk management areas
previously mentioned
• Inevitable technology changes occur with disparate systems in
combined entities and often create system consolidation delays and This particular IT risk management component is especially beneficial to
increase the security and compliance risks with the existing systems those organizations that worry about compliance, such as “How does
the new operating structure comply with SOX quickly?” By establishing
• The combined entity creates a new state, federal, and/or global
and evaluating integrated requirements early in the IT due diligence
jurisdiction operating footprint that often faces potential regulatory
process, the acquiring organization should have already identified the
and financial risk from the possible compromise of personally
SOX-related requirements and their impact on the other organization’s
identifiable information (PII)
operations. Once the M&A transaction has been executed, the acquiring
• The listing of IT assets assumed to be acquired during the financial organization should be able to quickly apply its SOX control framework
due diligence process does not reconcile with detailed IT-listed assets, to the acquired organization and assimilate the various reporting entities
which results in lost value transfer into the new organization’s compliance testing and reporting process.
• Unclear legal rights over existing key applications and information The technology assessment considers core technology development,
often inhibits integration and/or separation of IT systems
• Sensitive information cannot be identified and located, which Figure 1: A framework for value protection
impedes, and can completely halt, application and system integration
and/or isolation
• The merged entities have disparate access management systems, but IT risks
they have a need for immediate access to information, which often
results in poorly consolidated systems that lead to segregation-of-duty
conflicts and improper data access
IT risk management
• Hidden liabilities in licenses and third-party contracts result in lost framework
Integrated requirements
value and increased legal costs Identify required IT risk management
practices by aligning the applicable
• Dated technology prevents customization and leads to lost business
industry standards and regulations for Business assessment
agility, opportunity and value common IT risk management areas Evaluate technology strategy, business
process control integrity and automation,
So, what is needed to minimize these types of risks from compromising Information assessment
and governance and compliance
Identify sensitive data handling
an M&A transaction?
requirements and how well it is protected
Technology assessment
The IT risk management framework Risk quantification Evaluate core technology development,
Translate identified risks into licensing and integration issues
To mitigate the risks described above, M&A due diligence teams should financial impact
incorporate a comprehensive IT risk management framework and Value
readiness diagnostic into their planning and implementation efforts.
A sound IT risk management framework and readiness diagnostic Source: Deloitte & Touche LLP
has several key qualities. First, it is structured, risk-focused, and
customizeable to cover small and large organizations. Next, it helps in
the translation of information protection and technology issues into
business risk impacts that will affect the overall M&A transaction. Finally,
it helps address industry standards and regulatory requirements for each
of the IT risk areas highlighted earlier in this paper.
The IT risk management framework and readiness diagnostic can be
organized around five core components — integrated requirements,
technology assessment, information assessment, business assessment,
and risk quantification.

25
Wired for winning?

licensing and integration issues. Generally, this assessment will consider: The risk quantification translates identified IT risks into financial impact
statements and helps prioritize them for consideration in the final M&A
• Technology software and infrastructure vulnerabilities that may affect
transaction decision.
service levels
• Capacity and scalability of key systems to satisfy business requirements Today’s risk and compliance environment compels organizations that
are developing M&A strategies to integrate IT risk management into
• System backup and power issues that may cause business disruptions their M&A planning and implementation processes. Left unaddressed,
• Unsupported systems and code IT risk issues can fundamentally affect the overall M&A strategy and
• Vendor-owned source code that is not available for changes desired value creation. A properly structured IT risk management
framework and readiness diagnostic can provide practical insights
• Vendor service-level adequacy into the information and technology risk issues. Including IT risk
• Nonfavorable clauses in vendor agreements that would be affected by management from the outset can make the M&A picture complete,
change in ownership rather than an unfinished puzzle.
• Termination of key employees
• Loss of quality resources required for integration efforts
• Legal rights to existing key applications
• Source code that is not in escrow
• Hidden liabilities in licenses and support contracts
The information assessment considers sensitive data-handling
requirements and how well data is protected. Generally, this assessment
will consider:
• Systems and data accessible by unauthorized users and how
unauthorized access to such data can affect the company’s brand
and reputation
• Authorization, development, and approval processes for the
records program
• Privacy, intellectual property, and other sensitive information
collection, usage, storage and complaints-handling processes
• Third-party contractual arrangement adequacy for addressing sensitive
information handling
The business assessment considers technology strategy alignment
with the business, business process control integrity and automation,
and governance and compliance matters. Generally, this assessment
will consider:
• IT strategy that is not aligned with the current and future business
requirements
• Current systems that are not suitable for business requirements
• Inefficient manual work-around procedures that are required to
operate the business
• Level of system automation that does not match the level disclosed
by management
• Recently integrated business systems that have internal control
integrity issues
• Internal controls and SOX 404 issues that will impact
regulatory compliance
• Insufficient governance of IT system projects that could result in
hidden future IT costs or write-down of IT assets due to inappropriate
system development

26
M&A IT — The IT landscape

Built to last
Using an M&A event to build sustainable IT business value

By Indira Gillingham

In other words, a proactive, forward-looking attitude toward a business-


Introduction IT partnership is critical to achieving IT sustainability. An M&A event is an
excellent opportunity to capitalize on changes in the corporate landscape
What is the appropriate role of Information Technology (IT) in
by redrawing the lines between the business and IT. As personnel,
helping the business to achieve its strategic goals? What could IT
systems, and processes change, IT and the business must work together
do better, or differently, to enhance its contributions to corporate
to clearly define IT’s role. The IT organization must then make sure it has
growth and productivity? In what ways can IT and the business
the right resources to enable the corporate strategy. In this way, IT can
create opportunities to simplify IT’s footprint and reduce costs
be more effective and able to maintain and potentially increase levels of
associated with redundancy and/or unnecessary complexity?
business satisfaction.
CIOs ask themselves these questions repeatedly in the course of
managing their respective IT organizations. But during a merger, The business and IT need to view the other as a valued partner.
acquisition, or divestiture, IT can be under such intense pressure just Following are four suggested steps for a CIO to consider as they work to
to get to Day One that this focus on creating IT business value often improve the overall business-IT alignment and achieve IT sustainability:
gets put on hold.
1. Understand the business and cross-pollinate talent
Yet, not surprisingly, a merger or acquisition is actually an excellent
time to focus on building sustainable IT business value. Broadly speaking, IT must understand key industry challenges and
drivers, as well as technology trends that have the potential to affect
their industry sector. More specifically, IT should know the company’s
overall business imperatives and the specific imperatives for each
IT sustainability is a moving target
component of the business and be able to effectively articulate key
As a result of shifts caused by an M&A deal, old premises usually stakeholder expectations and concerns. This includes both internal
change and new demands often arise. How will IT operate efficiently stakeholders such as customer support, sales organization, and finance,
and effectively once the current business structure has changed? More and external stakeholders such as customers, business partners, and
to the point, how might IT operate even better in response to these suppliers. IT must then be able to provide technology solutions to enable
shifts? If an achievement of sustainability implies the ability of the IT the business capabilities required to address these expectations and
organization to continue doing its job (or doing it even better), it is concerns in a manner that potentially increases revenue and/or contains
expected that the definition of sustainable will change over time. What or reduces costs and/or reduces business risk.
may have been a sufficient level of IT performance before a corporate
One way to achieve this desired alignment is to facilitate the sharing
restructuring — whether caused by a merger, acquisition, or divesture
of insights and perspectives between business and IT constituents. IT
— might not be sufficient following the restructuring.
can share and rotate talent into the various business units and recruit
To stay sustainable after an M&A event, the IT organization needs to from them as well. The benefits can be dramatic. For example, if there
maintain focus on the following three activities: aligning IT and the is a disconnect between how a process is conceptualized and how IT
business, rationalizing technology, and retaining knowledge workers. designs and develops the corresponding application, or between how
These three activities have the potential to drive measurable benefits, an application is designed and how functional gaps are addressed by
such as improved operating efficiency, increased effectiveness in delivery, IT because the business does not have adequate business processes or
higher return on assets, and a larger contribution to shareholder value. documentation, the solution will fail to achieve anticipated objectives.
However, with a rotational model, IT is more readily able to identify
Aligning IT and the business: Can they speak the same language?
with the relevant pain points and devise appropriate solutions because
It has become almost a cliché: The business complains that IT doesn’t they understand the end-to-end business flow. Similarly, the business
deliver; IT says that the business doesn’t understand the difficulty of needs to understand the capabilities and limitations of systems
what it’s asking for. Business claims IT is unreliable; IT claims the business and technology platforms, which requires a substantial degree of
is unreasonable. During a merger or acquisition, the CIO can help familiarization with them.
bridge that gap by understanding the rationale behind the deal and the
2. Develop an IT strategy that is in line with business priorities
business’s future direction and determining how IT can most effectively
support the strategy. The IT strategy should delineate a business-driven vision, strategic
objectives, critical success factors, and key drivers. In conjunction with
An ideal scenario would begin with the CIO proactively consulting
defining the strategy, metrics to measure progress against the strategy
with the business leaders: “Of the key objectives we believe you are
must also be defined. As opposed to a traditional tactical approach
striving to meet, here is how we propose to support and enable those
of defining IT progress that is IT-centric, metrics should incorporate
objectives. Are we aligned in our thinking, here?” Versus the traditional
elements that resonate with the business. In fact, the process of defining
way of responding reactively and asking, “What do you need to achieve
the IT strategy should not be created in isolation. Rather, IT must secure
your goals?” and then proposing, “Here’s what we can deliver.”
participation and input from business leaders. In this way, the business
Moreover, this revised approach could very well be a catalyst to change
will have a vested interest in, and shared accountability for, the results of
the business perspective from “It hasn’t worked before” to “How do we
IT initiatives.
make it work moving forward?”
27
Wired for winning?

An IT roadmap should contain both short-term and long-term strategies. • Are applications helping pave the way for business innovation?
Initiatives in the short-term are more tactical in nature and should help • Are there strategic opportunities that are being missed due to
to alleviate pain points the business faces immediately (low-hanging limitations in application capabilities?
fruit); the long-term strategy should address transformation-type
projects. Finalization of the roadmap should also include the process by • Is the architecture meeting the current needs of the business? If not,
which the roadmap document will be maintained. For instance, periodic what are the pain points?
refreshes to the roadmap as well as generational updates (i.e., version • How flexible is the current application architecture?
1.0 to version 2.0, etc). • How pervasive is the amount of old architecture in the current
3. Deliver results environment?

Nothing succeeds like financial success. IT should focus on forward- • Are there obsolete applications currently in use?
thinking solutions that address business issues — solutions that center • Are there high-maintenance/high-support costs associated with the
on operational improvements to provide high or higher quality of service current architecture environment?
and then follow through by delivering with excellence. • Is the current cost structure reasonable for our business needs?
4. Communicate early and often with the business • Do the current data management strategies meet the business goals?
A partnership between IT and the business should not be a once-a-year • Are there any existing business processes that can be automated?
event when it comes time to discuss budgets and projects. Rather, the • Are there any overlaps across business units and/or geographies?
business and IT should be proactively engaged on an ongoing basis.
Communication should be targeted and specific to provide transparency The business case for rationalizing technology stems from the potential
to IT results by publishing the metrics defined during the strategy for improved performance, reduced costs, or both. Savings from a
definition and to assess project health continuously. In addition, IT simplified footprint can be reinvested to improve quality and efficiency
needs to engage in periodic meetings to discuss innovative solutions to and/or to respond to new business needs. Rationalizing technology can
ongoing or emerging business challenges. include consolidating or outsourcing data centers (reducing operating and
maintenance costs), standardizing applications, eliminating redundancy,
Rationalizing technology: Too much or not enough? moving toward newer technology, retiring old technology, or offshoring
As companies evolve, so must their respective IT organizations. Over some operations (low-cost locations and fewer sites). The CIO should also
time, mergers and/or organic growth can create an out-of-balance evaluate options such as software-as-a-service (SaaS) or a service-oriented
IT portfolio (e.g., redundant applications or multiple data centers). architecture (SOA) as a way to achieve more flexibility and agility.
The M&A event is an opportunity to help bring balance back to the Finally, going green can contribute to sustainability by creating an IT
IT portfolio by evaluating and rationalizing both IT applications and infrastructure that accommodates emerging technologies while being
infrastructure. more energy-efficient. Green IT focuses on leveraging resources and
As an example, applications may have evolved without consideration of reducing power usage. For example, blade-server technology reduces
compliance to enterprise architecture guidelines (due typically to loosely space, cabling, power, and HVAC requirements, as well as making
defined standards and/or lack of standards enforcement). The result possible simpler administration and flexibility with the configuration.
can be an unnecessarily large and complex application footprint that’s Retaining knowledge workers: Where’s the adaptable talent?
difficult to modify. During a merger or acquisition — and perhaps most
particularly, during a divestiture — the CIO might legitimately ask, “Do Often, the synergy gained through a merger or acquisition comes from
we really need all these applications?” Or “Let’s look at ways to reduce combining two companies’ support functions into one. When two IT
costs and invest back into supporting new business operations.” organizations converge, there is usually an increased focus on reducing
cost through consolidation, including human resources. The challenge
Similarly, earlier mergers or acquisitions might have increased the for the CIO is who and how? CIOs need to assess the skill sets of their
number of data centers and, with that, the associated infrastructure, people in an entirely new light, not necessarily as an infrastructure
such as hardware, storage, and physical space. In some instances, the specialist or development lead, but place more emphasis on identifying
existence of underground data centers, in the form of a smaller data those individuals with adaptable skills. The Gartner Group calls this class
closet and equipment rooms, creates additional complexity. Not only of individuals as “versatilists” — employees who know to get things
are they not standardized in terms of security, support, reliability, and done, who can wear many hats, and who can adapt to changes in the
cost, but they usually do not follow the same rigorous protocols and business and in the IT organization. These able and agile employees
processes. In fact, these are typically managed and operated outside need to be identified, retained, and supported to help deliver on the
of the central process and with varying levels of sponsorship resulting new vision and direction of the IT organization.1
in inconsistent level of support and inability to meet agreed-to service
levels. During a merger or acquisition, the CIO should determine: “Is Focus on the long-term
there an opportunity to consolidate? How can I leverage emerging
Delivering on Day One plans is essential to the financial success of an M&A
technology to improve data center operations?”
transaction. However, CIOs should look to see beyond Day One by using the
Working with the business, IT can develop guidelines and metrics for the M&A event as an opportunity to build an IT organization for the long term.
rationalization effort. For instance, IT can participate in redefining those
processes it needs to support and then recommend the most appropriate Notes
application and infrastructure for enablement. To facilitate these sessions, 1
“Gartner’s top predictions for 2006 and beyond,” The Gartner Group, November 28, 2005.
IT can come prepared to ask several key questions, such as the following:
• Are application/IT investments aligned with where the business is heading?
• How responsive are the applications to the changing business
environment? What is the cost of change?

28
M&A IT — The IT landscape

29
M&A IT – Synergy capture
Everyone wants it, yet so few companies achieve it. More revenue, less cost — at

their most fundamental, all deals are about synergy. We know, because we have

helped hundreds of companies in their efforts to realize more value, faster, from

their mergers, acquisitions, or divestitures.


M&A IT — Synergy capture

The role of IT in M&A


By Peter Blatman, Mark Bussey, and Jeff Benesch

Introduction The quest to capture synergies


The rationale behind prospective merger/acquisition transactions Synergy. The word is overused, to be sure, but it has real meaning for
is the expectation of specific business benefits such as increased companies engaging in a merger or acquisition process. Synergy is
market share, reduced joint operating costs, and a more integrated defined as, “a mutually advantageous conjunction or compatibility of
value chain. These potential mergers and acquisitions (M&A)- distinct business participants or elements (as resources or efforts).”2
related benefits are usually directly linked to anticipated synergies Creating these advantageous conjunctions and compatibilities can
including, but not limited to, shared overhead, economies of scale, have significant benefits for companies pursuing M&A activities. Some
cross-fertilization, and operational integration. What is sometimes potential benefits include:
overlooked or underestimated is the crucial importance of effective • Increased market share
information technologies (IT) integration in achieving anticipated
synergies. Examples include: • Expanded technical and management capabilities
• Shared overhead — Reduction of IT support costs through • Reduced costs through economies of scale
consolidation of IT platforms • Improved market position
• Economies of scale — Shared IT procurement • Increased assets
• Cross-fertilization — Mining of joint customer database information • Diversification
• Operational integration — Integrated production, forecasting, and • Integration along the value chain
logistics systems
These potential M&A benefits are linked to anticipated synergies.
Evidence of the importance of IT to achieving M&A-related benefits However, synergies are meaningless unless their source can be identified,
is reflected in numerous market studies over the past 10 years and expensive to capture if they don’t add real economic value to the
that indicate 50 percent to 70 percent of M&A transactions fail newly merged entity. Some synergies are produced by shared overhead
to ultimately create incremental shareholder value.1 While there through greater economies of scale. Others result from cross-fertilization
are many reasons for the low rate of success, failed post-merger of cultures and knowledge transfer. Still others come from operational
integration stands out as the most common root cause. integration and synthesized capabilities. These synergies can add value
by producing the benefits discussed above — benefits such as reducing
This paper addresses the essential role that we believe IT
costs, increasing market share — as well as by enabling the newly
must play in the full cycle of M&A activities, from pre-merger
created entity to enter or create new markets, thereby expanding their
integration planning to post-merger integration, with the goal of
reach nationally or globally.
increasing shareholder value from the deal. We define the four
basic IT integration models, “Preservation,” “Combination,” These benefits have one thing in common: They are realized through
“Consolidation,” and “Transformation,” within the context of the effective planning and execution of pre- and post-merger activities —
four pillars of M&A and ways they can be pursued in parallel with especially the integration of the merging entities IT processes and systems.
both IT and the business.
Figure 1 depicts how properly integrated IT processes and systems can
The four pillars are: help achieve anticipated synergies post-M&A.
• Strategy — picking the right model for integration Failing at the quest: What goes wrong
• Due diligence — getting the right information up front
Through our experience serving multiple companies in a variety of
• Post-merger integration — aligning systems and processes industries, Deloitte has observed that one of the most frequent causes
• Execution — effectively implementing the merger or acquisition of failure to achieve expected M&A-related benefits is poor planning
and execution of the merger project. Poor IT integration, especially the
Deloitte research, data, and practical experience gained from integration of disparate IT architectures, can be extremely detrimental.
providing consulting services support our position regarding the
importance of closely aligning IT and M&A processes to maintain Applications, data and infrastructure should enable efficient and effective
post-transaction momentum and to increase the potential of business processes. Without effective planning and execution of the right
achieving the defined business goals of the transaction. IT integration strategy, the capture of sought-after synergies between the
acquiring and acquired companies will likely fall short of expectations.
In a recent effort to quantify the relationship between IT integration and M&A
success, we conducted a survey of more than 50 M&A (including divestiture
projects) transactions from 2005 to 2007 to test the following hypothesis:
The lack of attention to pre-merger strategy setting, IT due diligence,
post-merger IT planning and execution, as well as poor IT/business
coordination, are dominant factors in explaining the empirical rate of
M&A success.
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Wired for winning?

Our findings were consistent with this hypothesis. Our survey results These differing agendas are the dominant drivers of post-merger
suggest that while IT typically has limited impact on the valuation of the integration focus, complexity and intensity. The more synergies the
deal, early involvement of IT in due diligence is critical to the effective companies seek, the more complex the post-merger integration will be.
identification of synergies and the effectiveness of subsequent post- Companies who set a high level of ambition/expectation for post-merger
merger planning and execution. synergy must place significant focus on external stakeholder management
and integration management as the merger or acquisition progresses.
While the data with respect to the role of IT integration and its impact on
the results of M&A transactions is not conclusive, when taken together Whatever the strategy chosen, there are critical success factors that will
with anecdotal evidence, the hypothesis is compelling. The available help improve the odds of achieving the expected benefits. They are:
evidence points to a straightforward approach to M&A deals that will • The business must be accountable for setting the IT integration strategy
significantly improve the odds of achieving the expected benefits.
• Make the integration strategy explicit — consolidation, transformation,
Getting it right combination, or preservation; each has specific critical success factors
This straightforward approach starts with the recognition that IT and risks
activities must be closely aligned with business activities during the M&A • Set realistic targets and concrete performance measures for meeting
process. As we highlighted above, there are four dimensions to an M&A the targets, as well as consequences for not meeting them
transaction:
Due diligence
• Strategy
No matter the merger agenda, due diligence is not an optional process.
• Due diligence Performing due diligence, especially with regard to information systems
• Post-merger IT integration planning compatibility and integration issues, is absolutely critical. When correctly
• Execution performed, due diligence can help identify risks and opportunities.
The risks include sources of instability requiring immediate action.
These dimensions apply to IT as well as business activities. How well Opportunities to reduce costs, leverage resources or assets in new areas,
companies navigate each of these dimensions during the M&A process and to improve IT effectiveness and increase business flexibility can be
— especially as they apply to IT integration — will play a large part identified and pursued.
in determining whether or not the merger or acquisition ultimately
achieves the expected benefits. Moreover, during the due diligence process, decisions or actions that
will be needed before there is any significant progress on the merger or
Strategy acquisition can be identified. Expectations can also be set. For example,
order-of-magnitude estimates of expected costs and anticipated benefits
Companies vary, of course, in their motivations to pursue M&A deals.
can be developed, and resources and time frames required to address risks
Some are pioneers. The reasoning for the merger is to combine two
and issues and to capitalize on opportunities can be identified. Finally, due
(or more) entities to create a better future. These companies are most
diligence should confirm how much (or how little) compatibility there is
likely to have the desire to seek out synergies as their main motivation
between IT architectures and assets of the merging entities.
for the combination. Others are talent scouts. Often in this scenario, the
acquiring, or larger entity, wants to acquire knowledge or capabilities
that it doesn’t have. These companies also desire to create synergies
with the combination. Then there are the consolidators. These
companies mainly seek operating value from the merger or acquisition.
Finally, there are the revenue hunters. These companies desire operating
value from the combination, but their main motivation is growth — in
revenue and in size.

Figure 1: Benefits of effective IT integration

Reduce costs Increase market share Enter or create new markets


Eliminate duplicate IS role and functions
Shared overhead Reduce support costs through
standardization
Common technologies, platforms State-of-the-art scheduling,
Combined electronic delivery
Economies of scale and systems forecasting or yield management
channel infrastructure
Combined IT procurement Global systems
Groupware
Customer database Selling derivative information
Cross-fertilization Intranets
Data mining Channel innovation
Workflow
Integrated operational systems — for Order-entry or customer-facing systems
Operational
example, production, forecasting and logistics Data warehouse Truly integrated products/services
integration
Workflow engine Internet presence
Synthesis of CAD Uncommitted product and Cross-industry business models
capabilities IT technology transfer customer models Content/context/conduit
Source: Deloitte Consulting LLP

32
M&A IT — Synergy capture

As with the process of setting the strategy, there are critical success Key questions to ask when choosing a model include:
factors in performing due diligence that will help improve the odds of • What are the main business objectives of the merger or acquisition,
achieving the expected benefits. They are: e.g., growth, market positioning, or cost savings?
• Form an IT integration team early in the due diligence process • What key benefits are expected from the transaction?
• Get the right people on the team — both internally and externally. • What approach to business integration is required to realize these benefits?
These people should have cross-functional knowledge and experience
and be able to see the big picture going forward • What approach to IT integration is required to realize these benefits?
• Set a broad due diligence scope — from assessing the IT environment • In what ways can IT help the business realize its goals for the transaction?
to assessing risk and identifying potential synergies • What opportunities exist to use technology to position the business
• Set the baseline — the knowledge base that must be in place to move for future growth and change?
forward with the M&A process For each model, the critical success factors, as well as the causes of
The bottom line is that IT due diligence should result in a high-level action potential failure, are strikingly different. Figure 3 depicts some of these
plan to mitigate identified risks, resolve key issues, and capitalize on major critical success factors and potential causes of failure.
opportunities. In addition to critical success factors for each integration model, there
Post-merger integration planning — the model makes the difference are critical success factors for the overall integration that will help
improve the odds of achieving the expected benefits. They are:
Once due diligence is finished, the results can be used to push forward
• Close integration between the IT integration planning and business
with post-merger integration planning. When two companies merge,
process and organization planning
or when one acquires the other, there are a myriad of scenarios in
which the combination can occur. In general, there are four “models” • Appoint a full-time project manager under an IT integration project
or approaches that can be applied to post-merger integration of most management office (PMO) linked to a company-wide PMO
M&A transactions. • Decide the future state of the IT organization, processes, and architecture
They are: • Create specific project plans based on which integration strategy is chosen
• Consolidation — Calls for the rapid and efficient conversion of one • Create and maintain a broad communication plan that keeps everyone
company to the strategy, structure, processes and systems of the in the loop
acquiring company
Execution
• Combination — Means selecting the most effective processes,
structures and systems from each company to form an efficient Each of the four post-merger IT integration approaches has associated
operating model for the new entity execution priorities and management issues that must be addressed. The
execution priorities focus on process and technology integration. The
• Transformation — Entails synthesizing disparate organizational and management issues include leadership and cultural blending challenges.
technology pieces into a new whole
• Preservation — Supports individual companies or business units in For example, with a consolidation approach to IT integration, the focus
retaining their individual capabilities and cultures is on risk management for process issues and on data conversion for
technology issues. With a combination approach, the process focus is on
The approach a company chooses is dependent on its goals for the systems evaluation, and the technology focus is on systems integration.
new entity. More specifically, M&A business objectives usually reflect With a transformation approach, the process emphasis is on innovation;
the acquiring company’s acquisition profile and business agenda, as the technology emphasis is on the overall IT architecture. Finally, with a
discussed in the “Strategy” section above. preservation approach, stakeholder management is the focal point of
process issues, while communication between business units is key for
Figure 2 depicts how the adopted integration approach should match
technology concerns.
the business objectives and acquisition profile.

Figure 2: The approach to match the acquisition profile

Reason for acquisition Approach Consolidation Combination Transformation Preservation


Consolidator Capture efficiencies

Open new geographic markets

Open new market segments


Revenue hunter Acquire new products
Buy into new
distribution channels
Talent scout Acquire expertise

Buy new or superior technology


Pioneer Develop a new business model
Source: Deloitte Consulting LLP

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Wired for winning?

Figure 3: Success factors and causes of M&A failure

Consolidation Combination Transformation Preservation


Success factors • Detailed implementation • True collaboration • Compelling vision of • Protection of autonomy;
plans • Commitment to new organization prevention of chaos
• Rapid systems conversion preserving the most • Unwavering focus and • Restrained management
• Uniform and consistent valuable parts of both committed leadership involvement
implementation organizations • Substantial experience in • Rigorous operational
• Proficiency at change management monitoring
synthesizing disparate
systems/technologies

Causes of failure • Sqandering exploitable • Long, drawn-out • Organizational resistance • Excessive inefficiency
assets assessment exercises to change • Unnecessary duplication
• Alienating key people • Unresolved issues • Unrealistic goals • Missed cost and
• Overlooking possible • Inefficient/complex • Failing to balance operational synergies
synergies patchwork of systems long-term benefits
Source: Deloitte Consulting LLP

Management issues can be challenging, even in the smoothest of a challenge is how to plan for and execute the post-merger IT systems
M&A transactions. The blending of organizations and cultures is not integration. Consequently, proper selection and execution of a post-close
easy because no matter the industry, no two companies evolve in quite IT integration plan in a timely manner can help achieve any anticipated
the same manner. Each will each have different leadership styles and synergies from the M&A transaction. Our experience indicates that the
cultures. To facilitate the transition to the newly merged entity, each better the post-close planning and execution, the better to overall merger
post-merger IT integration approach will have to deal with different results, and that a key attribute to effective post-close integration is a high
management and cultural issues. level of integration between IT and the business.
For example, the typical leadership style in a consolidation approach to To achieve this, effective IT due diligence and speed of integration are
IT integration is an authoritarian approach that imposes the will of the critical. Any post-merger integration approach chosen should be guided
acquiring company onto the company being acquired. The culture of by the M&A business objectives, and the selected approach (consolidation,
the acquiring company is also imposed (as much as possible) on the new combination, transformation, or preservation) should match the business
entity. In a combination approach, the leadership is more collegial and objectives and acquisition profile. Each of these approaches has its
there is a knitting together of corporate cultures. In a transformation individual characteristics, success factors, and potential causes of failure
approach, there is often inspirational leadership that seeks out new and should be selected with a full understanding of which approach most
ideas and synergies more than with any of the other approaches. There effectively fits the particular M&A transaction and which would work
is often a new corporate culture that is sculpted from select parts of well with the IT integration issues uncovered in the due diligence process.
the prior cultures. With a preservation approach, the leadership style is Each approach should be executed in a timely manner to realize the
most effectively described as respectful, with leaders of both companies expected value from the transaction and benefits should be tracked and
retaining autonomy and with the cultures of both companies remaining championed throughout the new organization to promote acceptance of
largely unchanged. transition to the new culture.
Why all the discussion about leadership styles and process issues? To improve the odds of achieving the expected benefits, it is very
Because these issues directly affect how smoothly (or not) the post- important to consider the four “pillars” of M&A:
merger IT integration will proceed. • Set the strategy — develop and carry out the IT and business
As with the other three dimensions of post-merger success, there are integration strategies in parallel
critical success factors for the execution of IT integration that will help • Don’t skip on the due diligence — form an IT integration team early
improve the odds of achieving the expected benefits. They are: on and cast a broad net to identify potential issues and roadblocks
• Execute the post-merger integration in a timely manner; the longer it to success
takes, the lower the realized value from the transaction • Plan the post-merger IT integration — closely align IT integration
• Develop, track and report on project performance metrics planning and execution with business planning and execution
• Measure and publish realized benefits, which will establish goodwill in • Execute the post-close IT integration speedily — execute fast and
the newly merged entity going forward nimbly; the longer it takes, the lower the realized value

Wrapping it up Following this path won’t ensure that the expected benefits are achieved
— nothing is guaranteed. However, proper planning and execution
The M&A transaction process is not easy. It is fraught with pitfalls and of post-merger IT integration can make the process easier and more
roadblocks to achieving the expected benefits that must be carefully effective to increase the likelihood of achieving the expected benefits in
navigated and overcome with skill and care to achieve the goal of one the long run. That’s a win-win deal.
new, (hopefully) improved organization from two separate, distinctly
different companies. While there are many hurdles that must be Notes
surmounted in any M&A transaction, the one that most frequently poses 1
“Solving the merger mystery: Maximizing the payoff of mergers & acquisitions,” Deloitte,
February 2000.
2
Merriam Webster’s Online Dictionary. http://www.m-w.com/dictionary/synergy.

34
M&A IT — Synergy capture

Leveraging IT’s ability to drive post-merger


business value
By Eugene Lukac and Jeff Benesch

Introduction Synergy identification and capture: Analyzing the IT value chain


In most M&A events, the companies expect “synergy” — a business In working with CIOs in post-merger environments, Deloitte has
value that comes from the fact that the two entities are (or should be) developed a comprehensive and structured approach for companies
more valuable together than apart. Synergy comes in all shapes and to find and exploit opportunities to cut costs, improving the overall
sizes, such as reduced operating costs, reduced risks, increased market financial performance of their IT organization, and helping their business
share, or the ability to enter or create new markets. Synergies are achieve its goals.
captured by sharing overhead functions, integrating operations, jointly
creating new capabilities, and exploiting economies of scale. Figure 1: Dimensions of IT-enabled business value
The assumed role of Information Technology (IT) in generating synergy
is that economies-of-scale will drive the most savings. But so much Components Action Examples
more is possible. In fact, IT can (and should) deliver significant strategic • Acquire complementary businesses
business value — the kind of value that comes, for example, from Increase • Improve sales tools
having better processes for financial management, or shared sales-and- • Initiate customer retention program
Business Preserve
operations planning processes, or an integrated procure-to-pay process, revenues • Test disaster recovery capability
or a collaborative new product development process — just a few of the Accelerate • Introduce new products earlier
types of competitive advantages that can be enabled by IT. • Improve order to cash cycle

Before and after M&A, a CIO is challenged to find economies of scale • Restructure operations
Decrease • Streamline supply chain
— yes — but also to identify other opportunities to help the business
compete more efficiently and effectively. Business Business Avoid • Increase economies of scale
value costs* • Maintain regulatory compliance
Delay • Apply cash management practices
• Use options to postpone purchases
Surprise! IT delivers cost synergies beyond economies of scale
Business risk Reduce • Strengthen security
The new IT organization in a post-merger high-tech company was • Identify delinquent accounts early
tasked to reduce IT expenditures for software and hardware by
$10 million annually — an aggressive target of 30 percent of the • Real-time information exchange
Business with partners
Enhance
budget — by leveraging economies of scale in purchasing. But IT capabilities • Automatic tracking of inventory
leaders soon realized that only 40 percent of its spending would
be with the same vendors. Was there a way to achieve synergy *Costs include operating costs as well as the cost of capital
by rationalizing architectures and streamlining service levels? In
the end, only 15 percent of the total cost synergies came from Source: Deloitte Consulting LLP
procurement, while 60 percent came from eliminating products
and, most interesting, 25 percent came from updating purchasing The possibilities for IT-enabled business value fall into four categories:
and maintenance standards — a result that could have been
achieved even without the merger! How do IT expenditures produce business value? Through the IT
value chain: IT spend is transformed into IT resources; IT resources
After the merger of two insurance companies, the annual IT budget are transformed into IT outputs; and IT outputs are transformed to
would be nearly $1 billion. Yet a delay in the deal closure forced business value (Figure 2). The IT value chain reveals three levers of IT-
each IT department to look for savings within its own organization. enabled business value: resource management, work management, and
One cut expenditures 10 percent by renegotiating contracts, business-IT alignment (Figure 3).
modifying an inefficient services, and reducing project spend even
prior to any economies of scale resulting from the merger.

35
Wired for winning?

Figure 2: The “IT value chain” Recent data suggests an average spend overlap of only 40 percent.1
Even for nominally interchangeable products, such as desktop
computers and low-end servers, existing leases and maintenance
contracts usually require a runoff of current contracts before savings
can be realized. Furthermore, given a maturing technology industry,
decreasing supplier margins, and (for most companies) already heavily
discounted unit costs, the opportunity to achieve savings purely by
IT cost IT resources IT output Business value economy of scale has diminished. Today, economies-of-scale opportunity
• Steady state funds • Productive • Information • Business revenues exists primarily when a small company is acquired by a much larger one.
• Project funds staff hours • Automation enhanced
• Computer • Business costs
Yet, there is usually a short-term opportunity in the avoidance of capital
• Operating budget • Coordination
hardware reduced spend. One large health care company was able to reduce capital
• Capital • Connection
authorizations • Software • Asset efficiency expenditures on hardware and software to virtually nothing for one year
• Discretionary
packages improved by redeploying surplus PC assets and rationalizing application licenses.
expenditures • Telecommun- • Business risk Also, the related internal overhead costs of obtaining the inputs can
ication services reduced usually be reduced. In a merger, the IT organization has the opportunity
• Nondiscretionary
expenditures • Office supplies
to combine IT purchasing or staffing functions, helping to eliminate any
• Etc. • Etc.
duplication and further improve resource management.
Source: Deloitte Consulting LLP Work management
The effectiveness of transforming IT resources into IT outputs is
Figure 3: IT value chain and IT business value drivers measured by the amount of resources required to put in place, operate,
and support delivered IT capabilities. The ratio of inputs to outputs can
IT cost IT resources IT output Business value
be improved, for example, by solving more user problems per hour,
delivering functionality with less rework, or operating systems with
fewer servers. Pulling this lever includes streamlining the workflow
within the IT organization, training and motivating employees, and
rationalizing architectures.
IT IT Business
Business For mergers in transaction-based industries, such as financial services
IT-enabled value resources output value
or physical distribution, IT may be able to deliver the combined service
business = = X X
value volumes of the new enterprise from the infrastructure of just one of
IT cost IT cost IT IT
resources output
the original companies. In the acquisition of a travel service company,
for example, the buying company was fully able to subsume the
target’s customer operations into its own infrastructure, effectively
increasing revenue while holding costs steady, leading to immediate
IT resource IT work Business and profit improvements.
management management IT alignment
A merger also gives the IT organization the opportunity to cross-
Relative impact on IT-
enabled business value 15% 35% 50% fertilize, to apply the practices from the most efficient and effective
organization, and to stimulate innovation in IT practices and tools.
Source: Deloitte Consulting LLP Moreover, the expected disruption caused by the merger can facilitate
the implementation of changes that would have been resisted in a more
stable environment.
To capture the full potential of an M&A opportunity, CIOs must Business-IT alignment
understand and make use of all three of these mutually exclusive
and collectively exhaustive drivers of IT business value. When pulled The transformation of IT outputs to business results is measured by the
effectively (together or separately), these levers can substantially improve use of IT outputs to achieve revenue growth or profit improvement. The
the overall ratio of IT expenditures to IT-enabled business results. business-IT alignment lever can be pulled by increasing the business use
of existing capabilities or by discontinuing low-value IT deliverables.
Here are practical suggestions to consider for pulling each lever in an
M&A context: In a merger, many business functions will be combined: For example,
the new organization may not need two sales forces, two warehouse
Resource management managers, two HR departments, and two accounting departments.
In acquiring resources, is IT spending efficiently? Resource management When one of the two is eliminated, its IT systems usually are also. In
(the ratio of resources acquired divided by dollars spent) can be addition, the merger itself may lead to the discontinuance of some
improved two ways: Buy more for the same money, or buy as much for operations and their IT support.
less. For example, the resource management lever can include reducing A merger provides an opportunity for IT to re-evaluate the service
overhead in contractor services or negotiating a greater discount based levels provided to the business. IT may be able to fine-tune its outputs
on purchase volume. without adversely impacting business performance by delivering services
This is the primary area for economies of scale. By aggregating the selectively — say, only to engineering or only to administrative services
purchasing power of the two merging organizations, IT can increase — based on need rather than company-wide.
negotiation leverage, positioning the combined organization to be able Finally, and perhaps most importantly, the energy and expectations
to obtain more favorable commercial terms from its suppliers. brought about by a merger can give the CIO the opportunity to engage
These savings, however, can be severely constrained by differences in business leaders in strategic discussions aimed at improving business
the two companies’ application architectures and hardware standards. results from the use of existing or proposed capabilities.

36
M&A IT — Synergy capture

A look at the levers Advice for the CIO


Economy-of-scale savings is simply one of the many ways that IT can The IT value chain provides the CIO with a rational line of attack for
contribute to M&A synergy. Three levers — resource management, work achieving a high level of IT contribution to M&A results. It equips CIOs
management, and business-IT alignment — can give the CIO the power with a practical — and ordered — view of three levers that can be
to deliver more business value in the post-merger environment. pulled to improve the types and degree of IT-delivered synergies.
The value levers are comprehensive. As may be apparent from Figure The three-step IT value chain is a good framework for prioritizing IT
3, the IT value chain consists of only three transformations. For this reason, post-merger integration efforts (in fact, we think it belongs in every
the three levers discussed here are a complete list; they provide the IT M&A playbook). But even before a merger, the CIO should consider
organization with a comprehensive set of synergy sources. By exploring improving value capture in several ways.
opportunities in these three areas, the IT organization can be confident that • Establish a clear linkage of IT capabilities and project portfolio to
it has exhaustively examined all areas of potential IT synergy. business objectives, so that when those objectives change during a
The value levers are practical. The value levers are not theoretical merger, activities can be redirected in an informed manner (thereby
constructs, but a practical way to classify both established and emerging improving the transformation of IT outputs to business results).
techniques for synergy capture. For example, eliminating unneeded • Develop execution flexibility to support rapid business growth,
systems can clearly lead to reduced IT costs with no loss of business including providing services to more locations and incorporating
value. And it can be easily seen how streamlining IT processes can new businesses into management and regulatory processes (thereby
provide the same IT outputs to be delivered without consuming as many improving the transformation of IT inputs to IT outputs).
IT resources.
• Aggressively rationalizing suppliers, creating favorable options
The value levers are measurable. Since the effectiveness of each lever in supplier contracts for increased volumes, as well as building
is measured by the ratio of its output to its inputs, the way to measure termination clauses into contracts (thereby improving the
improvements is suggested by the transformation itself. For example, a transformation of cash to IT inputs).
reduction in the average purchase price of a PC is associated with the
Pulling these three levers can — even without a merger — directly contribute
first transformation. A reduction in the number of hours to deploy a PC
to a company’s bottom line, while practice in their use can prepare the CIO to
is associated with the second. And a reduction in the number of PCs
achieve excellent results in the high-pressure M&A game.
required to support a business process (while maintaining its quality) is
associated with the third. Having a measurement makes it feasible to set
Notes
an improvement target and to track progress against it. 1
“Solving the merger mystery: Maximizing the payoff of mergers & acquisitions,” Deloitte,
The value levers are ordered. The three levers differ markedly in their February 2000.

synergy potential, with the transformation of IT outputs to business


results (the third transformation in the IT value chain) having the
greatest potential impact on the bottom line. Therefore, when looking
for synergy, IT should start there — identifying what doesn’t need to
be done at all. From our research and experience, this step (the third
transformation in the IT value chain) will yield approximately half of
the total available synergies. Secondly, one should leverage the most
effective IT processes from each company (the second transformation);
process improvement will yield approximately one-third of the available
synergies. Finally, based on our research and experience, economies of
scale (the first transformation) typically yields only about 15 percent of
the total synergy value.

37
Wired for winning?

Ignorance is not bliss


IT due diligence is fundamental for effective post-merger synergy capture

By Mark Walsh, Asish Ramchandran, and Shalva Nolen

Introduction Including IT in pre-close due diligence can enable the early identification
of potential synergies from the M&A transaction, empower business
Mergers and Acquisitions (M&A) is all about synergy capture — whether
executives to take advantage of the important role IT plays in realizing
cost savings or strategy enablement (or both). The role of Information
M&A synergies, and support the collaboration of business leadership
Technology (IT) in achieving cost savings is usually a given (rightly or
and IT in determining an effective integration strategy.
wrongly). But IT also can be instrumental in achieving strategic synergy
capture, which might take the shape of developing and delivering Without IT due diligence, certain risks — such as integration barriers,
innovative products, or establishing a distinguishing competitive long lead times, deal-breaking costs, and contract noncompliance
advantage, or solidifying a dominant position in a discrete market, or — are not likely to be identified. In the same study, we found that
expanding and growing in market share or geography. poor due diligence can cause integration costs to balloon by as much
as two to three times the annual IT budget. To cite just one reason,
Of course, where there’s opportunity, there’s risk. Given the importance
the costs surrounding relicensing or the transfer of existing licenses
of achieving synergy capture to make a deal worthwhile, it’s surprising
can end up being as much as 50 percent of the product list price — a
that pre-close IT due diligence is not more common. What could be the
penalty likely to be overlooked by the deal negotiating team if there’s
explanation? Simply put, a lack of perspective. In many organizations, IT
no IT due diligence.1
is thought of as a cost center, not as a mission-critical enabling function
or even, in some cases, as a profit center. We know of one global manufacturing company that did not include IT
on the acquisition deal team, then limited IT due diligence to less than
Achieving synergy one week. Twelve months post-close, the acquired business was running
If synergy (cost savings or strategy enablement) is a desirable outcome largely on legacy, nonintegrated applications. While IT costs rose, the
of the merger or acquisition — and when would it not be? — IT due greatest penalties came from inefficient processes and redundant data.
diligence is mandatory. A recent, internal Deloitte study of 31 companies Overall, the acquisition failed to realize anticipated synergies.
that had participated in significant M&A activity over the prior 12
months suggests that 1) synergy capture correlates strongly with the
financial success of a merger and; 2) when IT is part of the due diligence
process, there is a direct correlation to the enablement of post-deal
synergies capture (Figure 1).

Figure 1: The case for IT due diligence

...And for the most part, IT involvement in DD leads to effective IT ...The extent to which IT enables synergies correlates
enablement of synergies strongly with merger success
5.0 5.0
IT enablement of synergies

Merger success score

2.5 2.5

0.0 0.0
0.0 2.5 5.0 0.0 2.5 5.0
IT involvement in DD IT enablement of synergies

38
M&A IT — Synergy capture

The right scope Delivery risk


During an M&A transaction, IT due diligence is fundamental to effective Delivery risk analysis explores the strengths and weaknesses of IT project
enterprise risk management. The process includes discovery questioning management and performance. Here are some of the questions about
of knowledgeable personnel, competitive benchmark analysis, and an delivery risk that should be addressed during due diligence:
evaluation of relevant IT documentation in each of the five dimensions • Are the technology commitments realistic and achievable?
discussed here.
• Does the company have sufficient resources (current and future) to
Business risk deliver on planned technology commitments?
Managing business risk in one form or another resulting from growth Financial risk
opportunities, emerging competitors, technology obsolescence, industry
consolidation or the like typically triggers an M&A deal. The due Financial risks revolve around the IT budget and the management of
diligence process has to be grounded in an understanding of this larger IT business unit-based activities. Here are some of the financial risk
context. How will the deal affect the way the company moves through questions that should be addressed during due diligence:
the marketplace? How will it impact IT’s purpose and structure? • Are the scope and scale of investment required to support the
business and strategy appropriate?
Understanding the business risks includes appreciating IT’s relationship
with the business, the importance of a business-driven IT strategies, and • Are the IT direction and investment/operating plan affordable?
the value of IT in enabling business operation. When business functions • Are IT resources used efficiently and effectively?
and IT work smoothly together, this understanding drives current and
• Is technology appropriate compared to that of peer groups? Is the
planned IT projects — projects aimed at actualizing the value of the deal.
budget reasonable?
Here are some of the business risk questions that should be addressed
People risk
during IT due diligence:
• Is the business model changing? When it comes to people, the risk resides in IT resource management
and development, as well as in how effectively the IT organization
• Are the technologies competitive (vis-à-vis the industry and applicable supports the business. Here are some of the people risk questions that
peer group)? should be addressed during IT diligence:
• Is the IT function flexible enough to adapt to changes in the business • Is the IT organization adequately structured and aligned to support
model or marketplace? the business?
• Do the technologies support appropriate business control • Are IT resources capable and motivated (including IT management)?
(reporting/control)?
• Are IT resources adequate to address current and future needs?
• Is the IT function strategically aligned with the business?
• Does IT support key business objectives? Given this scope of IT due diligence, it is important to have an organized
view of evaluation areas (Figure 2) — those activities, processes,
Operational risk resources, practices, and metrics that, together, paint a clear picture
of the current and future IT organization’s capabilities and capacity,
The operational risks to be addressed by IT due diligence center
efficiency and effectiveness, strengths and weaknesses.
on whether and how well IT can support the business after the
merger/acquisition. The scope in this area focuses on how well the
IT environment is managed, including having in place viable disaster Figure 2: Evaluation areas
recovery and business continuity plans.
Here are some of the typical operational risk questions that should be IT history IT projects IT infrastructure IT business
addressed during due diligence: Past IT issues IT project General
management
management infrastructure IT organization
• Are the mission-critical technologies stable and reliable?
• Does the company have sufficient control over the technologies and
the resources to ensure ongoing stability and reliability (through
ownership or reliable contracts)? Innovation
management
• Are any facilities or operations located in unstable geographies? Innovation IT operations
IT security and
management General operations risk management
• What projects are scheduled for the near-term and long-term? Which process and
IT security and risk
are special projects? frameworks
management
planning process

IT applications
portfolio Service portfolio IT governance IT financial
Application (planning) management
IT service
support of key performance IT strategy and IT budget planning
business planning
processes

Source: Deloitte Consulting LLP

39
Wired for winning?

Getting started IT due diligence is smart business


To find and validate synergies during the due diligence process, the Getting a picture of the risks that might be triggered and the rewards
buyer (or the two companies, together) should take these steps. that might be gained as a result of a merger or acquisition sounds like
simple common sense. It’s worth while to take the time — to make the
Form an IT due diligence/integration team early in the process.
effort — to gather all the information possible. The results after Day
Put the right subject matter specialists on the team — not necessarily
One, after year one, and beyond are potentially the difference between
senior management, but rather the people working in IT processes
the financial failure and success of the deal.
who really know how work gets done. Make sure that key members of
the team are part of the post-merger integration effort, since lack of
Notes
continuity between due diligence and execution is both common and 1
Carve-outs share many of the same attributes as mergers or acquisitions. For IT, the difference is that,
destructive of value. for sellers, divestitures are not about realizing value but about meeting the terms and timetables of
the sales agreement. While there’s less correlation between IT involvement in pre-close activities and
Set a broad scope. The current and future IT organizations should the overall financial success of divestitures, it’s reasonable to assume that early IT involvement could
be evaluated with regard to their application portfolios (the functions be a positive factor in deal valuation and post-deal performance.

enabled, the number of people, the cost structure), infrastructures


(data centers and servers), end-user device footprints, voice and
data distribution (how complex is the network?), service models and
associated service level agreements (SLAs), staff distribution across
fixed overhead and variable components, and IT software/hardware
vendor contracts, license terms, and conditions.
Look at applications and infrastructure by function with an eye
to both Day One readiness and end-state goals. During planning,
the buyer should calculate the integration effort from a total cost of
operations perspective: What are one-time integration costs? What are
ongoing operating costs? What are the time frame for integration costs
and the recovery period for achieving a return on investment?
Specify synergy targets and performance metrics. Put a stake in
ground for targets and metrics to make it easier to measure progress
and manage expectations. This step includes defining the projects that
need to get done to achieve goals. Benchmarking can be a very valuable
tool, but do not take the results as absolute: Every company has to
adjust benchmarks to fit its own competitive position.
Consider outside resources. For many reasons — the sensitivity
of information being exchanged, the importance of achieving the
synergies, the complexity of the post-deal integration — many
companies ask independent consultants to perform some or all of the IT
due diligence.
Conduct an impact analysis. Does the IT due diligence expose
any factor that will negatively or positively impact the value of the
acquisition? Some shifts in the post-merger environment — for example,
from centralized to decentralized IT service delivery (or vice versa) or
from outsourced to in-house IT staffing (or vice versa) — can cause huge
a cultural change.
Dedicate a project team to address software licensing issues. Which
licenses are more cost effective? Can the new company negotiate better
terms? Legally, the two companies might not be allowed to interact
without security in place; in such cases, people from both companies
work together in a “clean room” under the supervision of attorneys from
both sides. (Do not use senior resources on this step; if the deal does not
go through, these people have to be moved to new jobs.)

40
M&A IT — Synergy capture

M&A IT benefits with no deal involved


Simple ideas for realizing M&A benefits without a transaction

By Mark Walsh and Punit Renjen

The expected benefits projections from some recent M&A transaction As an example, any CIO on any given day, could create a similar
announcements are staggering: $1 billion in cost savings, $100 million event (let’s call it a virtual M&A transaction). That is, they could make
in Information Technology (IT) cost reductions, $1.1 billion in combined an internal or external announcement and commitment to seize an
revenue and cost synergies, $7 billion increase in market capitalization.1 opportunity to dramatically improve business results without actually
Despite the recent credit crunch and historically high percentage of executing an M&A transaction.
failed M&A transactions, there are still companies making big bets
A review of the typical tactical activities and opportunities pursued
with high expectations for achieving going-forward benefits.2 Many of
during a real M&A transaction reveals some interesting findings:
these companies are realizing the deal promise and attaining staggering
results from M&A activities (mergers, acquisitions, and divestitures). 1. Most of the tactical M&A opportunities exist even without a real
M&A transaction.
However, while completing high-risk, high-reward M&A transactions
are not, and should not be, for everyone, we believe achieving similar 2. Because antitrust approvals and associated waiting periods do not
business results can and should be an expectation, even if no M&A deal apply to virtual transactions, many of the virtual transaction benefits
is involved. can be captured more quickly.
In recent months, the number of inquiries we have received about 3. An organization completing a virtual transaction does not have
M&A transaction results from CIOs, CFOs, governors, and various other to pay the acquisition cost or deal premium, which eliminates the
business and government leaders increased significantly. These leaders primary transaction risk while still achieving many of the benefits.
have two important characteristics in common:
4. Any executive with P&L responsibility can create a virtual M&A
1. They want to realize M&A-like benefits for their organizations. transaction and make a difference.
2. They have no intention of completing an M&A transaction. A review of the project objectives of a typical M&A deal listed below
begins to illustrate how an executive at any organization could create a
The specific reasons these leaders are asking M&A-related questions
virtual M&A event and improve financial and operational performance
vary widely, ranging from a governor’s need to fund overdue and
without executing a deal.
desperately needed public infrastructure repairs (e.g., roadways, bridges,
and tunnels) by decreasing IT costs, to a CIO’s need to reduce costs by
consolidating multiple division IT organizations into one central shared
IT function, to a government leader’s desire to prevent tax increases by Typical M&A project objectives
eliminating duplicate and redundant agency IT functions.
1. Realize the deal promise, and meet or exceed the deal premium.
The critical questions these leaders are really asking are: Can organizations
leverage the approaches, learnings, and tactics from M&A transactions 2. Reinvent and redefine the competitive landscape.
to realize similar benefits without taking the risk of actually completing a 3. Integrate and rationalize similar operations.
deal? Can they move the needle on the top line, the bottom line, as well
as the stock price, if applicable, without calling in the investment bankers? 4. Investigate alternative delivery models.
Can a CIO make difference? The data suggests absolutely yes. 5. Capture synergies rapidly.
At its core, an M&A transaction (an acquisition, for example) is an event 6. Streamline and integrate organizations.
— a public announcement and commitment to seize an opportunity to
7. Establish clear accountability, roles, responsibilities, and reporting lines.
dramatically improve business results. The acquisition is just the vehicle,
or the catalytic “event.” 8. Simplify the business and remove unnecessary complexity.
9. Retain and deploy top talent.
10. Achieve an issue-free cutover (Day One)/transition.

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Wired for winning?

To help bring the virtual M&A event-driven IT transformation concept to 2. The deal nonnegotiables and communicated them to external parties
life, consider a few recent examples: during his state-of-the-state address, similar to a Wall Street deal
announcement.
Case study 1: Ready for launch 3. Integration guiding principles. The status quo is no longer acceptable
if we are to achieve the expected deal benefits.
The burning platform
4. An aggressive integration blueprint that focused on consolidating and
Simplify the organization, remove duplication, and achieve IT cost
rationalizing the IT services of 30+ agencies providing IT-related services.
savings and efficiency
5. Clear and aggressive synergy targets based on “top down” and
Timeline
“bottom up” synergy analysis, aligned with external stakeholder
Six to eight months requirements (e.g., required infrastructure investment estimated),
which is similar to aligning goals with Wall Street analyst expectations.
Case overview
6. A compelling change management plan. Implementing change in
The CIO of a major company was faced with the integration of three the public sector often requires special attention, particularly when
related IT organizations. To gain immediate transaction, the CIO created the change involves services and spending reductions.
a virtual M&A transaction. With coaching from experienced M&A
subject matter specialists, the CIO developed:
Case study 3: Health care for all
1. A clear and compelling deal rationale, which was the mandate for
integrating the three IT organizations. The burning platform

2. The deal nonnegotiables and communicated them to external parties Remove $100 million in IT costs to reduce the cost of health care
(similar to a Wall Street deal announcement).
Timeline
3. Integration guiding principles. The status quo is no longer acceptable
12 months
if we are to achieve the expected deal benefits.
Case overview
4. Clear and aggressive synergy targets based on “top down” and
“bottom up” synergy analysis. The CIO of a major insurance provider was using the typical M&A
approach, techniques, and tools in completing the early planning for
5. A distinctly different competitive landscape with alternative delivery
an announced merger. However, the deal failed to gain the required
models. The current services delivered by the IT organization(s), and
regulatory approval to proceed. To salvage the work that had been
the delivery models used, would not necessarily be the same after
done during the planning process as well as capture a large portion of
the deal was completed.
the synergy opportunities that had been identified ($100 million in IT
6. A distinctly different IT organization model with clear leadership savings alone), the CIO turned the real M&A transaction into a virtual
changes. As with any deal, the organization and the leadership must M&A transaction. With coaching from experienced M&A subject matter
be evaluated and upgraded for the good of the continuing business. specialists, the CIO continued down the M&A path and developed:
1. A revised “deal rationale.” The mandate for capturing the identified
Case study 2: Hello there, governor savings and passing them to subscribers was still very important
regardless of whether the transaction proceeded.
The burning platform
2. A revised integration/improvement blueprint with aggressive
Streamline and rationalize overlapping state government IT operations delivery model changes. Focus shifted to driving improvement and
to significantly reduce costs and free up investment dollars to rebuild aggressively achieving efficiency and savings through alternative
state controlled highways and bridges. delivery models, such as outsourcing significant portions of IT.
Timeline 3. Clear and aggressive synergy targets based on “top down” and
12–18 months “bottom up” synergy analysis.

Case overview 4. A distinctly different IT organization model with clear leadership


changes. Implementing the improvement opportunities and
Faced with a declining tax base and crumbling transportation outsourcing model triggered significant IT organization design
infrastructure, the governor of a major state faced a major dilemma: changes as well as key leadership changes
How can the state repair the aging infrastructure without raising taxes.
In this case, the governor with the help of his CIO created a virtual
M&A transaction. With coaching from experienced M&A subject matter
specialists, the governor and CIO developed:
1. A clear and compelling deal rationale. The mandate was to reduce IT
cost, and reallocate the investment dollars to rebuild the crumbling
infrastructure without new taxation.

42
M&A IT — Synergy capture

What virtual M&A opportunities are available? The list of IT opportunities and synergy opportunities pursued and
achieved in a typical M&A deal are far-reaching and impressive.
The case examples only begin to show the power of the virtual M&A
Although the full breadth and magnitude of savings are typically not
concept. To truly understand the impact a virtual M&A transaction could
achievable with a virtual M&A transaction, the benefits can still be very
have on your organization, ask yourself: How could I leverage the M&A
significant to your organization.
improvement/synergy opportunities listed below to improve my business
in a meaningful way, even without an M&A transaction in sight? Beware: Virtual transactions are not risk free
Pursuing M&A-like opportunities is not without risk (even if there
is no underlying M&A transaction). To achieve significant benefits,
M&A improvement/synergy opportunities organizations likely need to take some operational risks. Unlike real
M&A transactions, however, an organization that pursues a virtual
IT organization transaction can set the level of risk it is willing to take and strike an
acceptable balance between risk and reward because no deal premium
• Organization consolidation
needs to be achieved.
• Organization rationalization and simplification
The keys to achieving expected results
• Resource location improvement and offshoring
The keys to achieving the expected results from a virtual M&A
transaction are much the same as those that make a true M&A
Applications
transaction work. These include:
• Application and instance consolidation
1. Strong, consistent senior management support — the mandate
• Legacy system retirement
• Web site consolidation and simplification 2. A clear and comprehensive virtual M&A strategy that aligns with the
overall corporate strategy
• Application development, maintenance, and support delivery
model refinement 3. Comprehensive preannouncement financial and operational
• Outsourcing setup, renegotiation, or termination due diligence
4. Clear revenue and cost improvement targets
Infrastructure 5. A commitment to evaluate and change every part of the business
• Data center consolidation (from top to bottom) — view every function, every process, every
product, every delivery model, every facility, every contract, every
• Network consolidation
alliance, every relationship, and every organization as an opportunity
• Server consolidation
6. An internal commitment to achieve outlined targets
• E-mail consolidation
• Data warehouse consolidation 7. An external commitment to the public, including shareholders and
Wall Street analysts
• Interface and EDI rationalization, simplification, and improvement
• IT infrastructure outsourcing setup, renegotiation, or termination 8. A clear and aggressive timeline
• Buy versus lease decision improvement 9. A structured and aggressive execution
• IT procurement contract renegotiation (hardware, software, The rewards go to those who challenge the status quo
and services)
Hollywood moviemakers regularly limit the risk and cost of new films
• IT strategic sourcing
by leveraging virtual special effects and even virtual actors in some
• Telecom bill reviews cases. The virtual technology also opens movie making to a much wider
group of players. Many of these films have achieved critical acclaim
and spectacular box office results. The same opportunities exist in the
Other business world for executives willing to move into the virtual world,
• IT project portfolio rationalization apply M&A tools and techniques to steady-state problems, and drive
• Facility consolidation and relocation step-change improvement within their organizations. Give the virtual
M&A concept some thought. Spectacular Wall Street results could
• Training credits
follow, even when no deal is in sight.
• Service level rationalization and improvement
• IT scope rationalization and improvement Notes
1
• IT demand management Deloitte Consulting analysis based on Mergerstat Data, all transactions <$500 million involving U.S.
based buyer and/or seller from January 1, 2003, to October 31, 2007.
• IT tax credits 2
Deloitte direct knowledge and client interviews.
• Rogue IT reduction/IT shared services implementation
• Consultant and contractor rationalization and renegotiation
• Legal entity structure refinement and simplification

43
M&A IT – Integration
It’s hard. Many M&A deals fail to deliver value — some even destroy

value — because of poor integration. The right level of integration,

driven by the company’s M&A strategy, is the “happy ever after”

ending to the deal. And that doesn’t happen by accident.


M&A IT — Integration

Walking the M&A IT tightrope


Establishing a safety net of M&A capabilities before integration begins

By Mark Walsh and Eugene Lukac

Key M&A capabilities


Introduction
Would you jump from an airplane without a parachute? Would Knowledge Processes and tools Experience
you perform a high-wire act without a safety net? Would you run Understanding the Establishing a set Using simulation
a marathon without the proper conditioning? Of course not. Yet basics of M&A, of time-tested exercises to give the
when it comes to the risky task of merger integration, many IT such as the M&A processes and tools team “real world”
organizations dive right into the fray without developing the core lifecycle, unique that can accelerate experience in a safe
M&A capabilities that could improve their chances for achieving M&A terminology, the integration effort environment before
their desired results. major challenges, and help manage thrusting it into the
war stories, effective risk. pressure cooker of a
Studies show that only 40 percent of M&A transactions deliver the
practices, and anti- real deal.
value that investors and analysts expect.1 More often than not, the
trust do’s and don’ts.
primary culprit is poor merger integration.
In the heat of a merger, CIOs find themselves walking a tightrope
on a variety of critical issues: Each of these elements is necessary — but not sufficient — for effective
• Integrating two distinct IT operations while continuing to merger integration. To increase their chances for achieving their desired
results, IT organizations must focus on developing all three areas. In our
support day-to-day business operations
experience, even companies that have completed a number of M&A
• Looking for IT synergies while enabling synergy capture transactions can benefit significantly by further developing and improving
in the business their integration capabilities around these three core elements.
• Tackling short-term challenges for an issue-free Day One while M&A knowledge. Basic M&A knowledge is the critical foundation for
laying the foundation for the organization’s long-term future any effective integration project. Yet all too often, integration teams
• Populating the IT organization with critical staff from both sides learn the M&A basics on the job while under the pressure of very
aggressive timelines. This approach can have several negative effects,
of the deal
including project delays, reduced productivity, employee stress, and
Post-merger IT integration is truly a high-wire act, and everyone is losing control of the deal because people on the other side of the
watching. Analysts. Investors. Customers. Employees. The media. transaction have more knowledge and experience.
Amid all the excitement, the chances for a significant misstep are
To avoid these problems, more companies are calling on experienced
plenty. And the consequences are potentially significant — both to
outsiders to train their prospective M&A teams on the basics of post-
the business and to your career.
merger integration before getting involved in a deal. This basic M&A
Thankfully, there is something you can do about it. When it comes training can cover a broad range topics, including an introduction to the
to merger integration, preparation is the most effective safety net. M&A deal lifecycle, basic M&A terminology, antitrust do’s and don’ts,
By developing your organization’s M&A capabilities — before you integration war stories, effective integration practices for each key
start walking the tightrope — you can dramatically improve your function, and a wide variety of lessons learned.
chances of making it to the other side.
Companies looking for even more of a competitive edge are also
training their teams on a number of advanced topics. These may
include: how to interact and negotiate with target company resources;
Developing your M&A capabilities how to identify and avoid common integration pitfalls; and how
to accelerate integration planning, execution, and synergy capture
In recent months, we have seen a number of CIOs taking a novel
through the use of ”clean teams” (sequestered teams of subject-matter
approach to preparing for post-merger integration. This new approach
specialists who are allowed to access and analyze restricted information
focuses on developing and improving IT’s M&A capabilities in three key
before the deal is approved).
areas before the integration begins.
The goal is not to create a team of M&A specialists overnight. The goal
is simply to equip people with the basic knowledge and understanding
they need to “hit the ground running” and to position the integration
team to be effective.

45
Wired for winning?

M&A processes and tools. Although your integration team might be 5. Curveballs. At various points in the simulation, participants are
going down this road for the first time, there’s no need to reinvent the presented with unexpected challenges similar to what they might
wheel. Why not capitalize on the successes (and failures) of others? encounter on a real integration project. This lets them experiment and
Today, there are a number of time-tested processes and tools that can gain experience in a safe environment. It can also help them understand
help integration teams complete their required tasks faster and more and appreciate the complexities of integration planning and execution.
effectively, thereby accelerating the overall integration effort. 6. Real-time coaching and lessons learned. Experienced integration
We recently helped a global manufacturing company in their efforts to practitioners provide continuous coaching and counseling
develop and institutionalize a set of detailed and repeatable processes, throughout the simulation. This can help participants learn from
tools, and accelerators that will guide all of its future M&A activity. The their mistakes and exposes them to effective practices that have
CEO had told his management team that the effective execution of a worked well for others.
number of M&A transactions over the next five years would be critical to A large chemical company recently conducted a simulation exercise to
the organization’s future financial success. Although the company had prepare its IT integration team for a series of upcoming acquisitions.
done a number of M&A deals in the past, the CEO recognized the need The simulation covered the entire integration lifecycle, from developing
to develop and improve the organization’s M&A capabilities even further. the initial integration project charter, through planning for Day One, to
As part of the project, we helped management in their efforts to defining the future state. By the end of the exercise, the vast majority of
define and develop a seven-step process for merger integrations and participants (89 percent) felt confident that they were well-prepared for
divestitures. This was followed by 22 function-specific playbooks, the M&A challenges ahead.
including two for IT: one for integration and one for divestiture. Each We have seen many real-world integration projects, where a company’s
playbook presented detailed processes that were consistent, efficient, business and IT functions were surprised by how closely they had to
and repeatable. We also helped them develop a comprehensive toolkit work together to achieve the desired outcomes. To tackle this problem,
that included company-specific and function-specific tools, templates, some companies have started using simulation techniques to help
and accelerators for effectively executing integrations and divestitures. the business and IT gain firsthand experience jointly developing a
This toolkit will enable their project teams to get out of the gate quickly blueprint for the future, identifying and capturing synergies, designing
using consistent tools and templates. It will also allow them to focus the required IT foundation, and managing a dizzying array of in-flight
their time and attention on strategy, planning, and execution — instead projects. Simulation can provide a safe environment for both sides to
of getting bogged down creating and implementing untested tools. learn what works and what doesn’t. Even more importantly, it can help
This effort is already paying big dividends. Since the project was the participants understand and appreciate their mutual dependencies.
completed, the company has effectively executed seven multibillion- This understanding is critical in the heat of a real deal; yet, it is difficult
dollar M&A transactions — a result they credit in no small measure to to convey in words. We have found the most effective way to learn it is
their investment in M&A processes and tools. through firsthand experience.

M&A experience. Experience is perhaps the most critical M&A Simulation exercises may not provide true “real deal” experiences. They
capability of all. This is especially true for IT, which is generally the most do, however, provide valuable exposure and practical experience that
expensive and time-consuming part of the integration and is also often can better position an integration team for the tasks ahead.
the key to unlocking synergy benefits across the entire business. How
can an IT organization develop this critical M&A experience without Walking the tightrope
learning everything the hard way on a series of real deals? Clearly, it takes more than just improved integration capabilities to
The solution to this dilemma is an integration simulator. After all, most make an M&A deal financially successful. There is usually little that can
people generally learn more effectively by doing. A simulator gives be done for a bad deal conducted with bad due diligence. However,
integration team leaders and team members a chance to develop “real an IT organization can do its part to help a good deal stay on track by
deal” experience in a safe environment before they find themselves in the developing and improving its M&A knowledge, processes, tools, and
crucible of a real transaction. A realistic and challenging simulation includes: experience before the integration begins. Key benefits include:
1. A realistic target company. The target company created for the • Shorter transaction lifecycle (faster deal execution, faster
simulation is often based on a real-life business to establish a high integration/divestiture)
degree of realism. • More effective capture of integration synergies and divestiture benefits
2. A realistic target company team. During the simulation, • Faster decision-making
participants interact with virtual members of the target company’s
• Reduced M&A cost structure (fewer Day One problems, less rework)
team. Every virtual team member has a unique personality, including
unique traits, strengths, weaknesses, and potential hidden agendas • Increased job satisfaction
— just like people in the real world. • Improved understanding of integration roles and responsibilities
3. Broad scope. The scope of the simulation covers all key integration Regardless of a transaction’s size or complexity, the integration team’s
activities, from initial integration strategy and scope development speed and effectiveness can have a significant impact on whether the
through Day One Go Live and synergy capture. deal is viewed as a long-term financial success or failure. If more IT
4. Training modules with real deliverables. Throughout the simulation, organizations viewed merger integration as critical to achieving the
participants are required to complete various integration activities and expected financial results and focused on developing their capabilities
produce actual deliverables. Prior to each activity, experienced M&A prior to being pulled into the process, the IT integration team might feel
practitioners deliver focused training about the activity and the related more comfortable walking the M&A tightrope when they come to it.
processes, tools, and accelerators required to complete the tasks. And maybe, just maybe, more than 40 percent of M&A deals would be
financially successful.

Notes
1
“Solving the merger mystery: Maximizing the payoff of mergers & acquisitions,” Deloitte,
February 2000.

46
M&A IT — Integration

Virtual fences
Five ways to retain IT people when you need them most

By Eileen Fernandes and Dr. Frederick D. Miller

Find the stars. Identify high-talent people from both organizations.


Don’t overlook employees who are informal leaders among their peers,
Introduction
with broad personal influence. Also target employees with valuable skill
Mergers create uncertainty that can prompt valuable Information sets and those with important customer relationships or responsibilities.
Technology (IT) people to look for new opportunities outside the
2. Decide on your long-term direction
company. What can you do to stop them from fleeing? Or more
important, what can you do to earn their commitment to the In the rush to meet integration timelines, it’s tempting to focus solely
transformation ahead? on Day One and dive directly into migrating the acquired company’s IT
functions into your own. However, this is the perfect time to establish
Most IT people know they work in a dynamic world — full of
an IT strategy that will more effectively serve your company’s long-term
changes, emerging technologies and demand for constantly
needs and develop a plan for the people you’ll need to make it happen.
evolving skill sets. They also know that headcount reduction is a
common merger outcome. Will they retain their current level of Keys to this step
compensation and benefits? Lose their stock options? Will the
workload double? Will they have to relocate? And what about that Align your path with the corporate vision. Develop or refine a
anticipated promotion? future IT organizational strategy that will support the corporate vision
and merger synergy targets.
If you aren’t prepared to act fast to address their concerns, you risk
losing key employees — just when you need them most. Here are five Consider all possibilities. Examine both organizations to determine
critical steps you should consider to help retain and build a strong IT which offers the most efficient IT solutions on a case-by-case basis. Also
team to get the job done. consider outsourcing opportunities.
Develop a back-up plan. Avoid hinging large parts of your strategy on
retaining particular people. Think through a succession plan in case a
1. Start with a baseline key employee decides to leave or if individuals decide they don’t want to
change their location, role, responsibility, etc.
It is difficult to pull together an effective plan unless you know your
starting point. Begin by compiling and comparing baseline information Look down the road. Think about scalability and future people needs.
for both organizations. Gather employee information, including If your IT plans call for future growth, you may have an ideal source
headcounts, organizational charts, span of control, and reporting of candidates to fill those new roles. Think about accelerating your IT
hierarchies. You’ll also need compensation information, such as salaries, growth plans to take advantage of your new resource pool rather than
benefits, incentive plans, 401(k) matching, and stock plans. letting people go.

The acquired company will also bring new and different infrastructure, 3. Create a short-term roadmap
technologies, operating systems and applications, geographic locations, Now that you have a broad-brush vision for IT, it’s time to create a
products, and services that will need IT support. Compile and compare roadmap to achieve your Day One goals and build your IT organization
organization information that will impact the IT skills, knowledge, and for the future. You’ll need to share your plans with the people who will
staffing required to operate your business on Day One and beyond. help fulfill your goals. Let them have a say in developing the tactics for
Keys to this step getting the job done. Also establish an incentive strategy, which may
include financial and nonfinancial rewards, to make sure you have the
Grow your friendship with Human Resources (HR). You’ll need people you need to achieve results.
their guidance and support from the start on your due diligence. HR can
provide the support you’ll need to develop and implement employee Keys to this step for reaching Day One
retention and release strategies, plan the new compensation strategy, Select an effective integration team. You’ll need an integration team with
formulate offer packages and letters to employees, and create and complete knowledge of both companies’ systems and processes to meet Day
execute communication and training plans. One targets. Select employees from both sides of the deal based on their skills
Get a head start. As much as possible, document employee and and knowledge so you’ll have a well-rounded team. Don’t underestimate the
organization baselines during the due diligence process. Determine need for the knowledge held by your newly acquired people.
which positions and people are most critical or most difficult to replace. Tell them what you know…and what you don’t know yet. You’ll
Locate potential sticking points, such as significant differences in job need to start communications as soon as the announcement is made,
requirements, salary ranges, benefit packages, and corporate culture. probably well before you have all the answers yourself. It’s okay to
With the right upfront planning, the final merger agreement can be communicate that all the decisions haven’t been made, but assure
structured to share the responsibility of achieving integration and employees that you’ll let them know as soon as you know. Don’t let the
synergy goals with the acquired company and their management team. rumor mill fill in the gaps for you.

47
Wired for winning?

Make them an offer they can’t refuse. You’ll need all hands on deck Play fair. Work with HR so that all offer packages are fair and
to achieve Day One targets. Right out of the gates, you may need to distributed simultaneously. Make sure you have a plan in place to assist
offer incentives to encourage critical IT employees to stay while you firm the management team in delivering consistent messages about the
up the long-range plans. offers. Also work with HR to provide a clear process for employees to
gain offer clarification and/or adjustments.
Look beyond financial incentives. Because good IT folks are in high
demand, your incentive strategy will probably include monetary rewards,
especially for short-term employees you’ll need during the transition.
Beyond the transition phase, nonfinancial rewards, such as stability,
leadership opportunities, broader responsibilities, and the opportunity
to work on new or different technologies are important reasons why IT
employees stay committed to the new organization. Often a balanced
strategy of financial and nonfinancial rewards works most effectively
from the employee and company perspectives.

Real-life results in the high-tech industry • Remained flexible to account for changing deadlines.
Regulatory delays caused the closing date to be postponed
The executive management of a global high-tech company wanted several times, resulting in retention renegotiations, especially
to accelerate growth and establish greater market penetration. In late with critical employees
summer, it announced its intention to acquire an out-of-state company
with comparable product lines, revenue, and employee demographics. • Designed plans for retaining long-term employees. The CIO worked
with the senior IT staff to identify IT employees who would have a
Meeting the synergy targets would require a substantial headcount long-term role with the combined company. With support from HR,
reduction after the integration work was complete. But in the interim, they created retention plans that supported the employees’ career
an all-out effort from IT employees from both organizations would be goals and the company’s synergy targets. These plans were ready
required to accomplish the integration tasks. These are the steps this for Day One rollout
company’s management followed.
Build bridges and commitment. During the integration process, the
Start with a baseline. The CIO looked to HR for support in CIO, with support from HR:
compiling employee salary and benefit information for both • Incorporated key members of the acquired company’s management
companies. Using this information, management: into the transition plans and the new organization structure. They
were instrumental in helping their coworkers assimilate into the
• Determined impacts to merger synergy targets and total
new organization and overcome cultural and other hurdles
compensation and benefits programs
• Made sure that employee offers (both short and long term) were
• Created strategies for short-term financial and nonfinancial
fair, and two-way communication lines were open for employees to
incentive plans and long-term job offers
get timely, accurate answers to their questions
• Identified key employees who were critical to operations
• Provided outplacement support for employees who were leaving
• Evaluated cultural fit between the two companies the company

Decide on the long-term IT direction. A future IT organizational Focus on meeting goals and celebrate along the way. Progress
strategy was created that supported the corporate vision and synergy toward milestones was shared with employees on a regular basis.
targets. As a result, management: Management:
• Accelerated plans for a backup data center to improve scalability; • Held Day One celebration events at all company sites to build
the target company’s out-of-state location was a good strategic fit, camaraderie. Executive road shows introduced the newly combined
plus fewer employees would need to be relocated management team to employees
• Analyzed operations for both operations to see which offered • Recognized attainment of major milestones with celebration events
the most efficient IT solutions and considered outsourcing and special recognition for those who helped make it happen.
opportunities; with all the options on the table, an adopt-and-go These events were used to set everyone’s sights on meeting the
solution of merging the target company’s operations into the parent next milestone
was confirmed as the most efficient solution
• Expanded the CIO’s span of control by moving people from both Results
organizations into a direct reporting relationship • Day One was issue-free with no disruption of operations or
customers
Create a short-term roadmap. The IT integration team created • Over the following months, the IT systems of the two companies
a detailed roadmap to achieve Day One goals and build the IT were combined, with no redundancy of infrastructure, services,
organization for the future. While systems integration plans were or management
being developed and executed, the IT and HR management:
• Nine months following Day One, third-quarter results showed that
• Designed and executed incentive plans for retaining transition most merger synergies had been achieved and overall cost savings
employees through Day One. Managers were trained to address were ahead of plan
employee concerns and support the offer process

48
M&A IT — Integration

Keys to this step for Post-Day One Keys to this step


Recruit your dream team. Identify critical employees early in the Establish milestones. Set and communicate key measures and
process and make them long-term offers customized to their career milestones for organization and individual performance. Measure results
goals and interests. Provide a clear picture of the future and the role along the way.
they will play. Look for people with potential to deliver results regardless
Report regularly. Report progress toward milestones, and share reports
of their current job and move them into positions that will give them
with all employees on a regular basis. Establish a reward strategy that
room to grow.
ties individual financial and nonfinancial incentives to organizational
Remember the people side of headcounts. IT reorganizations often performance.
involve major disruptions to peoples’ lives. Allow time in your plan for
Celebrate achievements. When the organization or division reaches a
people to make life-changing decisions and plans. People will be upset
major milestone, hold a celebration event. Recognize those who helped
if they lose their place in line for an expected promotion. And they may
make it happen. And use this opportunity to set everyone’s sight on
have mixed feelings about staying on while friends and coworkers leave.
meeting the next milestone.
Provide support for released employees. Retained employees will
Common-sense actions; uncommon results
be watching how released employees are treated. Some will view that
treatment as a window into their new company’s culture and long-term While these action steps may seem like common sense, in the rush to meet
viability as their employer. Providing released employees with transition integration targets, it’s easy to forget the basics — like having the right
support will speak volumes about the culture of the new organization. people available to get the job done. When you take these critical steps
to retain IT people through the integration process, you’ll be in a stronger
4. Build bridges and commitment
position to help capture the value of your company’s merger deal.
Trust overcomes many hurdles when merging organizations. Identify
where cultures clash, and identify ways to bring employees together
with common goals.
Keys to this step
Team up. Share responsibility for accomplishing goals with people from
both organizations. Incorporate key members of the acquired company’s
management into the transition plan and the new organization
structure. They can be instrumental in helping their coworkers assimilate
into the new organization and overcome cultural and other hurdles.
Manage the rumor mill. If you don’t communicate, someone else will.
Keep communication doors open and swinging both ways. Plan team-
building events and “get to know the new management” meetings to
build rapport and trust.
Provide support. Bring in outside help or outsource tasks to provide
additional support as needed. This support will help balance the
workload to avoid IT employee burnout.
5. Focus on meeting goals and celebrate along the way
The job isn’t done until the transformation is complete, which could
take months or even years. Be sure to celebrate quick wins and
achievement of key milestones and provide encouragement for meeting
the goals ahead.

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Wired for winning?

Building an IT integration roadmap


Key questions every CIO should ask

By Janice Roehl, Pavel Krumkachev, and Shalva Nolen

Introduction The integration roadmap has several key objectives:


Information Technology (IT) often plays a critical role in achieving 1. Attain merger synergies within the desired time frame. The sooner
potential synergies in a merger or acquisition. IT can also impact synergies can be achieved, usually the more aggregate savings can
the overall effectiveness of the integration. For most organizations, be realized.
many of their key functions (e.g., finance, Human Resources (HR), 2. Facilitate an issue-free Day One (the day on which merging
and operations) are highly reliant on IT. During an integration effort, companies become legally combined). This is critical for
applications and systems supporting these functions need to be uninterrupted business operation and preserving revenue.
integrated or merged requiring significant IT participation. The sooner IT
3. Keep the impact on key stakeholders (including customers, suppliers,
is involved and the more comprehensive the planning effort, the more
and employees) low. This is designed to protect current customers
likely these systems are to be pulled together smoothly and with the
and revenue base and help retain key employees.
least disruption to the organization.
The roadmap should provide a “big picture” overview of what to
Often, corporate management pays far too little attention to the
expect at each stage of the integration. The roadmap should also help
IT aspects of the integration. The most senior-level executives in an
to identify critical events, dependencies, and questions to ask during
organization may not be familiar with how IT enables the work of
the due diligence phase to increase the likelihood that IT will achieve
other functions/divisions. They certainly receive reports about the
the expected merger synergies and help enable an issue-free Day One
organization’s financials, but they may not always be aware of the
for key stakeholders. A well-planned roadmap can even help accelerate
extent IT systems are used to pull together all of the supporting data for
synergy capture.
the reports.
The finished IT integration roadmap can become a reusable tool that can
IT integrations are complex, resource-intensive initiatives that need to be
be improved with each future transaction. Many items in the integration
closely aligned with the overall business integration effort. Combining
roadmap will likely be similar from transaction to transaction, such as
two departments requires more than moving staff and streamlining
the customary project management methods or the nonnegotiables
processes. The IT function needs to determine whether the existing
(e.g., using the new buyer’s Enterprise Resource Planning (ERP) system)
systems supporting each department can compatibly run in parallel,
based on the company’s guiding principles rather than a specific
or must integrate the different systems into one. This type of activity
transaction. Building from an existing roadmap should leave the
requires significant time and staff and must be done in addition to the
company some additional time to focus on the unique aspects of a
day-to-day activities of the IT function required to keep the business
particular transaction.
running effectively. As a result, this combination of normal IT activity
combined with effectively executing integration-related tasks can put
significant levels of stress on an IT function.
Involve IT during due diligence
Planning an IT integration
Example from the field
The old adage “those who fail to plan, plan to fail” is particularly A hardware reseller company was evaluating the purchase of a
applicable to IT integrations. A well-developed plan will significantly software distribution business unit from a larger competitor. By
increase the likelihood of an effective integration within the desired time involving the CIOs of both companies during the due diligence
frame. Development of an IT integration roadmap is a critical initiative phase, the transaction team uncovered unanticipated IT-related
for overall integration effectiveness. complexities of the merger and its significant cost. A plan was
An IT integration roadmap should outline a solid and structured plan for developed to clone all required systems and the supporting IT
the initiative. A well-defined roadmap includes specific and clear goals, a function of the seller’s company and transition them to the buyer
detailed approach or methodology for achieving these goals, and lists all within 30 days of transaction close. Early planning and CIO
resources and time required to reach these goals. involvement played a large role in the effectiveness of this merger
and in accounting for all merger-related costs up front.
Where possible, the roadmap should be developed well before
integration begins. Ideally, companies should work on the roadmap as
part of the pre-merger financial and operational due diligence so that
they are asking the right questions from the start.

50
M&A IT — Integration

Asking the right questions


IT integrations are usually complex undertakings. They often include Plan for the unexpected
many moving pieces and multiple interdependencies. Development of a Example from the field
roadmap is an effective way to determine what dependencies exist and A technology manufacturing company developed an IT integration
to evaluate how to most effectively move the integration forward and roadmap for an upcoming acquisition. As the team was getting
maintain momentum. To develop a roadmap with the “right answers,” ready to kick off the largest phase of the plan ERP system
the company needs to ask the “right questions,” consolidation, they discovered the buyer’s ERP application needed an
An actionable roadmap is usually organized into the following specific extensive upgrade in order to be integrated with the target’s ERP.
areas: Organization, Guiding Principles, Integration Approach, and Although this seemed like a deal breaker initially, the flexible plan,
Integration Plan. While each of these components is broad and applies early discovery, and some creative thinking helped the integration
to nearly any integration, the basic questions in each area should be team overcome this hurdle and execute the plan within the
tailored and expanded for the specific transaction at hand. established time frames.
Some basic questions apply to each area. The answers to these
questions will not be simply yes or no, but rather should lead to
Guiding principles
additional questions that are tailored to the specific situation. The goal is
to address the full set of salient topics and issues. The guiding principles component of the roadmap should help set the
direction and expectations for the integration. The component should
also provide a consistent approach for IT leadership in reinforcing
Don’t underestimate pre-close IT activities
integration priorities. Address the following questions when developing
Example from the field the guiding principles:
M&A IT is not business as usual — this statement is particularly • What are the guiding principles (e.g., speed over elegance) for the
true prior to the deal close. During this period, numerous legal and overall integration?
regulatory restrictions make sharing design documentation, data,
and key subject matter information extremely difficult. • What key program requirements must be addressed?
• What are the nonnegotiables, particularly in regard to Day One
In our experience, any IT-related activities that need to be executed IT deliverables?
by “clean teams” and in “clean room” environments require as
much as three times more time than traditional IT implementations. • Is there an “adopt-and-go” strategy (e.g., use the acquirer’s
In addition, new hardware and network environments may need to applications)? Alternatively, will the IT systems and processes be only
be provisioned in order to establish an isolated “clean room” for the loosely integrated at first?
pre-close IT projects. • What are the IT synergy targets?
Integration approach
Organization The integration approach should help establish the overall structure of
The organization component of the roadmap addresses organizational the IT integration, including the degree of integration between the IT
design, the management of the IT integration, IT function preparedness, functions of the merging companies. A full integration combines all
communications, and change management. When developing the aspects of the IT functions, including reporting relationships, processes,
organization component, answer the following questions: and policies. A stand-alone integration leaves the main operations
and organization of the IT functions unchanged. A partial integration
• How prepared is the IT function for the integration? combines some aspects and leaves others intact, based on the specific
• What changes need to be made in the organization of the IT function transaction. Ask the following questions about the integration approach:
before the integration? • What is the integration strategy?
• Does the IT function understand the business intent of the integration? • What is the degree of IT integration for the target company?
• Does the IT leadership have the authority and accountability for • What is the vision for the future state of IT?
achieving the integration goals?
• What is the approach from an architecture and design standpoint?
• Is an IT Integration project management office (PMO) in place?
• What is the framework for project governance?
• Is a mechanism in place for quick decision-making during the integration?
• What are the risks and the mitigation plans?
• Are the necessary resources in place or will the IT function need to
hire external consultants to free up staff from existing projects? • What activities will be outsourced?
• What are the retention plans for employees critical to managing • How will the integration phases be divided? What will be expected in
the current day-to-day activities as well as those critical to the each phase?
effectiveness of integration? • What are the IT work threads? What is each thread responsible
• How will turnover be addressed? for delivering?
• How will communications be managed for both internal and • What are the common tools and processes that the integration team
external audiences? will use throughout the integration process?
• What is the mechanism for documenting issues and key decisions? • What security and regulatory issues must be addressed?
• Is a clean team required to begin IT integration activities prior to the
transaction close?
• What cultural issues need to be addressed?
• What does the future-state IT function look like?
• What knowledge transfer needs to take place?
51
Wired for winning?

Building the integration roadmap


Understand priorities and dependencies The integration roadmap is intended to provide an executable plan for the
Example from the field overall integration. To create the roadmap, think about how the answers
A financial services company was planning a multiphase IT to the key planning questions affect the integration time frames and work
integration that included more than 60 business-initiated IT within them. Some of the questions are fairly straightforward, whereas
projects. Building an IT integration roadmap helped prioritize others require more careful consideration. Be sure to thoroughly answer
the projects to determine which ones were truly required for each question and consider how that answer affects the integration
integration and which were just nice to have. The roadmap also before moving forward.
helped to identify critical dependencies that might have otherwise The final roadmap should outline how to proceed through the
been missed, which would have extended the Transition Services integration. It should provide the specific answers, related information,
Agreements (TSAs) by over a year at a significant cost. and timelines for the organization, guiding principles, integration
approach, and integration plan components. It should also address
people and technology issues that may arise. Building the roadmap
Integration plan should help catch dependencies that might have otherwise been missed.
The integration plan should describe how the future state of the IT In our experience, addressing the questions associated with each area
function will be achieved and include an assessment of the current state, discussed, while building the IT integration roadmap, will help the IT
a gap analysis, and a description of the initiatives required to close the organization effectively navigate the entire integration process. We
gap. The integration plan should also include a timeline, major milestones, believe overall merger integration effectiveness requires a structured
and key deliverables. Ask the following questions when developing the approach and well-defined plan. This thinking applies to the
integration plan: Information Technology dimension, as well. An effective IT integration
• What are the risks and the mitigation plans? roadmap is a critical enabler of an effective merger integration and
should be viewed by the IT organization as a reusable tool to be
• What are the critical milestones? How will these be monitored? improved with every transaction.
• What are the major deliverables?
• What metrics will be used to measure performance against plan?
When will these be implemented?
• What high-level initiatives will help achieve synergy capture and the
vision for the future state of IT?

52
M&A IT — Integration

Managing your data tightly through


an M&A event
By Rene Hoffman and Sheri Fedokovitz

Data is the lifeblood of virtually all organizations. While it may be Understand the data
difficult to place a monetary value on an organization’s data, we
One common pre-M&A activity we have seen is an assessment of the IT
believe it is one of the most valued assets associated with a Merger and
infrastructure of the organization that is being acquired. This assessment
Acquisition (M&A) event. Yet we have found that the role data plays in
would be beneficial for a variety of reasons, including assisting in the
an M&A transaction is often understated, and its potential to impact
estimation of potential cost savings that could result from establishing
ultimately the achievement of anticipated M&A synergies is frequently
an integrated IT environment.
misunderstood. Data must be given appropriate attention across the full
range of M&A planning and integration activities to better position the Though such assessments usually include a variety of data-related
organizations involved to realize its potential value. facts, e.g. the number of databases, data warehouses, and other data
components, they often do not provide the insight necessary to properly
The data challenge
plan the data integration. Figure 1 illustrates key steps that should be
Imagine acquiring a company under the condition that its data will not considered in an assessment of IT infrastructure:
be available until well into post-integration activities or that it could only
Figure 1: Key data integration steps
be made available in a limited manner. Issues like these can reduce, or
even eliminate, many of the potential synergies anticipated as benefits
of the transaction.
data
ca l As
Though these scenarios may seem unrealistic, all too often techniques riti se
ec ss
cri t
for properly integrating data are misunderstood and the importance th ti
d

he l d
n
of the data is understated. And, although it’s common to begin data

ca
qu ata
ta
ers

ali
integration planning during pre-M&A activities, too often the pre-M&A
Und

ty o
activities do not fully address the risks associated with data integration

f
activities. This creates a merged company that is not ready to go Day
Steps to effective
One post-merger.
data integration
Alternatively, properly planned and controlled data integration efforts can
App d me

result in data that is efficiently integrated and readily available as needed by


an
ly

the new company to support its operations and reporting requirements.

ls
th t h o

ro
e

g
nt
ri

We have seen many articles that describe various data integration do ht t co


strategies to integrate data associated with an M&A event. However, log ool ain
y int
Ma
these articles typically focus on how to integrate data from a technical
Source: Deloitte & Touche LLP
standpoint, and often fail to describe ways to plan for and manage the
impact and risks associated with data integration. This paper describes
the key risks and challenges associated with data integration from a Understand the critical data
data quality and control perspective and ways companies can mitigate It’s usually not possible to fully analyze all the data of the company
these risks by understanding and addressing the risks in a proactive, being acquired. However, an effort to understand the company’s most
effective, and efficient manner. Understanding these concepts and critical data will provide benefits in the long run.
anticipating their impact should better position organizations to achieve
both Day One and desired long-term objectives. For example, one common anticipated benefit of a merger transaction
is the leverage associated with an integrated customer base. Depending
While the intent of this paper is to focus on the data quality and control on the sophistication and maturity of the acquired company’s data
aspect of data integration, it is just one of the many key aspects that structures, its customer data may not easily integrate into the acquiring
companies should be considering when planning data integration, such organization’s systems, resulting in delays or costly work-around
as security and privacy risks, and strategies for commingling applications procedures to integrate the data.
within a unified Information Technology (IT) landscape.
If the acquired company has a custom-developed customer database,
and the acquiring company has a fully integrated customer relationship
management (CRM) system, integrating the data could prove difficult
and result in significant delays in moving to a smooth, joint operation.

53
Wired for winning?

Although data challenges may not be completely avoidable, they can Interim solutions like this are often developed in the interest of expediency
be anticipated and planned for. During pre-M&A and early post-Day and typically at the expense of establishing an appropriate control
One activities, a range of assessment activities can be undertaken to structure. In today’s heightened, heavily legislated control environment,
understand the potential ease (or difficulty) of data integration activities. lapses in control structures can have significant negative corporate impact.
To avoid such potential lapses in control, newly merged companies should
The particular assessment methodology employed is less important
strongly consider the following control mechanisms:
than gaining an understanding of the data itself and developing a data
integration work plan that aligns with key merger milestones. Data conversion controls. Any control structure associated with data
conversion and integration should address all aspects of the process,
Assess the quality of critical data
from data extraction through conversion and integration.
When two companies integrate, the compatibility of their cultures is often
Spreadsheet controls and limits. The use of spreadsheets in lieu
a concern. The same is often the case with regard to data compatibility.
of system-generated reports presents unique control challenges. The
More than likely, the two companies involved in an M&A transaction will intention for the newly-merged company to use spreadsheets for interim
have different approaches to data governance. As an example, suppose operational and financial reporting should be explicitly assessed and
the acquiring company has a strong data governance program that determined in advance. Further, tighter controls should be in place, and
closely controls the quality and integrity of its data. Should the acquired spreadsheets should be used for a limited time only.
company not have a similar level of discipline, the potential for data
Apply the right tools and methodology
compatibility issues is not insignificant.
The potential for data integration effectiveness can also be enhanced by
To proactively manage the impact of potential pre-M&A and early post-
applying appropriate tools and methodologies. While many companies
M&A governance issues, potential gaps in data governance styles — and
may have adequate data conversion processes and procedures, they may
resulting data quality and integrity issues — should be closely assessed.
still lack the right tools and methodologies to perform a complex data
This assessment should include an examination of the relative quality of
integration effort.
key data domains (e.g., vendor, customer, products/materials).
Within companies that don’t have adequate data integration tools and
An effective data quality assessment should include the following
methodologies, IT personnel are often asked to adapt methodologies
components:
normally associated with other IT tasks for the data integration process.
Risk assessment of key data domains. Identify any risks associated with While such approaches may suffice, they may also lead to potential
critical data domains. For example, if consumer data is involved, the quality control lapses and data integration inefficiencies.
of the “Do not call flag” relationship may be of particular importance.
To fully address this issue, companies should develop a specific data
Data profiling and business rule analysis. A well-planned integration strategy and consider acquiring a data integration software
methodology for evaluating the quality of data should be employed. The suite as they develop their overall M&A strategy. The benefit of this
methodology should support evaluation of whether the quality of the approach is the establishment of a more effective controls system and,
data is sufficient to meet business needs. ultimately, greater data integration efficiency.

Data remediation strategy. Data remediation needs to extend Bringing it together


beyond mere data cleansing. A data remediation strategy needs to
While the points outlined in this paper should contribute to an
be a comprehensive plan for effectively identifying and addressing
effective data migration, these points should be integrated into a more
any identified data gaps. Remediation activities will typically involve a
holistic technology integration plan that includes all aspects of the
combination of automated data cleansing techniques, in conjunction
technology integration.
with manual efforts.
In summary
The key to an effective data quality assessment is to start it as soon as
practicably possible so that the post-M&A project plan can appropriately Often, the data challenges associated with an M&A transaction are
address closing any identified gaps. addressed as an afterthought, frequently resulting in missed Day One
and longer-term objectives for the merger. The steps to data integration
Maintain controls
effectiveness outlined in this paper are intended to help companies deal
The demands and rigor of an M&A event can seriously tax even the with these data challenges.
strongest IT departments. During the first 90 days post-merger, the
The first two steps address the “wild card” role that data may play
merged company will expect to be able to rely on integrated data, but
in an M&A plan. The last two steps address two areas that are often
there may be a temptation to bypass established controls relating to
neglected (adequate controls and tools and methodology), which can
data to meet merger milestones (e.g., integrated financial reporting,
potentially result in control issues associated with data integration.
integrated customer base).
When addressed in concert, these steps should provide a solid
For example, assume that the newly merged IT staff plans to develop an foundation that can support companies in their efforts to meet their Day
integrated financial data warehouse within the first six months following One objectives for the merger or acquisition, as well as their efforts to
the merger. For the first quarterly report, IT indicates that it will provide achieve longer-term synergies.
the relevant financial information in spreadsheets that will first require
manual consolidation by Finance.

54
M&A IT — Integration

Cooking lessons
A CIO’s guide to leading a first merger integration project

By Anna Lea Doyle

Secrets to effectiveness
Recipe for serving up an effective IT integration:
Recruit your sous-chefs: No one runs an effective integration project
• Get into the kitchen early: Be actively involved in due diligence alone, so pick two strong integration leads ASAP. Logical choices
• Make your grocery list and check it twice: Craft a well- are your most senior application and infrastructure leads. When the
agreement is signed, integration planning and execution will be their
considered integration plan
full-time focus, so they will have to be prepared to delegate their daily
• Fire-up the burners: Move rapidly toward an issue-free responsibilities to their staffs for the duration of the effort. By being
Day One involved from due diligence onward, they should have the knowledge
• Make the most of your meal: Take advantage of all potential they will need to really “cook” when the integration heats up.
merger synergies Check the ingredients you’ll be using. During due diligence, the
• Write your recipe notes and file them away: Learn from deal team usually sends a data request to the target company. This is
a golden opportunity to ask for details about the target company’s IT
your experience
operations that you’ll need to develop an integration plan. Request
information about the target company’s IT operations so that you can
fully understand the organization’s people, locations, and assets. Pay
As CIO, you’ve managed more than your share of projects. But now close attention to the following items that will very likely impact your
you’ve just received word that your company is actively planning for an ultimate integration approach and target synergies:
acquisition. Just another project, right? Wrong!
• Large contracts, especially any that are coming up for renewal
Managing the integration of another company’s applications and within 90 days
infrastructure with your own carries with it all the challenges of classic • Substantial IT initiatives that are under way or about to launch
IT projects — managing disruption and risk so business as usual is not
disturbed; implementing quickly so you can enjoy the benefits ASAP; and • Operating budget and capital expenditures for the current and
keeping a close eye on the budget. But you also have the added pressure prior year
of achieving anticipated synergies with “nonnegotiable” deadlines. Sketch-out a preliminary menu. With this information in hand, you
To put it bluntly, when you’re responsible for the IT integration should begin to lay out a comprehensive, high-level future-state IT
component of an M&A deal, you’re operating on a whole new level. It’s vision that aligns with executive management’s overall vision for the
like the difference between preparing a sandwich as an afternoon snack combined organization. You should also identify the key elements
and cooking Thanksgiving dinner for 12! If you’ve never led an IT team of your tactical work plan for integrating the two companies and a
through an M&A integration, here are a few things you must absolutely preliminary estimate of how long it will take. You won’t know all the
consider before you start cooking. details, of course, but you’ll develop a pretty good idea. You may
uncover immediate cost savings that will jump-start the synergies, and/
Get into the kitchen early: Be actively involved in due diligence or possible contract conflicts that will have to be resolved soon after
Day One. Regardless of what you uncover, it’s better to know these
If you wait until the day before Thanksgiving to plan your dinner, you’ll
things sooner rather than later!
find all the turkeys have been taken. Browse your cookbooks early in
November and call mom for her stuffing recipe. Find out if your in-laws Make your grocery list and check it twice: Craft a well-considered
are vegans. Order the 20-pound turkey. But first, make sure your oven integration plan
will hold a 20-pound turkey.
About a week before Thanksgiving, it’s time to really get down to
Likewise, don’t wait until the deal papers are signed before you start business. Decide exactly what you’ll be serving — turkey with cornbread
lining up the information and people you’ll need to map out an stuffing, green beans, mashed potatoes, pumpkin pie — and tofu loaf
integration strategy and plan. When you hear an M&A deal is “in for cousin Ellie. Break down the ingredients into a shopping list by store.
the works,” be proactive and link up with the deal team (or business Write out a timeline — decide which dishes can be prepared in advance
development) to get your own IT investigation going that parallels the and which must be cooked at the last minute.
financial due diligence. Most likely, you’ll be part of a larger deal team,
with representatives from each area of the company. Make the most of The same is true for your top-down integration plan. As the deal
your position to learn all you can quickly. team negotiates the fine points, leverage this relatively quiet time by
fleshing out your outline for the future IT operations that aligns with
Why? The more you know early on, the sooner you can jump-start your management’s vision for the combined company. Then create a detailed
integration planning, including your budget and synergy estimates. approach for implementing your plan.

55
Wired for winning?

Once the merger is announced, you’ll be leading the mad dash to Fire-up the burners: Move rapidly toward an issue-free Day One
integrate the infrastructure of the two companies in advance of Day
The day before Thanksgiving, you’ll need to roll into high gear. Thaw the
One. The date for Day One is set by the deal team, but as CIO, you’ll
turkey. Wash and trim the beans. Set the table. Do everything you can
need to determine how long it will take to fully integrate IT — typically
in advance. Then Thanksgiving morning, cook the turkey and handle
12 or 18 months after Day One, or perhaps longer. The actual timeline
any last-minute items. If all goes according to plan, you’ll have time to
will depend on many variables, including how much your team
straighten the kitchen and tidy up before the doorbell rings!
can reasonably accomplish before Day One, the complexity of the
integration, and the willingness of the target company to share relevant Day One is likely to be even more hectic. Once the merger agreement
IT-related information before the deal closes. is signed, your integration team moves into overdrive to make sure
that Day One is issue-free. You should have an IT project management
Be prepared to present your macro-level plan to executive management.
office (PMO) that works in conjunction with the overall integration
Boil your thoughts down to three concise points:
PMO (sometimes called an IMO). Your integration team should focus on
• Outline of what you’ll be integrating (preliminary integration strategy) integrating the infrastructure right out of the gate (e.g., e-mail, active
• Amount of time you’ll need to integrate the IT operations directory, voice integration). They should streamline all contracts, looking
(high-level timeline) for “quick-win” synergy savings.
• Pro forma estimate of the level of tangible business value you expect This isn’t the time to think of “nice to do” add-ons — all nonessential
to achieve (synergy model) projects should be put on hold until the integration is complete. You’ll
need to focus your team on completing critical tasks before Day One, as
Why? A clear integration approach and plan for the future IT operations
well as contingency plans to maintain business continuity.
of the combined company will allow the IT integration team to
quickly mobilize and execute. This should also allow you to clarify and Why? By anticipating possible Day One issues, you can focus your
communicate integration expectations with your business counterparts integration efforts on making sure the basics are covered, and you’ll be
who are highly dependent on IT solutions for their functional integration well-prepared if something goes awry.
and synergy capture.
Secrets to effectiveness
Secrets to effectiveness
Call Aunt Betty to confirm she’s bringing the pies: You cannot
Set your integration strategy: With a project as complex as post-merger assume that everyone will be on track for meeting their Day One
IT integration, it’s easy to lose sight of your ultimate goals — an issue-free responsibilities. At least a month in advance, the overall integration PMO
Day One and achievement of synergy targets. To keep your team on track, should lead you through a readiness certification, which is a detailed
create a clear depiction of the end-state vision, guiding principles, and high- list of specific questions that helps people throughout the organization
level scope (Day One and end-state) that will used to support and guide all decide if they are really ready for Day One. As part of the certification
key decisions. Sample guiding principles might include: process, management is required to sign off on these items:
• Consider your company’s existing solutions first, the target company’s • Are all the Day One preparation tasks complete?
solutions second, and the new solutions (developed or purchased) as a • If tasks are not complete, what is your plan for getting them on track?
final resort. This is often referred to as “adopt and go”
• What is the contingency plan if the original plan fails? (This is critical
• Focus on the must-haves for Day One (e.g., e-mail, secure file transfer, for areas that are high risk or at a high probability of failure.)
management reporting)
• Set clear goals and target dates (e.g., IT integration will be complete Post the turkey hotline number on the fridge: Day One changes
within 12 to 18 months) affect nearly everyone in the organization, so be proactive by setting up
a Day One Command Center to provide temporary support specifically
Develop your game plan: Full integration of all elements of the for Day One. The Command Center should link with your internal Help
merging IT operations will probably not be feasible — or desirable. Desk to provide support for problems related to Day One, typically
Determine, on a case-by-case basis, the appropriate level of integration through a hotline phone number. The Day One Command Center is
for each key IT component. Then figure out what you’ll complete by Day internally focused, so your customers, suppliers, and other external
One and what will be completed afterward. stakeholders should continue to use their normal support channels.
Don’t rule out the option of “ordering-out”: Consider all viable Communicate, communicate, communicate: All employees will feel
solutions to achieve efficiencies. In most cases, you’ll likely integrate the the impact of changes in the IT systems, so communicate the changes
target’s operation into your own. But before you make final decisions, they can expect in advance. Typically, the company-wide communications
look at each area on a case-by-case basis. You may find that they have a team publishes a “Day One survival guide” or “welcome package” for
better vendor contract or more efficient help desk operation. all employees. An important part of this is package is a list of what is
changing and what will remain the same. You’ll also include information
on how to contact the people who will help them with Day One issues.

56
M&A IT — Integration

Figure 1: Examples of three integration levels

Low integration Moderate integration Full integration

Exchange global address list (GAL) Common system and hosting


Messaging and e-mail Encrypted (entrust) internet e-mail
Synching of calendars Full instant messaging (IM)

Direction influenced by corporate


Sharing of effective practices and Utilization of x1111 and select 2nd
Support management IT service center and integrated
program oversight and 3rd level support
product support

Ownership and guidance


Sharing of effective practices and Direction influenced by corporate
Data integrity from corporate
program oversight IT data Center of Excellence
IT data Center of Excellence
Source: Deloitte Consulting LLP

Make the most of your meal: Take advantage of all potential Write your recipe notes and file them away: Learn from
merger synergies your experiences
Thanksgiving dinner was a success. The turkey was moist. There was You’ve learned a lot from your first Thanksgiving dinner. Next year, you’ll
enough pie for seconds. And no one noticed that the mashed potatoes order a slightly smaller turkey and save a few bucks. And you make a
came from a box. Once the dishes are cleared, take a well-deserved rest. note on your recipe card to cook the beans a little longer next time.
Tomorrow, you’ll focus on making the most of those yummy leftovers.
And finally, your merger integration work is complete. If all has gone
So your team survived Day One. Time to relax? Hardly. The real work is according to plan, your integration team has achieved the IT end-
just beginning. You should already have a plan under way to complete the state vision and captured your share of the promised synergies. Now
integration. Now it’s time to start fulfilling on the synergy promises made that you’ve completed your first merger, take time to document what
at the outset and thinking of ways you can help exceed those promises. worked well and what you’d do differently next time. You can be sure
that Thanksgiving will come around again — and most likely, so will
Why? You should accept the inevitable: Senior management will expect
your next merger.
IT to make a large contribution to the cost synergies. You’ll be ahead
of the game if your team identifies additional opportunities in case of
leakage or raised synergy expectations.
Secrets to effectiveness
Turkey lasagna, anyone? Soon after Day One, bring together your
integration leads from both sides for a synergy brainstorming session.
Your goal is to create a bottom-up plan for meeting the IT synergy goals.
By this point you should know exactly what you’re dealing with and what
you need to accomplish. Start with the top-down plan that you developed
from the due diligence, flesh it out and challenge your assumptions. If it
appears you’ll fall short on meeting synergy targets, brainstorm how you’ll
make up the difference. Or, if you’re lucky, maybe the team will find an
unexpected nugget that will help you exceed expectations.
Decide who gets the leftover pie: Be prepared to link synergy savings to
your IT operational budget. So if the team cancels an IT initiative that called
for 100 new laptops, who should claim the savings? IT, if the cost of the
laptops was in the IT operating budget. But if the laptops were budgeted by
sales and marketing, they are entitled to the cost savings. The lesson? Make
sure you can trace projected synergy savings back to your operating budget.
Track of your progress: Implement a synergy reporting system, tied to
the IT operational budget, so you can track progress toward your goals.
Variance from the plan should be easy to identify so that corrective
actions can be monitored. Expect the company-wide PMO to request
monthly synergy progress reporting.

57
Wired for winning?

Give IT a fighting chance


An M&A information technology integration framework

By James Mark Andrews, Colleen Chan, and Kenneth Wu

The big question Figure 1: An M&A and IT integration framework


Your CEO has determined that your company’s growth strategy over the
next 10 years will be largely driven by future acquisitions. Your CFO has
figured out how to finance these acquisitions. The consultants hired by M&A business direction
IT
IT architecture
your CEO have done the requisite market research and due diligence • Strategic M&A goals
architecture
• Future state application
and have developed a list of potential acquisition targets. and objectives M&A
business
architecture
• Business capability IT
direction • Information needs and data
And now, the $64,000 question: Is your Information Technology (IT) requirements funding and IT architecture
governance organization
organization ready? Moreover, will a series of acquisitions topple your • Business imperatives for IT • Enterprise infrastructure
M&A IT execution
current IT infrastructure? Will you be able to deliver the IT synergies that • Enterprise architecture standards

your shareholders are looking for? Have you ever considered what it IT funding and governance IT organization
would take to give your IT organization a fighting chance to smoothly
integrate these new business entities? We believe getting IT ready to • Strategic IT planning and
investment (portfolio
M&A IT execution • IT organization structure
• Capacity management
support business growth by acquisition is clearly one of today’s critical management)
and strategic sourcing
• Integration program
business challenges. • IT spend analysis management office • Skills and competencies
• Target portfolio mix • Transaction governance • Facilities and work
IT readiness is dependent on many factors; there is no one element that • IT governance, • Synergy capture and validation environment
is common to all acquisition scenarios. IT organizational profiles can vary program structure,
• Communication and
and management
greatly, from a loosely knit conglomerate of dissimilar entities supporting change management

heterogeneous platforms to a tightly focused group intent on unifying


disparate IT applications and infrastructure and aligning them with an over- Source: Deloitte Consulting LLP

arching strategic IT-enabled business vision. It is tempting to assume that a


tightly integrated platform is preferable, but that is not always the case. The framework does not present a one-size-fits-all solution to the
challenge of M&A IT integration. Instead, it provides a set of guiding
Companies that have grown primarily organically tend to have a more
principles to increase the potential for an effective integration. These
unified and tightly integrated IT architecture, which can often result in
principles encompass the development of a “plug and play”, flexible,
increased difficulties with respect to acquisition integration. In contrast,
and open IT function to effectively establish an IT ecosystem that
companies who have “modularized” their IT environment often as
allows acquiring companies to easily “plug” in new IT components
a result of their acquisition experience, and in anticipation of future
or environments from acquired companies and operate (i.e., “play”)
acquisitions, usually have an easier go of it. Additionally, modularized
them to support the newly combined businesses. The “plug and play”
environments typically have superior associated tools and techniques
framework is comprised of the following five components:
that can accelerate capture of integration benefits.
• M&A business direction: A key driver in defining business objectives
An M&A and IT integration framework and requirements of the merger and/or acquisition, which, in turn,
Before examining different strategies that CIOs can adopt to prepare defines every other aspect of the IT integration
their organizations to effectively execute the integration of an • IT architecture: A “plug and play” architecture defined by open
acquisition (or a divestiture of a division), it’s important to note that and flexible enterprise application and technology infrastructure for
there is no one-size-fits-all solution. Acquisitions are so varied and effective M&A IT integration
dynamic, and the nature of each transaction so potentially unique, that
• IT funding and governance: Forward-thinking IT spending and
it is virtually impossible to establish an IT environment that is perfectly
governance models that effectively prepare companies for M&A
prepared for all potential acquisition scenarios. However, focused
IT integration
planning and preparation is critical. To that end, this document presents
a discussion of some key principles for developing an effective strategy • IT organization: A nimble and flexible IT organizational structure and
that will prepare an IT organization and the IT infrastructure it maintains operating model that can simplify M&A IT integration
to effectively execute the integration of an acquired entity. It provides an • M&A IT execution: Effective processes, tools, and governance that
overview of Deloitte’s “plug and play” M&A IT Integration framework are needed to smoothly execute post-merger IT integration
and describes the fundamental elements of the framework. Figure 1
depicts the overall “plug and play” framework.

58
M&A IT — Integration

M&A business direction IT architecture


For most companies, the IT organization’s strategic direction is driven by Enterprise application architecture
the overall business strategy. Therefore, for an IT organization to execute
The enterprise application architecture is the cornerstone of an overall
in a “plug and play” environment effectively, it must align its operations
IT architecture. A robust, open, and flexible enterprise application
with the business strategy. Thus, the M&A business direction is a driver
architecture is one key to the effective execution of the “plug and play”
for other components of the framework.
principle for post-merger IT application integration.
The business strategy for any merger or acquisition will often determine
One enabler of a “plug and play” application architecture is the
post-merger business operating requirements, which, in turn, will help
implementation of Enterprise Application Integration (EAI) using
determine the scope and degree of business process integration (e.g., tightly
middleware and a Service-Oriented Architecture (SOA) framework.
vs. loosely) for the combined company. Further, IT integration requirements
are driven largely by the business process integration requirement. Middleware
With that understanding, it’s crucial to consider the trade-off between Middleware, especially middleware that is capable of facilitating EAI, can
the cost and the degree of business process integration, hence IT play a key role in effective post-merger integration. A strategic buyer
integration. From a systems integration standpoint, the cost of achieving that has a robust EAI middleware infrastructure will likely have a much
a fully integrated and rationalized environment could be quite high. easier time integrating an acquired company’s applications and related
Consequently, to completely integrate an acquisition may not make key business processes.
financial sense. First, a complete IT integration could take a long time
and consume key resources. So, in some circumstances, it may be Further, when one company acquires another, one considerable
better to have legacy systems continue to run independently and add a challenge is to integrate the companies’ business processes. EAI
financial consolidation solution, rather than perform a costly conversion middleware is especially useful for those strategic buyers that operate in
of the acquired systems. Second, size, cost-of-effort, and turnaround a process intensive business, such as insurance companies.
time are all key factors in determining the most effective level of For example, insurance companies typically require tight business
business process integration and IT core application integration. process integration. Processes such as underwriting and claims
For example, suppose a fully rationalized Enterprise Resource Planning management can be ideally orchestrated and enabled by a BPM
(ERP) environment would require a $20 million investment, but would (Business Process Management) tool, which is often an integral part
generate a savings of $10 million per year in operating expenses. of an EAI middleware platform. A middleware platform facilitates the
A consolidated reporting solution, at a cost of $5 million, may only automation of the business processes by providing seamless integration
generate a savings of $5 million per year. Thus, the payback on the between the applications supporting these processes.
fully rationalized environment is greater long term, but so are the initial Having a robust EAI middleware infrastructure can also facilitate the
investment and the risk. The consolidated reporting system provides less business process integration by enabling the application integration. This
benefit, but delivers results more quickly, with less investment and risk. integration can be achieved because EAI middleware usually provides
Figure 2 illustrates the differences between the two solutions. the following two key functionalities.
With these factors considered, we can begin to look at the standard • Facilitating data transmission between applications. From a
components of a “plug and play” IT environment. business perspective, having access to data, as well as the ability
to manipulate that data, is one key to completing an effective
Figure 2: Rationalization vs. consolidation transaction. As an example, take an insurance company that decides
to acquire a competitor and decides to consolidate the claims
25
Rationalized
processing function once the transaction is complete. Using EAI
20 ERP middleware, the buyer could integrate the target’s underwriting
15 system with its middleware platform, which would transmit the
underwriting data from the target’s system to the buyer’s existing
10
claims processing system. The claims processing personnel at the
5
acquirer could then work with the underwriting data from the target
0
1 2 3 4 5
company to process a claim.
-5
• Facilitating workflow. Workflow integration is key to business
-10
process integration. Most top-tier EAI middleware includes a robust
-15
workflow engine that orchestrates work activities among business
-20 users. High-quality workflow features provide a collaborative and
-25 integrated work environment for all business users involved in
executing a business process. For strategic post-merger integration,
20
Consolidated workflow integration between the acquirer and the acquired entity is
reporting
15 solution
usually the first step in achieving smooth business process integration.
10

0
1 2 3 4 5
-5

-10

Source: Deloitte Consulting LLP

59
Wired for winning?

Let’s examine the merger of two banks as an example. If an acquiring Figure 3: Potential integration scenario for merged companies
bank decides to centralize the loan approval process after the acquisition
is complete, the acquirer could require the acquired bank to send loan
applications across its system boundary to the acquirer’s loan approval
system. With an EAI middleware infrastructure, the acquiring bank could New business process
achieve such workflow integration with relative ease.
Systems supporting new business process

Service-oriented architecture
If middleware provides a quick and easy way to integrate applications
and business processes between companies, then an SOA lays a solid
Services Services Services Services Services Services
foundation for the combined entity to achieve long-term post-merger
integration excellence, both for IT and the business. SOA foundation SOA foundation

There’s no doubt, SOA is a hot topic. It has been for several years, and
only recently have more companies taken significant steps to implement Legacy
system
Proprietary
system
Other custom
system
Legacy
system
Proprietary
system
Other custom
system
an SOA. This migration toward SOAs has been partly driven by the
maturing of SOA technology and widespread vendor support for SOA. Acquirer’s SOA environment Target’s SOA environment
Another driver has been the appealing values and capabilities an SOA
brings to solve some of the most common challenges of post-merger
Source: Deloitte Consulting LLP
integration. Such challenges include:
• Ability to implement and support new business requirements Consolidation packages vs. ERP level consolidation
and processes. Merged entities often create a new vision or strategy
for going forward, and the new vision and strategy often leads to new In an M&A transaction that involves large companies, there’s a good
business requirements or processes. Further, executive management chance that ERP systems will be part of the IT environment at both
sometimes asks the IT organization to quickly develop a solution to companies. Integration of ERP systems is typically one of the biggest IT
support the newly created business processes. This is often a failure challenges in an M&A transaction. Moreover, given the importance of
point, and it can sometimes be attributed to inflexible and rigid ERP systems, ERP is, and will always be, one of the critical components
architectures that do not respond well to changes. However, with in any enterprise application architecture.
a robust SOA solution, IT should be able to quickly create service At one extreme of the application consolidation spectrum lies the
components as needed and reconfigure the IT capability to meet the strategy of consolidating all acquisition targets onto a single ERP
new business demand. platform; the other extreme is to leave both ERP systems intact and
• Ability to protect existing IT investment at both the acquirer separate and perform financial consolidation and management
and the acquired. In some cases, a company may take a “rip reporting at the corporate level using business intelligence toolsets.
and replace” approach to legacy applications that are deemed too Every M&A transaction is unique, and there is no definitive answer as
difficult to integrate. This drastic approach is usually an enormous to which strategy is correct. However, there are certain considerations
multiyear effort, a significant disruption to business operations that a strategic acquirer or seller should keep in mind when deciding
— often — requires a multimillion-dollar investment. SOA gives how to effectively integrate the ERP of an acquired business. These
companies another option. Instead, companies that implement considerations are:
an SOA can treat their existing applications’ functionality as • Industry-specific ERP. As an example, let’s say an acquiring company
reusable service components to be consumed as needed by other wants to maintain multiple ERP platforms. This decision may seem
applications, and hence improves the Return on Investment (ROI) on odd, given the rise of total cost of ownership of maintaining multiple
existing applications. platforms and vendor relationships. However, the company may elect
• Ability to integrate heterogeneous IT environments. this strategy based on its growth strategy, such as varied acquisition.
Sometimes, IT organizations have little experience with the task of And, if the company operates in multiple industries, the choice is clear
integrating disparate IT environments — which is typically required to us: run specific, industry-standard ERP platforms for each managed
in an M&A transaction. Further, custom-developed applications are division, and do not try to integrate all businesses on a single ERP
often difficult to integrate, because they require custom-written platform. This strategy could reduce risk and increase the likelihood that
interfaces in order to integrate them. However, the component- an acquired company is ready for business on Day One post-merger.
based structure of an SOA facilitates a more straightforward process • Line of business-specific instance. Most companies base their
of IT application integration. ERP instance strategy on either geographic or business groupings.
For companies that intend to go through a series of acquisitions or
Figure 3 depicts how SOA architecture helps to facilitate post-merger
divestitures, it may be wise to consider grouping like businesses on
integration.
the same instance. This greatly eases the carve-out of the business
An SOA is not only valuable in the post-merger integration process. It to be sold.
offers a significant advantage in improving internal IT operations and • Data tagging. No matter what strategy a company chooses to
efficiencies for the combined company in the long run. It is a strategic integrate acquired businesses, one important consideration is the
architectural foundation to build on. tagging of data according to business unit.

60
M&A IT — Integration

Technology and industry standards • Leverage the VM environment to streamline and simplify the
infrastructure support and maintenance. Bringing servers onto
Certain applications seem to be de facto industry standards. Choosing
a common VM platform can facilitate a unified and centralized
a particular application built specifically for an industry increases
server monitoring and control mechanism. Centralized maintenance
the likelihood that the acquisition target also operates on the same
and support can increase overall server availability. In addition, the
platform, and it eases the integration effort.
provisioning of a new server can be easily handled by adding a new
Although implementation standards at companies involved in an server instance on an existing VM server, thus improving provisioning
M&A transaction may be different, choosing to implement industry de speed and user satisfaction.
facto standard applications can facilitate easier integration. It can also
As an example, let’s consider a merger of two Internet hosting
allow the acquirer to realize benefits by strengthening its negotiation
companies. Both companies are operating on a dedicated server
position with software vendors to restructure the terms and conditions
hosting model for their clients. The operating model has led to an
of software contracts. Therefore, even though companies might have
increasing demand on the data center, server power consumption, and
unique requirements and may contemplate building custom applications
space usage. All of which have become major cost factors impacting
to accommodate those requirements, the use of de facto standard
the companies’ financial performance. As part of the post-merger
applications may meet the requirements and save costs in the long run.
integration plan, the companies could implement VM technology to
Infrastructure architecture dramatically reduce the number of dedicated servers by virtualizing them
via VMWare.
While it is important to maintain a “plug and play” enterprise
application architecture, it is equally important that the underlying As with any technology, VM technology is a solution meant for certain
infrastructure supporting the applications is “plug and play” enabled. situations and scenarios; it is, by no means, a silver bullet for all IT issues.
One way to enable a “plug and play” infrastructure is to use The level of virtualization is also an important consideration that varies
virtualization technology. by company. Some applications and servers are perfect candidates for
virtualization while others are not. Companies must strike an effective
Virtualization technology balance between the virtualized and traditional environments, not only
Virtualization technology can be key to enabling a “plug and play” in preparation for a potential future acquisition, but also in improving
technology infrastructure. And, it can be crucial to capturing major IT their own internal IT operations.
cost savings and operational efficiencies post-merger. Platform flexibility
Just a few years ago, the concept of a Virtual Machine (VM) was For most post-merger integration scenarios, the IT platform of
indeed more concept than reality. Now, it’s one of the hottest trends in the acquiring company has to be flexible enough to absorb the
IT, getting attention both inside and outside of corporate boardrooms. infrastructure components of the acquired entity. SOA and VM
CIOs of big and small companies alike are increasingly leveraging the technology are currently the prevailing methods of delivering that
latest VM technology in making their IT operations lean, yet effective. flexibility. Regardless of the chosen method, an acquiring company’s
One key challenge most strategic buyers face post-merger is how priorities should be focused on its own IT infrastructure. The focus
to effectively and efficiently integrate fragmented and disparate IT should be on implementing technology and processes that provide a
infrastructures. Each company’s IT environment may include numerous high level of performance and flexibility and equip the company to
data centers at multiple locations across the world, with heterogeneous integrate with acquired companies quickly and effectively.
server hardware environments used by different businesses for different IT organization
purposes. The issue becomes one of integrating such a massive and
messy environment. The “plug and play” characteristics of an IT organization usually
mean the IT organization has to be nimble and flexible enough to
The advantage of VM technology is that it allows companies to “plug” accommodate change or allow speedy integration with the target’s IT
heterogeneous systems onto a common hardware platform and allows the organization. Some of the key areas to consider for a nimble and flexible
existing systems to continue to operate (i.e., “play”) as they do currently, IT organization include the following:
with low disruption or downtime. With this technology, an acquirer
can also take advantage of the merger situation and quickly improve Core skills (IT management, business analysis, etc.)
the IT infrastructure for the combined entity. By using VM technology,
In any IT organization, it’s important to identify industry-specific IT roles
infrastructure optimization can be achieved in the following ways:
and recruit talent that are both common and mainstream within the
• Combine underutilized server hardware resources at both industry. It’s also important that there is low dependency between roles
companies onto a single VM platform. This approach not only so that they can be easily changed.
can increase the server utilization (i.e., better ROI), it can also reduce
the number of servers that must be maintained at the combined With strategic acquisitions, it is quite common that the acquirer and
company. The reduced number of servers could also result in target are players in the same market segment and sell similar products
considerable savings on data center power consumption and facility or services. This sometimes simplifies the integration (applications are
rental expenses. similar, staff are familiar with the business concepts, etc.). However,
differences may exist concerning IT’s role or strategy. Existing IT
• Upgrade legacy hardware platform via VM. One common theme management processes and company cultures can play a crucial role in
in any M&A transaction is the likely discovery of certain mission-critical the initial stages of assimilation. Organizational differences should be
applications still running on outdated server hardware platforms, given due consideration before beginning the IT integration process.
which could fail at any moment. VM technology can help avoid For example, a globally centralized IT organization may require different
expensive one-to-one server replacement by bringing the company skill sets and experience than an IT organization that is federated and
onto a flexible VM-enabled server platform. regionalized. Many companies have found positive results by taking a
phased approach to integration, allowing for a natural mapping of skills,
thus facilitating long-term synergies.

61
Wired for winning?

Organization structure In addition, many buyers (strategic and financial) request that sellers
provide IT services via Transition Services Agreements (TSAs) over a
There are many ways to structure an IT organization. Common
predetermined period of time. In many instances, much time and effort
organization methods include by function, by business units or
is spent on determining and negotiating with vendors as to whether
departments, or by geographic locations. Regardless of the IT
the existing software or hardware licensing agreements allow the seller
organization’s structure, the roles and responsibilities between internal
to provide such services to a third party. Though problems may never
IT departments and business functions should be clearly defined, and
be fully avoided due to individual vendor issues, savvy negotiations up
the structure should be aligned with the overall business objectives.
front and well-kept records of each agreement can save effort and avoid
A decentralized IT organization, with dedicated IT support for each
delays when the transaction closes.
business unit or departments, will lend itself more easily to a “plug
and play” structure, with the retention of knowledge of IT systems and Also, due diligence is more effective with target companies where a
infrastructure within the business units. paper trail is organized and available. Any steps that management
can take to simplify the due diligence process will ultimately result in
As with core skills, the acquirer and target might have similar IT
efficiency and help avoid delays in closing and/or ill-informed decisions.
organizational structures (e.g., organized by business units) if they
operate in a similar business. In any case, a clear structure definition IT governance
and its alignment with business goals can facilitate post-merger IT
The enterprise IT governance model is another important factor. Some
organization integration and lead to the organizational synergies that
effective IT organizations are organized around decentralized IT, with key
shareholders expect.
business and IT roles existing at the line of business or business unit level.
Outsourcing Though decentralization may increase the cost of IT operations, it usually
facilitates a quicker IT decision-making process and can simplify integration,
More and more, outsourcing is an integral part of any IT operation.
or divestiture, of the IT organization through an M&A transaction.
Many companies now rely on outsourcing relationships for many critical
services, from application maintenance to telecom and data network M&A IT execution
support. To stay “plug and play” on the outsourcing operation, an IT
Last, but not least, is the execution capability of the IT organization.
organization should be familiar with the terms and conditions of the
Even with the right components, the effectiveness of the “plug and
outsourcing contracts and should try to negotiate contracts in a way
play” model depends greatly on a company’s processes and tools.
that is flexible and easy to terminate or change, in the event of a merger
or acquisition. Three relevant focus areas are:
In addition, outsourcing relationship evaluations are also an important • M&A transaction governance
consideration for future M&A transactions. In choosing an outsourcing • Change management
relationship, their ability to expand its services quickly could have a direct
impact on the timeliness of integrating an acquisition or divesting a part • M&A IT processes and tools
of the business. Some key attributes of typical outsourcing providers are: Also, even with appropriate planning for the M&A transaction, the IT
• Rapid access to additional hardware, server, and storage space organization must still be able to execute the plans effectively. Typically,
experience breeds effectiveness, and companies that have participated
• Swift access to additional network bandwidth
in multiple M&A transactions often fare better than companies that
• More robust skills to assist with disparate systems integration are undergoing the process for the first time. The execution of the IT
• More flexible architecture to take on additional hardware (server, integration process is where third-party integration advice and assistance
storage, etc.) from acquired business can often be extremely valuable, especially to companies that are
attempting post-merger IT integration for the first time, or that lack a
IT funding and governance series of deals to draw upon.
IT cost structure Wrapping it up
Cost structure is a major issue in M&A transactions, and companies Across all industries and despite the presence of numerous integration
should determine whether their current cost structure allows for quick methodologies that permeate the marketplace, the rate of merger
“plug and play” transactions. Costs can be divided into: effectiveness continues to be disappointing; most studies suggest
• Ongoing costs (fixed or variable recurring costs) that 50 percent to 70 percent of mergers fail to create incremental
shareholder value.1 The reasons for failure are myriad and include poor
• Project costs (discretionary; currently in flight)
strategy, bad deal-making, and, most notably, failed IT integration
This division allows for greater opportunity to achieve synergies and — which our research shows is the reason for close to half of all failed
reduce costs. mergers. Most of these failed IT integrations are due to the lack of
preparation or planning or to poor integration execution.
Contract terms
The “plug and play” M&A IT integration framework presented here is
Another important consideration is the expandability, or reducibility, by no means a silver bullet that addresses all of the IT challenges that
of software or hardware licensing agreements. Any company that can result from a merger or acquisition. However, it does present a
anticipates acquiring or divesting a business in the near term should time-tested and well-structured approach to consider for any M&A IT
only have licensing agreements that can be expanded (to allow for an integration effort. It can also be used to help prepare IT organizations as
increase in the number of users) or reduced (to allow a reduction in the they face the many possible challenges ahead.
number of users, or a transfer of a portion of the licenses to a buyer)
economically. This upfront planning and negotiation can make for an
Notes
easier transition during deal time.
1
“Solving the merger mystery: Maximizing the payoff of mergers & acquisitions,” Deloitte,
February 2000.

62
M&A IT — Integration

63
M&A IT – Divestiture
If putting two businesses together is difficult, so is taking them

apart. Without careful planning and execution, a divestiture can also

fail to deliver value. And the business that’s left after the dust settled

can be forced to pay the price for years after.


M&A IT — Divestiture

Time to leave the nest, kid


13 tips that could ease the transition of a carve-out

By Mark Walsh, Punit Renjen, and John Powers

and planning activities. To position your organization for positive M&A


Introduction carve-out results, you need to raise the yellow flag as early as possible
— before a transaction is contemplated — so that IT is included from
The rumors are true: Your division is being carved out. It’s time to the conceptual stage of the deal.
move! (Does that make you panic?)
IT may not seem important to the business development group or deal
No matter the size and complexity of a carve-out, the list of team, but IT is quite often material to the deal’s costs and timeline. If the
Information Technology (IT) related activities that need to be IT infrastructure, applications, and organization are tightly integrated (or
completed quickly is long and urgent. If you have never gone even partially integrated) with the parent company, the carve-out will
through a carve-out, you’ll have more questions than answers. likely take significant time, resources, and money. Before you even think
And the clock will be ticking. about renting a moving truck (or letting your deal team sign a letter of
intent), carefully think through the most efficient and cost-effective way
The experience of a carve-out is a lot like your parents letting you
to conduct the carve-out to meet the Day One close date, as well as to
know it’s time to move out. Can you make it on your own? The
expedite full separation thereafter.
goal of moving out — whether from your parents’ house or from
your parent company’s shelter — is to achieve long-term prosperity There are many short-term and long-term IT application carve-out
with limited short-term pain and failures. You should consider options, from transition services agreements (TSAs), clone-and-go,
whether our transition tips can help. give-and-go, extract-and-go, to new build. Advanced planning, before
a letter of intent is signed, can provide significant benefits since, at that
time, more cost-effective options are still available, alternatives to jump-
start detailed planning can still be pursued, and material timing and cost
1. Take control of your destiny implications can be incorporated into the valuation model.
We have all heard the adage: “Control your own destiny or someone The last thing you want is the moving truck in the driveway before you
else will.” As you will likely learn, there are a lot of different ways to have finished packing.
plan and execute an IT carve-out. Since you’re the one who will have
to live with the consequences of the planning and execution activities, 3. Read the lease carefully before you sign it
set up the effort for positive results by establishing an aggressive Believe it or not, we have found that, in many cases, the scope of an IT-
“command and control” IT program management office (IT PMO), related carve-out is agreed to by the deal team and legal counsel before
closely aligned with the overall program PMO. the CIO even knows a deal is in the works. Although the deal team and
The IT PMO must be more than just status reports and issues logs. It legal counsel can have the best of intentions, they rarely have a clear
should serve as your vehicle to actively plan and manage the carve- understanding of the impact that offering memoranda and purchase
out from an IT perspective. Our evaluation of 17 M&A IT transactions agreement language have on IT planning and execution activities. For
illustrated to us the importance of an IT PMO in key carve-out activities, one thing, when it comes to IT, many of the promises are vague or not
including Day One and end-state requirements gathering (blueprinting), achievable tactically. For example, with regard to ownership of IT assets
IT synergy identification and capture, carve-out work plan development, (e.g., applications, hardware, software, and licenses) and of setup and
and rapid decision facilitation. exit activities, legal language is typically kept to a theoretical level that is
often difficult to interpret. If there are a lot of shared assets, the picture
Unlike many other events in a company’s life, a carve-out can change is even more complex.
many if not all of the “value levers” of the business — and most of the
movement impacts or is dependent on IT. If IT is not at the table to help To effectively position your organization for positive results, develop
to shape the future, then gaps and disconnects are very likely. a relationship with one of your attorneys (no, there is no lawyer joke
following this statement). The deal attorneys clearly want to make the
2. Do lots of planning before you agree to move out legal documents as clear as possible. By building an alliance with them
(don’t reserve the moving truck just yet) early in the process, you can share your ideas, answer key questions, and
IT is typically the largest synergy-enabler in M&A transactions. In express your concerns. Your goal should be to help include language
addition, IT is also usually the “long pole in the tent” in carve-out that eliminates confusion, keeping your overall strategy in mind, while
planning and execution. Yet, from our experience, IT is often the last you still have some negotiating leverage.
to know about a transaction and is left out of the early due diligence

65
Wired for winning?

4. Think through all of your options; don’t rule anything out Another often overlooked item in this area is TSA exit support. There
usually is a major focus on getting to Day One and setting up the
When you are making large-scale changes in an M&A environment,
required TSAs, but most CIOs don’t think about securing TSA exit
both operational and financial, in a very short time frame, the rules will
support from their parent while they still have some leverage. To position
change. During a carve-out, replicating current operations probably
your organization for a rapid and cost-effective TSA exit and transition,
should not be the answer. But before you can begin to paint a picture
before the deal closes you must discuss, document, and agree to all the
of your future IT organization, you must first establish and understand
services and help you will need (from pre-Day One through the end of
the basic guiding principles and constraints (overall and IT-specific) for
the TSA period and beyond). Once the transaction closes, you will lose
the carve-out. The delivery options typically viewed as taboo yesterday
negotiation leverage and be at the mercy of your former parent to set
(e.g., IT outsourcing, less scope, offshoring, reduced functionality, or
terms and conditions.
buy versus lease) may be the only viable answers tomorrow. Don’t rule
anything out! 6. Be prepared to eat lots of soup
Actively encourage your internal business and IT resources and your Eating soup is not bad if you like soup. But if you’re used to drinking
external relationships to challenge the status quo: “Think out of fine wine and eating filet mignon, soup will be thin fare indeed. Since
the box” and diligently brainstorm how you can create the desired most carve-outs involve separating a business from a larger parent — a
future state. In IT carve-out situations, it is often easiest to start with parent with deep pockets — you should be prepared to make significant
the minimum mandatory IT requirements and build from there. For changes to your expectations. As a CIO, one of the first things you will
example, what is the required applications functionality for the business need to do is identify your likely going-forward IT budget. It’s likely that
to continue operations and hit the future business goals? What are your new budget will be a fraction of your old one, and you’ll quickly
the mandatory IT infrastructure requirements to support the business? realize that backing into the budget on a short-term basis is extremely
What are the most cost-effective methods of delivery? While questions difficult, if not impossible. There are, however, a number of key things
like these can create some difficult dialogue between the business and you should consider to improve your position:
IT, they’re absolutely necessary to achieve the carve-out goals. If the
See tip number 4. You will absolutely need the flexibility and cost relief.
business (the entire business) and IT can join forces and stay “connected
at the hip” to challenge the status quo and lay the foundation for See tip number 5. You will need short-term help. It’s better to have
change, the carve-out can truly represent a significant opportunity for used furniture than no furniture at all.
the organization.
Put on your scope control hat and take your relationships with
Ten times a day ask yourself, “How are we possibly going to get this the CEO and CFO to another level. Given budget constraints, you will
much work done in the time allotted?” Regardless of your carve-out plan, need to work with your IT leadership team and the business leadership
there will be a lot of parallel work and an aggressive timeline. The IT PMO team to evaluate and rationalize IT scope. Keep it simple. Strive for plain
(see tip number one above) must play a key role in laying out the plan, “vanilla” implementations wherever possible. Be ruthless with scope.
identifying cross-functional and cross-project dependencies, and helping Every request for non-standard functionality should require close scrutiny
to orchestrate the program. Everyone must understand the timeline and and approval. If you set an example early in the process and keep the
commit to getting their piece of the puzzle done. The speed and multiple scope tight, the requests will slow over time. But you can’t do it alone.
parallel moving pieces associated with an IT carve-out are typically very You’ll need a lot of help from the CEO and CFO to set the stage for the
difficult for IT outsource providers to deal with using their standard organization to “think lean”: everyone needs to understand that for the
processes. If your activities involve IT outsourcing, take the necessary steps carved-out organization to be successful, it won’t be able to afford a lot
to prepare the outsourcer to accelerate standard processes and approval of IT bells and whistles.
procedures to enable an aggressive timeline.
Enlist the help of your external relationships. In most carve-out
5. Convince your parents to let you take what you need situations, there is a need for some external resources to help meet
(and nothing more) short-term IT budget requirements. (But if you don’t ask for help, you
will absolutely not get it.) This help can and should take many forms: IT
See the moving truck filled with furniture? The carve-out is one of the
procurement pricing discounts, contractor and consultant price reductions,
most important moves of your life. To achieve the benefits of this tip,
software leasing versus buying, spreading carve-out set-up cost payment
you will need to start thinking early about your “wish list” to be put
over an extended period of time; potentially back-end loaded to a period
into the deal documents. But be careful: Don’t ask for everything you
where you can better afford payment, to name a few.
could possibly take (e.g., people, assets, applications, infrastructure
components, historical data, licenses, TSA set-up and exit, and knowledge Plan for the depreciation bubble. In most cases, IT carve-outs
transfer services). Rather, keep it simple. Ask only for 1) what you require significant one-time setup costs (e.g., IT infrastructure setup,
truly need; 2) what you can afford; and 3) what will help your budget equipment purchase, ERP implementation). All of these present CIOs
regarding carve-out set and/or run costs later. You’ll want to ask for more, with yet another budget challenge: the depreciation bubble. Given the
but avoid the urge with one major exception: free services. constraints of the typical IT carve-out, there is little CIOs can do to avoid
the bubble, but there are some tips you should consider to help reduce
One common issue of contention should be addressed early, and that
its impact on your short-term budget: for example, you can make new
is the separation of shared assets (e.g., people, hardware, software,
decisions about leasing versus buying hardware and software, leasing
application, telephone switches, licenses, etc.). To reduce the cost, risk,
existing data center space versus building new, transferring existing
and arguments created by these situations, gain clean agreement and
software licenses from your parent, and taking existing fully depreciated
then document a tactically possible approach (don’t forget to agree on
PCs from your parent. While there are no silver bullets in this area, if
who will pay the costs). This topic may seem trivial, but it’s a fight-starter
you’re aware of the bubble and manage it, you have a fighting chance
on almost every deal.
to hit your budget.
The CIO can pull a lot of internal and external levers to achieve short-
and long-term budget requirements. You still might have to eat soup
most days, but at least you will have the chance to splurge once in a
while down the road.

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7. Make sure your parents commit to giving you a lot of help 8. Expect to wait until your parents’ cribbage game is finished
initially (you will likely need it) before they will return your calls
If your IT operations are heavily integrated with your parents and if you Expect your relationship to change. When you were a child, you parents
have an aggressive close window, you will likely need transition service responded immediately to your requests. Once you move out of the
agreements (TSAs) for a short period of time (typically 6 to 12 months). house, you might not get the same attention. The pattern is no different
The development of the TSAs should be viewed as a critical strategic for IT carve-outs.
instrument. They are important for two reasons:
When you are owned by the parent and contributing to the profit and
First, they will have a major impact on the effectiveness of Day loss, you are a top priority. When you are a carve-out, your position on
One. If the TSA services are not ready and done correctly, you will have a the priority list will drop, sometimes dramatically. To protect yourself
major problem as a separate entity and your business may be put at risk. from the changing relationship, do your due diligence, planning,
and negotiations immediately. Your best friends today may not even
Second, they are a vehicle for efficiently migrating to the future
answer your calls tomorrow. The people left behind at the parent
state. If the TSA period is bumpy, chances are your migration to the
company have bosses to please and — guess what — your priorities
end-state will be difficult as well. Here, your best defense is a strong
aren’t theirs anymore. Also, your parent’s memory is not what it used
offense: The party that drives the TSA development usually ends up in a
to be. Get everything in writing (even if it’s just in an e-mail). If you
better position from a service delivery and pricing perspective.
have a disagreement after the close and you don’t have promises and
You can and should play a major role in the development of the TSAs in agreements in writing, chances are you’ll have a battle on your hands.
the following areas:
9. Stay close to your best friends
Service definition. Even though the TSAs are legal documents, you
The one characteristic of every effective IT carve-out is the strong
and your team (not the attorneys) should provide the most important
relationship and alignment between the business and IT. To be effective,
input. Play a leadership role in identifying and clearly documenting
IT must stay “attached at the hip” with the business (your best friends).
the short-term services you need. Make sure the services are clearly
In designing a blueprint for the future, the business and IT need to
spelled out in the document. If the service request is vague, it will
spend quality time together, function by function, process by process.
likely lead to contention later. Gain clear agreement in writing while
As you discuss future operations from three perspectives — people,
you still have some negotiating leverage.
processes, and systems — given carve-out and budget constraints, you
Service levels. Chances are your parent is not set up to be a service will need to pull multiple levers and make some difficult decisions to
provider and cannot routinely provide the performance metrics of a achieve your goals. If you complete the process together, collaboratively,
typical outsourcer. But that should not prevent you from demanding you will reach your goals with a clearer understanding of why decisions
specific service levels to keep your business running efficiently for the TSA were made, why scope elements were eliminated, and how you can
duration period. Make sure appropriate monitoring and issue resolution work together to make the blueprint work.
processes and tools are put in place so you can protect your business.
Don’t be afraid to lead and teach the business. The typical IT
You’ll be happy you pushed this issue if you do have a problem later.
organization thinks in “MS project” mode that’s all about projects,
Duration. In most cases, you will want to limit the duration of the TSAs planning, and execution. The typical business function doesn’t. If you
for cost and risk reasons (not to mention the fact that your parent will help the business through the planning process, you will have joint
not want to be in the service provider business any longer than it must). ownership of the plan and joint ownership of implementation results.
Be careful, however, to make sure the TSA duration gives you and your
10. Choose your roommates carefully
team enough time to unwind the TSAs and smoothly transition to the
exit solution. If you don’t build in enough time, you may find yourself Effectively completing a carve-out is difficult. If you don’t have the right
implementing a less effective solution and spending extra money just to team (the right roommates), it can be impossible. One of the first tasks
hit your deadline. Set an aggressive, but achievable, timeline for TSA exit. that you should work on is picking people who have the right skills,
the right experience, and the right caliber. You probably won’t be able
Pricing. Negotiate the TSA pricing as early as possible, certainly before
to take all of the A players with you, but don’t settle for a cast of C
the deal is signed. If you wait too long, you will lose your negotiating
players. If there are A players critical to your business, fight for them. If
leverage. Nobody will want to delay deal closure because the CIO can’t
you believe your parent is using the carve-out as an opportunity to clean
achieve favorable TSA pricing. The TSA pricing will be a rounding error
house (yes, this does happen), demand the names be removed from the
for the overall deal, but it could be a showstopper for your short-term
transfer list. If you accept surplus resources today, you’ll bear the cost of
run rate.
addressing the situation later.
Exit-cost relief. A key strategic component of the TSA pricing is exit-
If you can’t find the right employees in the parent organization, don’t
cost relief. You will likely exit the TSA in phases, so you need to address
be afraid to look externally. In many carve-out situations, the role of
the cost relief issue early and clearly. A well-schooled seller will give you
IT changes dramatically and the skills to support the new operation
cost relief only when the total TSA is exited. Be aware of this issue or
may not reside in the company. For example, if you’re moving from an
you might pay double for services.
internal-oriented IT environment to a largely outsourced environment,
Exit support. The last consideration is exit support (often overlooked, your team may require new and different skills and experiences.
but very important). If you have a well-thought-out TSA exit solution,
Don’t be afraid to let go of some parts of your past. You need to design
but don’t have the migration or knowledge transfer support available
and staff for the future.
from your parent, you will have a major problem. Before you sign any
TSAs, make sure you and your team clearly think through how you will
exit from the TSAs and what support you will need from your parent.
Also, identify who will bear the cost of migration activities. In most
cases, the exit costs can be material. Try to make your parent bear the
cost of the exit support. The parent wants to close the deal, so usually
that strategy will work.

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11. Paint a picture of how great your independent life (freedom)


will be
The good news is the carve-out could position IT to reach new heights;
the bad news (real or perceived) is you will no longer be part of a larger
organization (with all the perks). Some of your A players may not want
to go with the transaction, because they can’t see the upside or don’t
want to take the risk of working for a smaller company. You will need to
become a sales person. To recruit and retain high-caliber staff, you will
need to convince them of the opportunity. This may be difficult (especially
if you also feel some reluctance), but the organization’s long-term results
will depend on your ability to create and sell the future vision.
12. Set an aggressive, but achievable, plan to reach your goals
M&A IT is different from most IT projects. Due to hyperaggressive
transaction milestones, it is usually not an option to complete rationale
project planning. In most IT projects, you lay out the work, estimate
the time required to complete the work, and arrive at a go-live date.
For carve-out projects, the timeline is typically driven by the deal team,
which wants to close the deal quickly. In most cases, the idea that “time
is money” drives the Day One timeline. In addition, the final separation/
TSA exit date is heavily influenced by the seller (which typically wants to
cut off support as soon as possible to limit risks and distractions).
Be ready to plan to very aggressive (sometimes seemingly irrational)
timelines. Think and act creatively. Backward scheduling will become
your new forte. You are not the first CIO to be put in this position,
so leverage lessons learned and strategies from experienced people.
Every deal is unique, but there is no reason to reinvent the wheel. Ask
consultants for some tips (it won’t cost you a dime to ask); they’re
usually more than willing to share war stories, and you may just find the
one idea that you were searching for.
13. Be prepared to please the boss (there’s always a boss!)
Regardless of the type of transaction — a purchase by a strategic
buyer or a purchase by a private equity firm, sovereign wealth fund, or
IPO — one thing is clear: You will have a new boss. Your new boss’s
expectations will likely be very different from your old boss’s. Find out
what makes the boss tick early on, and then make sure your goals align
with his or her goals. The early days of the carve-out (even before the
deal is closed) will be your tryout; as long as you are aware of that fact
and leverage the tips outlined above, you will position yourself and your
team to start out strong.
Leaving the nest is difficult, but the rewards can be great. Sure, you’ll
have to take a few risks, and you will hit some bad weather on your
journey (you can’t cross the ocean without losing sight of land). But if
you leverage these tips from people that have made the trip before you,
you will have a much better chance of achieving excellent results.
Good luck, and have some fun along the way.

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M&A IT — Divestiture

Fast break
A way to design and manage TSAs to achieve a fast and clean separation

By Indira Gillingham and Mike Stimpson

The time between announcement and close is often driven by the


Introduction size of the deal. Small carve-outs can close as quickly as 30 days after
announcement; however, even large deals (more than $1 billion)
Shifting economic forces are driving a big boom in divestitures. average only 115 days to close. In many cases, this does not give the
In 2007, 10 of the 40 largest deals were divestitures, and the buyer enough time to respond, particularly when there are anti-trust
trend appears to be growing.1 One of the most critical elements concerns or confidential information that cannot be shared until after
of a divestiture is the Transition Services Agreement (TSA) in the deal closes. Therefore TSAs can become a vital part of allowing the
which the seller agrees to provide specific services on behalf business to transition or separate quickly.
of the buyer to maintain business continuity while the buyer
prepares to receive and operate the new business. A TSA can The double-edged sword
accelerate the negotiation process and financial close by allowing
Sellers generally want to keep the number of TSAs as low as possible and
the deal to move forward without waiting for the buyer to
the duration of service as short as possible. Many are divesting the business
assume responsibility for all critical support services. However,
so they can fund or focus on another part of their business, and from their
divestitures that get the TSA wrong may drag on for much
perspective, TSAs can become a nuisance and a distraction from achieving
longer than expected, which is undesirable for both the buyer
this objective. Additionally, most sellers have little experience or interest in
and the seller. This article provides senior leaders with guidance
providing professional services to other companies. Buyers, on the other
and practical advice to consider for using TSAs to achieve a fast
hand, tend to use TSAs as a way to address missed Day One requirements
and clean separation.
or defer difficult integration decisions.
If not used properly, a TSA certainly can be a crutch and a nuisance.
However, when used wisely, a TSA offers some important benefits:
A complex challenge • Faster close
Divestitures are usually tricky to pull off, particularly when the affected • Smoother transition
people, processes, and systems are deeply integrated within the seller’s • Reduced transition costs
business, or when services and infrastructure are shared across multiple • Better end-state solutions
• Clean separation
business units. Identifying and carving out the pieces in a divestiture can
be a complex and time-consuming process; however, with experience Creating an effective TSA
and careful planning, an effective outcome for both parties can be
achieved. During the planning process, participants from the affected Setting up effective TSAs is a complex, time-consuming task and should not
business units on both sides must think through the transition period be underestimated. IT specific TSAs are unique in that they often require
from Day One to Day Two to determine the strategy for each business input from stakeholders across the enterprise and take time to implement
process, associated applications, and underlying infrastructure. especially if third-party vendors are involved to provide the support.
Depending on the strategy, it may be beneficial for certain services to be Below are some practical and time-tested tips to consider that could help
covered under a TSA. both buyers and sellers avoid the pitfalls and create an effective TSA.
A TSA is an increasingly important tool to help the buyer and seller arrive Understand the exit strategy. Do not use a TSA to put off decisions
at an approach for achieving a clean separation and to bridge the time about the overall integration strategy. Every TSA should be written with an
period between Day One and Day Two. The TSA is a legal agreement, end-state solution clearly in mind. Not only does this understanding help
separate from the separation and purchase agreement, in which the the buyer identify the exact services it needs to develop, it also helps the
buyer agrees to pay the seller for certain services to support the divested seller provide the right solutions, services, and resources in the interim.
business for a defined period of time. TSAs are most often used in carve-
outs where the buyer lacks the necessary information technology (IT) For example, if the buyer’s long-term plan is to outsource payroll, the TSA
capabilities or capacity to support the business on its own. For instance, should make the seller responsible for cutting all payroll checks. On the
many Private Equity (PE) firms rely on TSAs until they can identify and other hand, if the buyer plans to keep payroll in-house, the TSA should
engage an IT outsourcing vendor. TSAs are also often necessary when provide for sharing the existing payroll system until the buyer can install a
the deal closes faster than the buyer’s IT organization can respond. payroll system of its own.

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Wired for winning?

Figure 1: TSA – Illustrative timeline

Day Zero: Day One: Day Two:


Deal announced Financial close Full separation
Transition period

• TSAs identified and drafted


• TSAs monitored and status
• TSAs reviewed with seller’s reviewed on a periodic basis
TSAs TSAs
legal department and updated
in place • TSAs fees collected terminated
• TSAs reviewed with buyer
• TSAs issues resolved
and buyer’s legal department
• TSAs termination notices
• TSAs finalized and signed by
received
both parties

Source: Deloitte Consulting LLP

At a minimum, the buyer should identify its high-level strategy — e.g., Prior to Day One, both parties will need to agree on the scope of services
build, buy, outsource, or terminate the function altogether. Once an to be covered under a TSA. For example, near the end of the TSA the buyer
overall plan has been established, the team can develop the timeline may be expecting the seller to provide migration services, such as extracting
and estimated costs to implement the plan in the agreed time frame. It data, cloning systems, and sharing their knowledge and experience with
is important for both the buyer and seller to be realistic about when the the new service provider. Defining the charge-back rules for such activities
TSA can end. Setting unrealistic targets with the idea that the TSA can before the deal closes helps both parties produce a better migration plan
be easily extended does not help either organization plan efficiently and and leaves the buyer with some bargaining power with the seller.
ultimately results in the buyer’s not being ready to inherit the process,
Partner with the business. IT is a business enabler. Therefore, every
system, or environment. When defining the exit strategy, it is also
business TSA should be evaluated and paired up with the corresponding
important to understand the dependencies within and across services
IT TSA. Stand-alone TSAs should be avoided, unless there are no
to prevent systems and or services from breaking. For instance, security
reasonable alternatives. Note that individual TSAs may be required for
access and control services are typically one of the last to be transitioned,
distinct and separate services and for different geographic regions that
since controlling access to the environment is critical to guaranteeing
are providing or receiving service.
service levels on services such as network routing and server hosting.
Another example is tying services like e-mail and VPN to desktop support, Connect the dots. A master services agreement (MSA) can provide an
since one can’t typically provide support for one without the other. overall structure for all of the TSAs, explains the hierarchies of various
documents, and lists the services to be provided. It can also define the
Understand your costs. This is one of the most important elements
billing terms and conditions and describe the overarching principles
of a TSA. To avoid disagreements down the road, both parties must go
for terminating the TSA. Last but not least, an MSA can help avoid
into the agreement with a crystal-clear understanding of costs and cost
contradictory language by providing a central location for legal terms
drivers. Clearly define the cost components and assumptions that will be
and conditions so they can be defined once and then referenced in
used to calculate costs. Identify both fixed and variable cost elements, as
supporting agreements and exhibits.
well as the factors that will drive cost, such as headcount, office space,
location, server utilization, and network bandwidth.
Put it in writing. Once the services that will require TSAs have been
Understanding the cost drivers helps both parties develop a fair plan to determined, it is time to put pen to paper. TSAs for every function should
migrate off the TSA. For example, activities that are likely to decrease follow a standard format and template that has been approved by Legal (see
over time (e.g., desktop support migration) might include “step-down sidebar: Key elements of a TSA). Keep in mind that this is the most time-
events” where costs go down as the buyer becomes less dependent consuming aspect of finalizing TSAs as both parties contribute to the editing
on the seller’s services. Other activities that are more likely to remain of the content, and both legal departments must approve the verbiage.
constant (e.g., mainframe hosting) might be defined at a fixed cost until
the last remaining user/resource is removed.
Description of services not included under a TSA — This helps to
Note that identifying the costs and cost drivers for transition services can provide additional clarity on services or portions of a service that
be quite a challenge, particularly since most sellers are not in the business the seller does not intend to provide. Remember that the roles and
of selling services and may lack the systems, tools, experience, knowledge, responsibilities of support groups can vary greatly by organization,
and skills to accurately analyze service costs. In such situations, sellers so they need to be clearly defined.
should attempt to identify some benchmarks that can serve as a gauge
for identifying standard costs for their particular industry and size. These
benchmarks can be obtained by performing a quick survey of outsourcing Designate the manager or executive responsible for delivering the
services and the current market rate for these services. transition services as one of the primary authors of the TSA. This helps
produce a better, more realistic agreement and helps avoid confusion and
Define the charge-back rules. The TSA must clearly define what finger-pointing later on. Also, get input from subject matter specialists in
services the seller can charge for and how the charges will be made each service area (e.g., telecom, networks, help desk) as early as possible.
(unless these issues were already covered in the purchase agreement).
Defining clear charge-back rules in the TSA allows the tactical teams to
focus on delivering services without unnecessary debate.
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M&A IT — Divestiture

Key elements of a TSA


All TSAs should have the same format and Writing should be consistent, clear, and concise. Try to be specific and exact, rather than open
template, and once they are established, ended and general. Detailed service descriptions can facilitate more accurate cost estimates and
they should not be changed for individual can provide a clearer understanding of what is or is not covered. They also can make it easier
TSAs. Here are the major elements to to “step down” from individual services when they are no longer required. For example, an “IT
consider for a standard TSA: hosting” service actually comprises many lower-level services that in certain situations could be
phased out individually. Breaking the high-level “hosting” service into more discrete services,
• Identification of provider(s) and receiver(s) such as “platform” (e.g., Wintel, Mid-Range, Mainframe), “job scheduling,” “backup,” and
of services “server monitoring,” could allow a step down in TSAs, thereby reducing costs and accelerating
the transition. The specifics of the step-down arrangements should be detailed in the TSA, as in
• Description of services not included under
some cases there are no cost advantages to terminating certain services early if the agreement is
TSA: This helps to provide additional
structured as an “all or nothing” arrangement.
clarity on services or portions of a
service that the seller does not intend to Splitting broad services into discrete elements requires an understanding of performance
provide. Remember that the roles and dependencies across different services. Generally speaking, the buyer and seller need to
responsibilities of support groups can vary agree about when certain performance levels can switch to a “best effort” basis as a result of
greatly by organization, so they need to changes in other services. For example, if the buyer has taken over responsibility for application
be clearly defined. monitoring, the seller will not be able to guarantee application up-time.
• Support processes: These processes should Managing TSAs
be as close as possible (if not identical) to
those currently in use. Be sure to describe Get to work. Signing the TSAs are just the end of the beginning. The real work starts when
the issue management process, current the deal closes and the TSAs go into effect. As the services are being delivered, it is important to
severity levels and their definitions, as well continually track and manage the services that are being performed. It is also critical to keep track
as any associated service level agreements of the migration activities and related step-down in services.
(SLAs). Describe the outage management The relationship between buyer and seller will inevitably change once the deal has closed,
process and incident communication plan. regardless of how well they might have worked together leading up to Day One. Sellers will focus
Because a support arrangement may exist on cleaning up the bits and pieces that the divestiture left behind, and then quickly shift their
today, the team should attach any existing attention to their retained businesses and other priorities. Buyers may find themselves wrestling
SLA, trouble management process, or with unanticipated service costs and struggling to capture the promised integration synergies as
system availability agreement to the TSA as quickly as possible. For both parties, the honeymoon will definitely be over.
an exhibit.
Figure 2: TSA management – Example structure
• Geographic coverage: For multinationals it is
important to differentiate where the service
is being provided from (and for whom) so
there is no confusion regarding overlapping Provider of services Receiver of services
agreements at the global and local level.
Executive management/Sponsors Executive management/Sponsors
• Servers and instances: Specify the service
level differences between production Status reporting, Final issue resolution Status reporting,
and nonproduction environments. escalation of issues escalation of issues
Keeping service levels for nonproduction
environments can be extremely Overall TSA manager/PMO TSA performance
Overall TSA manager/PMO
tracking, billing
important, as environments will change in issues, changes in
preparation for isolation and separation. services, etc.

• Special needs: Use this section to capture


Process owner Process owner
scope-related items not contained within Services provided
Day-to-day
Services provided
management
a previous section. Examples include: under TSA under TSA

– Table maintenance: If the service


requires frequent access to maintain Process owner Day-to-day Process owner
Services provided Services provided
tables, the team should spell out the under TSA
management
under TSA
table maintenance arrangement.
– System development: If the teams Process owner Day-to-day Process owner
expect to need systems development Services provided
under TSA
management
Services provided
under TSA
(beyond break/fix) during the TSA
period, the team should describe
Source: Deloitte Consulting LLP
system development expectations.
– User administration: If the team needs To keep things moving forward, each company should identify and assign a service coordinator
the ability to add/modify/remove users to manage their part of the overall relationship. These people are similar to the vendor managers
from the system, the team should who currently exist in many organizations. They do not need to delve deeply into the details of
describe the agreement. day-to-day operations; rather, they need a holistic view of the services being provided and an
understanding of the overall requirements. Their job is to monitor the services being delivered
• Planned exit strategy
against the TSA and keep the separation activities on track.
• Length of agreement/termination of TSA
Retention of key transition resources is another important issue. Sellers will generally want to get
• Cost and invoicing: This section should list on with their business by shifting people to new assignments as quickly as possible. To maintain
the cost and terms (e.g., flat fee, monthly, by adequate staffing and performance during the transition, buyers must specify in the TSA exactly
user) as well as specify the invoicing details, which key resources and groups will be retained to execute the promised services.
including process, content, and timing.
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Be realistic about performance levels. Avoid the common trap


of demanding (or promising) better service than existed prior to the Guiding principles
transition. In most cases the historic service levels were sufficient to
support the business and struck a reasonable balance between service • Draft the TSA with an exit plan in mind.
cost and true business needs. Buyers and sellers should focus their • Create an agreement that is simple but clear; someone new to the
attention on completing the transition as quickly as possible, rather than process should be able to pick up the document and do the job.
get distracted trying to maintain high-than-necessary service levels.
• Get everything in writing. Assume if something is not written in
That said, it is important to precisely define in the TSA what service the TSA, it will not get done.
levels are expected. Simply stating that “existing service levels” will be • Be specific. Relationships change. People forget. Clarify who
maintained is generally not sufficient. Often, the seller has not been will provide support, how performance will be monitored, how
measuring performance for the services in question. In these cases, it is payment will be received, and how issues will be escalated
critical for both parties to agree on the performance metrics and, once and resolved.
agreed, to document them in the TSA.
• Focus on completing the transition, not achieving a high level
Establish an exit protocol. A formal exit protocol is the final step in of service.
the effective use of a TSA. Both parties should understand and agree on • Leverage existing information, including costs, performance
the process required to terminate the service provider relationship (for metrics, reporting mechanisms, etc.
example, requiring the buyer to provide a 30-day notice to terminate
• Allow enough time for both parties to review and revise
e-mail services). In turn, the seller should acknowledge the termination,
the document.
clarify any termination fees, and bill appropriately. Additionally, the seller
should complete any knowledge transfer that was agreed to in the • Track costs religiously.
initial planning, close out the accounting, and take care of any cleanup • Only request changes that are truly critical to the business.
activities, such as deleting, archiving, or inactivating the resources • Agree on a communication plan; continually monitor status and
receiving the service. stay in touch.
Conclusion • Stay engaged and be patient. Developing a robust TSA is an
iterative process — not a “one and done” effort.
A TSA is, by definition, supposed to be temporary. Yet, all too often,
buyers and sellers feel as though they are stuck in a TSA that will never
end. The key to a fast and smooth separation is to understand the most
common TSA pitfalls and take steps to avoid them. Both buyers and
sellers should consider the practical and time-tested insights provided
here in their efforts to design and manage TSAs more effectively.

Notes
1
Garver, Rob. “Take a piece of me,” http://www.cfo.com/article.cfm/8909803?f=related, 2007.

72
M&A IT — Divestiture

Breaking up is hard to do
Five questions for every CIO whose company is divesting a business

By Drew Manusky, Asish Ramchandran, Rod Walker, and Mike Stimpson

Introduction The sooner the CIO knows of any strategic shift caused by the
divestiture, the better — not only because it would affect choices made
In any large divestiture, some of the hardest jobs fall to the CIO: segregate
during the transition period, but because it would have significant
those corporate systems and services needed by the carved-out business;
after Day One impacts on resource requirements and utilization, on
untangle applications and infrastructure (some of which took years to put
investments, and on performance expectations and measurements.
together) in a few months; do it without disrupting service to the ongoing
business, while often holding or even cutting costs.
Tactical tips
Working with companies from every industry, we’ve seen the same
pattern again and again: CIOs end up with their feet in two fires, • After a carve-out, the company’s footprint will likely shrink
expected to provide service above and beyond what they’re used to for materially. IT needs to align or rationalize infrastructure, capacity,
not one, but two organizations. Support the parent company and the and applications to fit the new size and shape of the business.
divested business; be a profit center and operate on shoestring budget; • To perform the rightsizing analysis early in the planning process,
have a long-term strategic vision; and work at breakneck speed. No the CIO should engage the business in defining the nature of the
wonder “breaking up” can make the CIO feel a little like Dr. Jekyll and company’s new business model.
Mr. Hyde.
• Rightshoring/offshoring options need to be evaluated with the
Can anything relieve this pressure? Yes. intent of both reducing the in-house performance of noncore
activities and increasing leverage of core activities kept in-house.
First, the CIO’s office should be included on the deal team. The
expectations put on the Information Technology (IT) organization
escalate when Transition Services Agreements (TSA) for the deal 2. Should we move the divested business, as fast as possible,
are coined. When the CIO is part of the discussion (What can the IT from limited to complete separation?
organization reasonably accomplish with current resources? What
should the TSA promise? How long should it be in place? What are One secret to an effective divestiture is keep the end in mind: What
appropriate rewards/punishments for meeting/missing this timetable?), is the immediate and eventual relationship between the seller and
they can influence the outcome. the divested business? For the CIO, the ultimate goal is nearly always
complete separation (isolation) of the two entities with the timeline
Second, in planning for the divestiture, the CIO can ask five critical being the variable aspect. It is usually in the seller’s best interests to
questions — questions that help frame the IT organization’s work, support the carved-out business for a while, until the buyer is fully
rationalize its use of resources, and direct everyone’s efforts toward a equipped to operate the business. If the seller takes its hands off the
directed conclusion. carved-out business too soon and the business fails, shareholders will
1. Will the divestiture change the nature of the business and, blame the seller.
therefore, the purpose of IT? What’s important is a direction for going forward. How will the seller’s
Sometimes, the carving out of a business can change the obligations change over time (Figure 1)? What do both businesses
fundamental strategic direction of the ongoing enterprise. In most expect from the IT organization at each stage? These expectations, as
cases, the strategic intent behind a divestiture is to realign or refocus well as performance metrics, have to be part of the TSA, which should
the business — to do away with noncore businesses and heighten align the goals of the two organizations.
the focus on core businesses. Therefore, the CIO needs to ask, “What
are the rightsizing implications?”
For example, a company that had been experimenting with innovation
— new products, new markets, or new technologies — might shift
gears, deciding to sell off its more aggressive operations and reinvigorate
its older, commodity products. The role of IT would radically change,
from developing cutting-edge solutions to providing low-cost services
for a low-margin business. (Of course, a company could use a divestiture
to move in the opposite direction. The impact on IT would likely be just
as dramatic.)

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Wired for winning?

3. Where can we cut costs?


Tactical tips
The rationale behind a divestiture usually includes cost savings, as
• If the goal of the divestiture is complete separation as soon as the business being carved out is typically not an efficient part of the
possible, the TSA should be rigid, with escalation clauses that enterprise portfolio. Also, incidental savings — for example, redundant
clearly define strict penalties for not adhering to the schedule. real estate holdings or IT infrastructure consolidation — can become
Extending the agreement should trigger a hefty surcharge. In possible as a result of the divestiture.
pre-sale planning, the seller has responsibility for controlling the
outcome of the carve-out. The sooner the CIO can calculate potential savings, the better. Foresight
about ongoing operating costs is necessary for the IT organization to
• Before Day One, all commingled systems and infrastructure
continue to work with fewer resources. What can be done, realistically and
should be carved out into separate domains.
reasonably? The IT organization should answer that question by analyzing
• If the separation is not time constrained, and if the seller sees a the value of various possible initiatives relative to the time and effort
benefit in supporting the divested business indefinitely, the TSA required for each. Figure 2 illustrates sample results of such an analysis.
should be flexible. The schedule for complete separation might be
negotiable or even open-ended. The TSA should include extension Figure 2: IT synergy opportunities and priorities
clauses for services to be provided at fair market value. The TSA
should also spell out any activities that could be discounted based Initiatives Time to value
on volume and service levels. (Note: In reality, it’s uncommon for a A. Application consolidation and legacy
system retirement (core business and
seller to opt to become a service provider over the long term.) back-office) High A
B. Economics of scale (HW/SW procurement, B
service agreements, and licenses)
C. Headcount reduction (duplication and
C
organization streamlining) D
Figure 1: IT separation continuum D. Telecom contractual arrangements
E F
(long distance, local, conferencing)

Degree of separation E. Support consolidation (help desk,


maintenance, PC services)
Value
I G
Limited Logical Physical Isolation
F. Operational efficiencies (business H
process, data centers, networks)
G. Outsource nonvalue-add services J L
Infrastructure Shared Shared Shared/separated Separated
H. Physical asset consolidation (data
centers, shared services)
K
Applications Shared Shared/separated Separated Separated
I. Expenditure avoidance (telecom
Data Shared Shared/separated Separated Separated bill audits, current/future services, Low
development projects)
IT Services Shared Shared Shared Shared/separated J. HW, SW, business process standardization
Fast/easy Long/hard
K. Skills transfer/upgrade
Access Open Constrained Restricted Very limited (managerial/technical)
Timing and
complexity
L. Effective practice sharing (delivery
Source: Deloitte Consulting LLP model, service levels)

While complete separation (isolation) is usually the ultimate goal Source: Deloitte Consulting LLP
for the IT organization, an interim “limited or logical” separation
is usually necessary when:
• The deal will close quickly (e.g., within three months). Observations

• Confidentiality of parent data/information is not critical. • In many cases, the quickest and highest impact synergies in IT are
decisions NOT to do something — canceling duplicate projects is
• The deal is still being developed and/or multiple buyers are quick and can have significant short-term cost savings
being considered.
• Once a common infrastructure standard is selected, implementing
• The parameters/scope of the deal will develop over time. consolidation is relatively quick — the key is making the decision on
• It’s important to minimize transition impacts to the divested business. standards quickly and early in the process
• The application landscape will likely not change significantly. • Application consolidation and legacy system retirement are the hardest and
most time consuming to integrate, but offer “by far” the highest value
For each process or application, IT needs a Day One strategy,
an interim strategy, and an exit strategy. The IT organization’s • Standardized technology and business processes are a fundamental
position on the spectrum (which changes over time) can affect how enabler for IT integration
data/information is managed, what reports are maintained and • Forward-thinking IT organization have performance-driven cultures
generated, and the type and level of service provided. and a strong focus on continuous improvement. Metrics should be
balanced, promote accountability, and effectively reflect the status
One of the CIO’s particular challenges is resource availability and
of the IT organization
utilization, especially if either business (the original or the divested)
is undertaking a major project, such as a systems upgrade,
installation, or integration at the same time. Another consideration:
the CIO’s operating budget. Sometimes, the speed with which the
IT organization can move from the far left to the far right of the
continuum depends on financial constraints and synergy targets.
If the CIO has to cut the budget by 10 percent in six months, that
automatically impacts the timetable for achieving isolation.

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M&A IT — Divestiture

Technique Advantages Disadvantages Cost savings/Risk


Clone-and-go Time-efficient solution; incorporates flexibility Sensitive data might be exposed to the buyer High High
Set up a copy of production/application on a needed for “moving” divestiture
separate instance; operational Day One
Clone, vitiate, and go Competitively sensitive data is masked from the Requires more time than clone-and-go Low Low
Clone copy, clean out sensitive date (legal and buyer; incorporates flexibility; is operational Day One
competitive), release for production use
Copy, configure, and load Outcome is predictable; know-how for doing this Longest timeline; scope needs to be static; High Low
Create a configuration only copy of application, is widely available more expensive
then load relevant master and transactional
data onto new/separate instance
Extract and go Quick and easy for seller; low-cost option Potentially nonviable option for the buyer Low High
Extract data from production systems, put in (may not have an operational business on Day
flat file, and hand over to buyer One); significant pressure on buyer to keep the
business operational during the transition

Give and go Buyer is operational Day One with a system that Deal will involve personnel seller will no longer Low High
Hand off production system to buyer is familiar; users are comfortable; seller costs have access to historical data; potentially
drop immediately sensitive data will be left in the system
Hybrid Overall risk is better managed; more options to Requires detailed planning early on for each Medium Medium
Choose different techniques for different effectively get to day on suite; business participation is increased
application suites
Source: Deloitte Consulting LLP

Figure 3: PMO roles and responsibilities of two models


Tactical tips
• Most deals have top-line synergy targets. The CIO should hold Passive role Active role
a series of blueprinting workshops to identify the bottom-up
Accountability for integration success
opportunities to capture synergies by function, by application, by
infrastructure, and by activity. (For insights about blueprinting,  Provide limited functional assistance  Direct functional PMO activities

read the article “A new house begins with a blueprint” by Governance


Anna Lea Doyle, principal, and Mark Walsh, principal, Deloitte  Offer sample processes  Drive cross-company/function coordination
and tools  Apply tools across company/function
Consulting LLP). Blueprinting also allows the CIO to prioritize
Workplan design and management
projects, again with synergy capture as the driver.
 Monitor programs at a high level  Drive workplan effectiveness and
• For large applications with significant associated costs, these management
 Manage firmwide resource pool
carve-out techniques should be evaluated.
Issue and risk management
• Benchmarking should be taken with a grain of salt. While an IT
 Manage program-level issue  Complete detailed function risk and Day
cost model addresses the value of IT assets relative to their costs, resolution only One readiness reviews
the actual importance of any given IT asset varies by a company’s  Conduct proactive contingency planning
 Aggressively facilitate rapid decisioning
industry, revenue, number of employees, and other factors. That’s
Communications and management reporting
why benchmarking, while a great tool for promoting creativity,
 Consolidate line-of-business  Mandate consistent reporting standards
should not be considered the source for “black and white” metrics. status reports  Lead programwide communications
Cost reduction and tracking
 Consolidate functional  Drive savings identification and capture; set
tracking reports clear targets
4. How can we effectively manage the timetables and risks of the  Proactively track costs/benefits
divestiture process?
Source: Deloitte Consulting LLP
In the typical carve-out, time frames are shorter, the scope of activities is
bigger, the number of stakeholders is larger, and the risks are greater than the
The command-and-control model used in a divestiture should include
IT organization’s comfort level. Hence, the need for a separation management
guidelines on the appropriate depth of planning and plan maintenance,
office (SMO) modeled on a program management organization (PMO).
a fast-track mechanism for problem solving or issue escalation, and the
There are two possible types of PMO: decentralized (passive) and definition of penalties for decisions not made. For example, in one deal
command-and-control (active), as shown in Figure 3. For an SMO, the the steering committee was told that if it could not make a decision
latter — the command-and-control model — is required because of the within 48 hours, one of the members would have to buy dinner for the
high risks of the deal. The SMO has to be involved in every aspect of entire SMO team.
the carve-out planning and execution — not from a status-gathering
perspective but from a work-enabling perspective.
Early on, the SMO answers questions like:
• What are the critical IT activities that must be prioritized for immediate
implementation?
• What tools and techniques can be leveraged to accelerate transition
planning activities?
• How can the integrating firms enable rapid decision making?
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Wired for winning?

After the break-up, life goes on.


Tactical tips
A divestiture is hard on an IT organization — no question about
• The SMO should be more content-heavy and less status that. Being prepared will help ease the pain all around. These
reporting-heavy. While many management offices focus on five questions point to an underlying truth: Good planning and IT
weekly status reports, the SMO is all about understanding the participation can make all the difference.
carve-out technique, identifying roadblocks, making decisions,
expediting processes, and keeping momentum moving forward.
• During pre-planning, the use of a “clean room” can help direct
the team down the appropriate path.
• The surfacing of issues should be rewarded, not penalized.
(Everybody can use another iPod). Change should be embraced
and encouraged; status quo should be discouraged.
• The steering committee’s role is to enable efficient and effective
decision making.

5. What are ways to retain key talent for the future?


Of course, one of the greatest risks in a divestiture is that the parent
company will lose people whose knowledge and skills are necessary to
operations after Day One. Well-planned communications and retention
strategies can diminish the negative impact.

Tactical tips
• Very early in the process, the CIO needs a detailed analysis
of skills required for achieving the desired outcome (not just
technical skills, but interpersonal skills) and the names of the
people with these skills. Are the right people available inside
the company? Will the IT organization have these skills after
the carve-out? Also, the CIO will want to determine a mix of
full-time equivalent and external resources right for the future
operating model.
• The CIO should establish a separate contract approval process
for HR retention bonuses. Innovative retention techniques can
also include new job descriptions, roles, and responsibilities.
In fact, an emotional appeal is typically more effective than a
financial incentive.
• Clear and consistent communication can help reduce the number
of critical employees that leave during the transition period, can
foster commitment to the change and the new organization,
and can build support and trust. Town hall meetings are a
good, open format for communicating decisions that have
been made (and not made), including timelines. The CIO should
communication widely and often; interactive decision-making is
highly encouraged.

76
M&A IT — Divestiture

77
Appendix
Appendix

About the contributors


James Mark Andrews Colleen Chan
Mark is a Director in the Technology Integration Service Area of Deloitte Colleen is a Senior Manager in the Enterprise Applications (EA)
Consulting LLP and a leader within Deloitte’s M&A Consultative services IT Service Area of Deloitte Consulting LLP. She has over thirteen years of
due diligence service offering. He has more than 8 years of experience with consulting experience and has specialized in IT consulting in support
Deloitte and over 20 years in operations, finance, and IT consulting. He of merger, acquisition and divestiture transactions, as well as customer
has provided consulting services to financial and strategic buyers involving relationship management technology. She has substantial consulting
IT due diligence, transition services planning, and post-merger integration. experience in helping clients in their efforts to achieve business results
Mark has worked with some of Deloitte’s most significant clients. through the enablement of new processes and/or technologies, which
includes gathering and analyzing business requirements, and aligning
Jeff Benesch business requirements with technologies. She has helped many clients
in their efforts to design and implement new customer-centric systems
Jeff is a Senior Manager in the Strategy & Operations Service Area of and has served clients in a variety of industries, including high-tech
Deloitte Consulting LLP. He provides consulting services to help clients manufacturing, life sciences, food and agricultural, telecommunications
in their efforts to execute merger, acquisition & divestiture events, make (client care) and retail sales.
major IT investment decisions, and develop and implement executable
strategy. He focuses on serving clients in the high technology and
Nikhil Chickermane
semiconductor industries, based on his broad operations experience in
both industries. Jeff has provided services in support of clients across Nik is a Manager in the Strategy & Operations Service Area of Deloitte
the M&A lifecycle including due diligence, creating the new company’s Consulting LLP and focuses on Mergers and Acquisitions related services.
operating strategy, identifying synergies, planning pre- and post-close He has primarily worked with clients in the high-tech and life sciences
activities, executing carve-out and standup in divestitures and supporting industry. His consulting experience encompasses the entire M&A lifecycle
the client through achieving their synergy objectives. His primary from M&A strategy to integration, with a focus on synergy planning and
functional focus areas include IT strategy and supply chain operations. customer growth strategies.

Peter Blatman Julianna DeLua, Informatica


Peter is a Principal with Deloitte Consulting LLP and leads the technology Julianna DeLua leads enterprise information management and strategic
strategy service line which is focused on providing consulting services partner solutions for Informatica. A frequent speaker and author on the
designed to help clients in their effort to enable and drive business topic, Julianna maintains active, ongoing engagements with information
performance through effective use of information and technology. management and business intelligence professionals worldwide. She
With over 25 years of experience, Peter has consulted nationally guides the use of information management solutions for Mergers
and internationally to major government and corporate retail, and Acquisitions (M&A) including post-merger integration, divestiture
financial services, health care, high-tech, energy, transportation and planning and revenue growth strategies. She is also a specialist on
telecommunications industry clients regarding the application of advanced Governance, Risk and Compliance (GRC), having led engagements on
technology to business systems development and business transformation. integrated risk and compliance managements for Fortune Global 500
He has provided consulting services involving in all phases of technology companies. Prior to joining Informatica, she managed the integrated
planning, development and integration from strategy through content security product line at Juniper Networks and held strategic
implementation, and has particular experience, knowledge and skills in advisory and consulting positions at Gartner. She holds a Master’s
the alignment of business and information technology strategies. Peter’s and Bachelor’s of Science in Aeronautics and Astronautics from
consulting focus is the intersection of business strategy, information Massachusetts Institute of Technology.
and technology; particularly the shaping/enabling impact of new and
emerging technologies on business strategy. Peter has deep experience Anna Lea Doyle
in IT strategy development, IT governance, IT organization design,
pre-merger IT due diligence and post-merger IT integration. Peter has Anna is a Principal in the Strategy & Operations Service Area of Deloitte
authored numerous articles on IT strategy development, and is a frequent Consulting LLP. With more than 18 years experience in manufacturing,
speaker at industry conferences on the topic of significantly improving the high-tech and consumer business, she is a leader within Deloitte’s
business value of information technology. M&A Consultative Services IT service line with extensive integration
and divestiture experience in the areas of program management, M&A
capability development, integration diagnostics, Day One planning &
Mark Bussey
readiness assessment, IT synergy, IT blueprinting and implementation.
Mark Bussey is a Specialist Leader in the Technology Integration Service She leads our U.S. M&A Consultative Services eminence initiative.
Area of Deloitte Consulting LLP. With more than 25 years of professional
experience, he has helped major corporations align business and IT
strategies, improve the effectiveness of their IT processes, governance and
organization, and integrate/separate IT functions in mergers, acquisitions
and divestitures. Mark specializes in IT strategy development and
implementation, business process improvement, performance measurement
and financial management. He’s held a senior role in providing services to
more than a dozen global enterprise application projects. He has provided
consulting services to clients in a number of industries in Latin America,
Europe and Asia. Mark is fluent in Spanish and German.
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Wired for winning?

Sheri Fedokovitz Rene Hoffman


Sheri is a Partner with Deloitte & Touche LLP and has over 18 years Rene is a Principal with Deloitte & Touche LLP and has over 21
of experience in providing data quality and integrity assessment years of experience. She currently serves as the national leader of
and consulting services with particular focus on the implementation Audit and Enterprise Risk Services (AERS) within Deloitte’s M&A
of monitoring techniques and systems, and the development/ Consultative Services with experience in global mergers, acquisitions
implementation of data quality applications and solutions. She is and divestitures. The AERS focus areas for integrations and divestitures
the national leader of Deloitte’s Data Quality & Integrity service line. related services are reporting advisory services — U.S. GAAP, IFRS,
As part of her role, Sheri has overall responsibility for developing SEC reporting (conversion, implementation, evaluation, application,
and maintaining the data quality specific components of Deloitte’s preparation, training, development of financials for carved-out entities),
implementation methodology and the associated automated tools transaction execution: SEC reporting requirements (S-4 filings) and
and approaches used to support and facilitate assessment and related activities (responding to comment letters, etc); establishment
implementation related services, including those to support merger, of treasury operations for divestitures and treasury merger integration
acquisition and divestiture related services. In addition, Sheri provides including: cash management, financial risk management (interest
leadership over delivery of Deloitte’s transaction monitoring services rates, FX, commodities), policies, procedures and treasury technology;
and leads Deloitte’s alliance relationship with ACL, a data analysis regulatory controls (SOX, data privacy, HIPPA, industry regulations,
software vendor. etc): risk assessment, rationalization, implementation, automation,
readiness; implementation of ERP security and application controls;
Eileen Fernandes data conversions, master data management and data governance; IP
protection, cross — border privacy, and access provisioning.
Eileen is a Principal in the Human Capital Service Area of Deloitte
Consulting LLP and serves clients in the Technology, Media, and
Joseph Joy
Telecommunications (TMT) industry. She is the national leader of
Deloitte’s M&A Consultative Services Human Capital service line. She has Joseph is a Senior Manager in the Technology Integration Service
more than 20 years of experience in people management and human Area of Deloitte Consulting LLP. He has over 16 years of consulting
resources strategy development and implementation for organizations experience spread across such areas as mergers and acquisitions,
undergoing a change of ownership. Eileen provides consulting services divestures, IT integration, data center & networks and IT cost reduction.
to assist clients in their efforts to develop and deliver integrated His experience also includes consulting services in support of the
communications to internal and external audiences. implementation of OLTP, ERP, CRM and package based applications and
the planning, scoping and execution of complex projects. Joseph also
Indira Gillingham has experience working with vendors in providing consulting services
in support of implementation and technology support related activities,
Indira is a Manager in the Technology Integration Service Area of hardware/software procurement, and the development of processes,
Deloitte Consulting LLP, focusing on technology strategy and M&A procedures and documentation required to support implementations.
services. She has over 8 years of professional consulting experience
servicing a variety of clients in the TMT industry. Her specialty is
Bill Kobel
providing services designed to help clients in their efforts involving
technology strategy and the execution of large complex business Bill is a Principal with Deloitte & Touche LLP in the Enterprise Risk
transformation initiatives across all phases including planning, Services service line and Security & Privacy Services service line and is
development, and implementation of technology solutions. She also a leader in the Security Management & Strategy and Infrastructure &
has consulting experience with large scale, complex divestitures (greater Operations Security service offerings. Bill has over 26 years experience
than $2 billion) and post-merger integrations. with information risk management disciplines, and has provided
consulting service in support of projects involving enterprise security
John Gimpert strategy and architecture development, identity and data access
management, infrastructure protection solution implementation,
John is a Partner with Deloitte & Touche LLP. He leads Deloitte’s Midwest Governance, Risk, and Compliance (GRC) programs, IT risk
region Corporate Governance service line. In this role, he is actively management, and large systems project implementation. He has served
involved in shaping Deloitte’s approach to providing services designed clients in the banking, federal, health care, insurance, manufacturing,
to assist clients with corporate governance and help them achieve petroleum, retail, telecommunications and utilities industries.
sustainable risk management and compliance programs. With over 25
years of experience, he has served some of Deloitte’s largest clients.
Pavel Krumkachev
He has provided services to assist clients with their efforts to design
and implement corporate governance and risk management programs, Pavel is a Principal in the Technology Integration Service Area of Deloitte
ethics and compliance programs, and governance and control related Consulting LLP. He brings 12 years of professional consulting services
training programs. He has assisted the senior management of several experience to his clients, specializing in M&A IT, business process
large public organizations in their efforts to develop and implement integration, and service oriented architecture related services. Pavel
sustainable Governance, Risk and Compliance (GRC) programs in focuses on the high-tech industry. He has led the consulting services
response to business acquisitions, reorganizations and spinoff’s. provided in support of a number of large M&A efforts geared toward
helping the client effectively complete strategic IT initiatives related to
M&A. Pavel leads Deloitte’s M&A IT Methodology team. In this role he
is responsible for the development of Deloitte’s comprehensive and
structured methodology for all phases of M&A IT activities.

80
Appendix

Eugene Lukac Dr. Frederick D. Miller


Eugene is a Specialist Leader in the Strategy & Operations Service Area Fred is a Director in the Human Capital Service Area of Deloitte
of Deloitte Consulting LLP. He provides consulting service to major Consulting LLP and has 15 years of professional consulting experience.
corporations to help them in their efforts to integrate IT functions in His work at Deloitte focuses on providing services in support of the
mergers and acquisitions, align business and IT strategies, and improve deployment of business strategies and cultural change, the design
the business effectiveness of IT. He is a recognized specialist on the of effective global organizations for knowledge work, cultural due
financial management and contribution of the IT organization. He has diligence and executive assessments for mergers and acquisitions. He
provided consulting services to some of the world’s largest companies has led the development of Deloitte Consulting’s methodology for
in support of their preparation for and their conduct of post-merger cultural due diligence.
integration. Eugene is a frequent speaker at industry gatherings, and a
contributor to several publications. Shalva Nolen
Shalva is a Senior Consultant with Deloitte Consulting LLP in the
J. Marc Mancher
Technology Integration Service Area’s Platform Architecture and
Marc is a Senior Manager in the Outsourcing Advisory Services service Infrastructure service line where her focus has been on delivering Next
line of Deloitte Consulting LLP. He has over 15 years of experience in Generation Data Center and M&A IT related consulting services. She has
providing services to clients focused on IT and business outsourcing more than 4 years of consulting experience providing services involving
and offshoring, as well as, mergers and acquisitions including cost next-generation data centers, M&A IT integrations and divestitures,
reduction, transformation and risk management in the complex decision custom IT implementations, and IT shared services operations, working
making process. Marc has provided services in support of the structuring with clients in a range of industries. She also helped lead the effort to
of significant (as large as $2 billion both domestic and international) develop Deloitte’s M&A IT Methodology.
outsourcing and offshoring projects, CIO evaluations of IT capabilities
during mergers, establishing an offshore presence, evaluating IT portfolios John Powers
during divestitures, managing IT end user and call center operations, and
in-sourcing previously outsourced and offshored functions. John is a Principal in the Strategy & Operations Service Area of Deloitte
Consulting LLP and leads Global M&A Consultative Services. John is also
the U.S. service line leader for M&A Consultative Services and directs
Andrew Manusky
the Global M&A Center of Excellence in Hyderabad, India. With over 12
Drew is a Principal in the Enterprise Applications (EA) Service Area of years of strategic and operational consulting experience, John focuses
Deloitte Consulting LLP. He focuses on leading the consulting services the majority of his time providing consulting services related to merger
in support of technology enabled, enterprise transformations for a integration, commercial due diligence and restructuring. John has
diverse range of M&A clients. Over the past 17 years, Drew has provided provided consulting services to several Fortune 500 clients in a variety
services involving the planning, development and implementation of industries, including TMT, life sciences, and consumer products, both
of ERP, application migration, IT infrastructure, IT operations and IT domestically and internationally. John holds an MBA from Northwestern
outsourcing for a host of M&A life science and manufacturing industry University’s Kellogg Graduate School of Management and a bachelor’s
clients. His experience includes enterprise application implementation degree from Brown University.
and consolidation, merger and acquisition/divestment IT integration/
separation, business and IT strategy development, CIO advisory services, Asish Ramchandran
business process reengineering and supply chain management.
Asish is a Principal in the Technology Integration Service Area of
Deloitte Consulting LLP and a TMT industry specialist. He is a leader
Olivier May
within Deloitte’s M&A Consultative Services IT service line with
Olivier is a Senior Manager in the Outsourcing Advisory Services extensive technology transformation, integration, divestiture, carve-
service line of Deloitte Consulting LLP. He has 17 years of experience, out, restructuring, and technology management leadership experience.
specializing in areas including business-IT alignment, technology His experience includes providing consulting services in support of
integration, strategy development, project management and large-scale systems implementation project planning and execution
global telecommunications. Olivier has provided services to Global management, process re-engineering and process conversion. He has led
2000 corporations focused on strategic projects in the health the consulting services in support of multiple large-scale implementation
care, manufacturing, and financial services industries. He has lead projects within the M&A area and has provided advisory services to help
the consulting services in support of large scale shared services clients, ranging in size from $150 million to over $30 billion, in their
transformation projects in the areas of IT, F&A and procurement that efforts to drive their integration planning and execution and IT portfolio
involved every steps of the outsourcing/offshoring lifecycle. He also has realignment efforts.
extensive consulting experience involving sourcing including contract
management and supplier relationship management and has worked Punit Renjen
with ITO and BPO service providers in North America, Brazil, Hungary,
Romania, India, China and Australia. Punit is a Principal in the Strategy & Operations Service Area of Deloitte
Consulting LLP. He has over 20 years of experience advising senior
management and leading Deloitte teams in pursuing and delivering
on a diverse set of M&A and strategy services. He has held numerous
leadership roles with Deloitte, most recently as the leader of the Global
Strategy & Operations Service Area for Deloitte Touche Tohmatsu as
well as the Deloitte Consulting LLP Strategy & Operations Service Area.
He currently serves on the Board of Directors for both Deloitte LLP and
Deloitte Touche Tohmatsu. Punit has authored a number of papers in the
M&A space including Avoiding Merger Failure and Making the Deal Work.

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Wired for winning?

Jan Roehl Mark Walsh


Jan is a Principal with Deloitte Consulting LLP and leads the Enterprise Mark is a Principal in the Strategy & Operations Service Area of Deloitte
Applications (EA) Service Area in the Northern Pacific Region. She is Consulting LLP. He is the national leader of Deloitte’s M&A Consultative
responsible for facilitating the delivery of all ERP-related services within Services IT service line and has over 20 years of professional experience
the region. Jan has managed the consulting services in support of leading consulting services in support of projects involving due-diligence,
the implementation of numerous ERP and CRM software packages, divestiture, carve-out, integration, joint venture, and portfolio swaps
including ones from Oracle, PeopleSoft, SAP, and Siebel. Jan has in the consumer business, manufacturing, high-tech, and health care
over 20 years of global systems-related experience in a variety of industries. His consulting experience includes significant work in the M&A
sectors including media and entertainment, consumer business, strategy, program planning and execution management, process re-
communications, cable, high-technology manufacturing, and financial engineering, transition services agreement development, and outsourcing
institutions. Additionally, she has extensive experience with global Oracle advisory areas across multiple functional areas. He has provided senior
implementations and with mergers, acquisitions, and divestitures. She management support to help clients in their scoping, planning and
has co-authored over 10 books on accounting and information systems. execution efforts for more than 20 global carve-outs and integrations
ranging in size from $250 million to $20 billion.
Mike Stimpson
Kenneth Wu
Mike is a Manager in the Technology Integration Service Area of
Deloitte Consulting LLP. He brings more than 12 years of experience in Kenneth is a manager in the Technology Integration Service Area of
IT planning and operations. He focuses primarily within the health care Deloitte Consulting LLP, focusing on technology strategy services. He
and life science industry and on providing consulting services in support is experienced in providing consulting services in support of M&A IT
of customer transformation efforts as well as merger & acquisition due diligence and post-merger IT integration activities. Ken also has
IT planning activities including the integration of technologies and IT experience in providing services in support of numerous private equity
operations to realize identified synergies and the efficiencies of their and strategic clients on M&A IT issues. His experience, knowledge and
new scale. skills includes areas such as IT due diligence and planning post-merger
IT integration.
Tom Torlone
Tom is a Principal in the Outsourcing Advisory Services service line of
Deloitte Consulting LLP. His previous work includes over 20 years of
providing outsourcing services to more than 200 clients on many aspects
of the outsourcing lifecycle. He specializes in business process, IT, and
knowledge based process outsourcing markets and is called upon often
to speak at conferences on these topics. He has published several papers
and is one of the principal architects of Deloitte’s approach to providing
services to clients in the outsourcing advisory space. He has been able
to build a significant experience base with clients in a variety of vertical
industries, having advised these clients on a broad range of outsourcing
initiatives. He provides consulting services to clients regarding the
potential benefits of outsourcing to their respective businesses and
assessing the feasibility of alternative delivery models. His most recent
clients are part of the high-tech, media, life science and consumer
business industries.

Rod Walker
Rod is a Senior Manager in the Technology Integration Service Area
of Deloitte Consulting LLP, focusing on M&A IT related services.
His experience includes providing services involving due diligence,
integration, IT restructuring efforts, and M&A IT capability development
across a variety of industries including consumer & industrial products,
media and entertainment, and energy.

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Appendix

Deloitte’s M&A Consultative Services


Deloitte’s M&A Consultative Services cover strategy, integration, divestiture, human capital, information technology, financial advisory, and tax planning.
Our purpose is to help companies protect and grow shareholder value.

Advice and support across the entire M&A lifecycle

M&A Target Due Transaction


Integration Divestiture
strategy screening diligence execution

Strategy. With a well-crafted growth strategy in hand, management Synergies and value capture. Capturing synergies (both cost and
is better prepared to recognize possible mergers, acquisitions, or revenue) is usually the driving force behind the decision to merge two
divestitures that could move the company toward its goals. Plus, we can companies. The integration team works toward fulfilling these promises
help put in place the organizational structure and support needed to act by identifying functional and operational areas where costs can be
efficiently and effectively. reduced. It also assesses market revenue opportunities to capture the
deal’s value by evaluating customer, market, and product synergies.
Target screening. Chasing unqualified acquisition prospects wastes
valuable time and resources. A structured screening process can help a Customers, markets and products. Protecting and growing core
company define the acquisition criteria upfront, create a pool of target business revenues are vital to capturing value. During planning, the
candidates and focus on prospects that match its strategic objectives. integration team conducts in-depth studies of customers, markets and
products and makes recommendations to executive management for
Due diligence. It pays to dig deep to uncover an acquisition target’s
integration or divestiture. To excel, the team must manage the change so
true value and risk before the offer is made. Scrutinizing financial
that business continues as usual — or improves — during the transition.
statements and understanding tax implications is just the beginning.
There’s also commercial diligence work required to evaluate the Organization and workforce. Headcount reduction is a common
potential impact on customers, markets and operations. Key back office target for lowering costs, but it’s equally important to retain top talent.
areas, such as human capital, information technology and supply chain, Creating the new organization chart requires deft handling to satisfy
demand special attention. practical and political concerns.
Transaction execution. With the deal structure and valuation finalized, 360° Communications. Timely and clear communication among all
it’s time to close the deal. Sound financial, tax, accounting and legal the stakeholders is critical. The integration team facilitates top-down
advice can go a long way toward helping fulfill goals and avoid and bottom-up communications among executive management,
unnecessary risks. shareholders, employees and customers of both companies.
Integration. Few operational challenges are more daunting than Finance, human capital, supply chain, and information technology
merger integration. It’s a balancing act that requires close attention to integration. Delivering on the synergy targets requires drilling down
meeting the expectations of all stakeholders – management, employees, into each functional area, searching for opportunities to capture value.
customers and shareholders. In an ideal world, integration planning Ideally, an outside functional specialist is assigned to each key area, such
begins well before the deal closes to facilitate an issue-free Day One for as finance, human capital, supply chain and information technology.
the combined company. Also, a team leader with an objective outlook and broad experience
working with many companies can see opportunities that someone with
Divestiture. Divestitures are not just mergers in reverse. Achieving
less experience may miss.
the expected results is highly dependent on maintaining operational
excellence while managing potential conflicts between the time of the Location and facilities. Strategic decisions, and often negotiations,
announcement and the final execution of the divestiture. are required when mergers result in overlapping locations and facilities.
Some sensitive decisions, such as selecting a merged company’s
Comprehensive M&A planning and execution
headquarters, require evaluating softer qualitative factors alongside the
During an M&A integration or divestiture, the qualities we bring — hard numbers.
knowledge, speed, objectivity, and experience — help our clients achieve
a smooth transition.
Integration and divestiture management. During planning and
execution, the integration team keeps the project on track by moving
the decision-making process forward and coordinating integration
activities across both organizations. The team also expedites and
monitors progress toward each milestone from the time the deal is
announced until all the integration or separation goals are achieved.

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Wired for winning?

Deloitte’s M&A IT Methodology


A merger or acquisition is the most rapid way for a business to IT due diligence - The key objectives:
dramatically affect its position in the marketplace. M&A can change • Develop an understanding of a target’s IT strategy, IT operations
the fundamental dynamics of an entity almost overnight by changing and organization
the scope and breadth of the products or services it provides and
the paradigms along which it competes. Deloitte has a time-tested • Assess potential IT cost synergies or cost reduction opportunities
methodology for helping our clients in their efforts to manage M&A IT due diligence focuses on three key areas:
transactions. The methodology is a comprehensive, integrated set of
detailed tasks and work steps designed to be used to guide for our • The IT infrastructure due diligence effort includes accessing server
clients through the six phases of the lifecycle — M&A strategy, target hardware and network capabilities, data centers and IT help desk or
screening, due diligence, transaction execution, integration, and call centers that may be in-house or outsourced to a vendor. If the
divestiture. The IT component of the methodology and approach has data center or the IT help desk or call center locations are physically
been used in over 700 M&A IT due diligences, IT divesture, and IT post- owned by the target, then the IT infrastructure due diligence scope
merger integration related projects. may include a site visit to these locations.
• The IT applications due diligence effort includes accessing the key
Our M&A IT Methodology specifically is designed to help the CIO enterprise applications, such as those deployed for enterprise resource
effectively address the challenges encountered by their organizations planning (ERP), customer relationship management (CRM), and supply
during due diligence, integration or divesture. Supporting the IT chain management (SCM), and enterprise information management
Methodology is a practical and robust tool-set that can be leveraged to applications such as data warehouses and business intelligence
expedite execution of the IT-related activities associated with post-deal applications, master data management, and metadata repositories
integrations and divestures. It focuses on helping the CIO create the
technical environments necessary to host resulting ERP and non-ERP • The IT supplier management due diligence effort includes accessing
software, including legacy system interfaces and back-office supporting areas of target’s existing IT sourcing and procurement arrangement
infrastructure. The M&A IT Methodology covers the full spectrum of IT and the feasibility to renegotiate, terminate, transfer, extend or renew
integration/divestiture topics in the following four major areas: the contracts with the suppliers.
• PMO and governance
• Infrastructure
• Applications
• Supplier management

Deloitte’s Merger & Acquisition Methodology

M&A management office

Synergies & cost reduction


Transaction

Integration

Customers, markets & products


Divestiture
execution
screening

diligence
strategy

Target
M&A

Due

360˚ Communication

Organization & workforce

Functional integration

Location & facilities

84
Appendix

IT Integration - The key objectives: IT divesture - The key objectives:


• Create a strategic plan for IT integration • Execute against the client’s IT divestiture strategy
• Develop the acquirer IT strategy and a vision for the combined • Plan and manage the IT divestiture transaction
IT organization • Capture IT divestiture value
• Establish IT performance metrics • Complete any post-divestiture activities to confirm a clean separation
• Create business processes for the combined organization of the IT organization
• Design the structure for the combined IT organization A key consideration for IT divestures. Divestures can include
• Implement the combined IT organization structure and work processes carve-outs, spin-offs, liquidations, split-offs, exchanges, and tracking
stocks. While divestiture activities can create a major strain on an
A key consideration for IT integration. It is critical that those organization’s resources, the organization must maintain operational
involved with the IT integration understand the aspects of process excellence between the time of the announcement and final execution
change unique to mergers such as the requirement for establishing an of the divestiture. This task should not be underestimated. Meeting Day
understanding of existing processes from the acquirer and the target. One requirements and positioning for Day Two business processes are
This understanding is crucial to enabling appropriate decisions about difficult while simultaneously trying to operate in an environment of
the process attributes to be adopted in the new organization. A well- business as usual and separation.
orchestrated and openly communicated analysis of existing processes
can help integration participants define new processes that capture the
most effective existing practices and Industry benchmark practices.

Deloitte’s M&A IT Methodology

Due diligence Integration/divestiture

1 2 3 1 2 3 4
IT IT IT supplier IT IT IT IT supplier
infrastructure applications management PMO infrastructure applications maintenance

Plan, conduct Plan, conduct Plan, conduct Plan and Develop and Develop plan Create and
and finalize IT and finalize IT and finalize establish PMO implement and execute implement
infrastructure applications due IT supplier structure and plan for IT activities related overall sourcing
due diligence diligence management activities for IT infrastructure, to IT applications and procurement
due diligence detailing tasks, plan
activities,
resources, and
cost figures

Note: The M&A IT methodology is specifically designed to help address the challenges of the IT function during due diligence, integration or divestiture.

85
Wired for winning?

86
Related reading: Wired for winning is the second compendium of
articles in Deloitte’s Making the deal work series. For a broader look
at M&A issues, check out Making the deal work – Perspectives on
driving merger and acquisition value.

Coming soon: The next two installments of Making the deal work
focus on Human Capital and Finance issues in M&A.

Find Wired for Winning – and links to all Deloitte M&A related
materials — at www.deloitte.com/us/makingthedealwork.

Talk to us: We look forward to hearing from you and learning what
you think about the ideas presented in this compendium. Please
contact us at Makingthedealwork@deloitte.com.
This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this
publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice
or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may
affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained
by any person who relies on this publication.

Copyright © 2008 Deloitte Development LLC. All rights reserved.

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