In a byline in Norwegian business newspaper, Finansavisen, PA’s Øystein Landgraff and Olav Lydersen, IT experts, explain why companies risk big losses if they fail to include IT functions in due diligence prior to mergers and acquisitions.
PA’s experts advise that skipping a review of IT systems during a merger or acquisition can prove costly. Olav comments: “No company will include a figure to reflect the failure to realise IT synergies in their annual statement, but we know of a number of examples where things have turned out badly.” The pair explains that, in a merger, IT is an area where benefits from synergy are almost always expected. “Our experience is that almost half of the anticipated savings can be related to IT,” says Øystein.
Olav cites Nordea’s acquisition of Postgirot Bank in 2001 as an example of a situation where IT was not taken into consideration, with very negative results. By contrast, he names Danske Bank as a company that has made a success of its acquisitions due to its strategy of moving all acquired customers on to a common IT system.
IT is increasingly intertwined with organisational core processes and, due to innovative product, service and customer care delivery solutions, has become a source of competitive advantage in many industries. “Leaders without IT experience often think it will be easy to integrate IT systems. Unfortunately, that’s not always the case,” says Olav. “Different systems hold different information and may define this information differently. So it may prove difficult to integrate core system functions without making changes to the core itself. The problem is that, in making changes, many organisations go for simple solutions that do not support the initial intention of realising synergies through the merger.”
Øystein goes on to explain how failing to initiate IT due diligence often leads to IT departments from both organisations having to get involved in order to resolve the situation. This is a time-consuming process and comes at the expense of day-to-day business.
To avoid these types of problem, PA’s experts believe every mature company must develop an acquisition and integration model to ensure that any companies it acquires are aligned with its strategy and share its platform. This emphasises the importance of the acquirer having a scaleable IT model.
With a good process in place it, integrating a broad range of IT systems should be fairly straightforward in most industries. However, Olav warns: “If a company does not have this concept in place, it is absolutely essential to develop a strategy rather than considering each acquisition on a case-by-case basis. Requesting technical due diligence is imperative for success”.
PA’s experts also alert acquiring companies to the danger of under-investment in IT on the part of the selling party. As the seller will be interested in getting the best possible return, it is not uncommon for this party to under-invest in IT just before a sale to improve results. This relates to everything ranging from IT infrastructure and ERP systems to smaller support systems.
Additionally, investments needed to align systems with regulatory requirements and software licensing costs may also be overlooked. “When taken all together, these conditions will generate a classic combination of a high transaction cost and low reward realisation during the integration phase,” says Øystein.
Øystein Landgraff and Olav Lydersen are IT experts at PA Consulting Group
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