The importance of IT due diligence during the M&A process
Most firms, when looking to take part in mergers and acquisitions activity will want to generate synergies. However, many deals fail to achieve the required level of synergy due to inadequate focus being given to IT.
A recent report from Ernst & Young (E&Y) has given an interesting insight into this issue, clearly showing that although dealmakers are aware of the vital importance of IT in the deal making process, too little attention is given to this function.
The report shows that a large proportion of respondents admitted that both unrealistic synergies and deal value erosion result from inadequate attention to IT at the pre-deal stage. Despite this, only 21 per cent of corporate respondents said they took IT considerations into account when carrying out negotiations for a deal. Astonishingly, almost half of those who answered E&Y’s questions said that more IT due diligence would have prevented deals they have been involved in collapsing in the past.
Only 40 per cent of those questioned said that they considered IT to be a priority during the due diligence process. This compared very poorly to other businesses functions, which were given much more attention. For example, finance was given priority in 79 per cent of deals, while 54 per cent considered supply chain operations factors to be a priority and 48 per cent considered sales and marketing a priority function.
Both Ernst & Young and Deloitte - in its ‘The role of Information Technology in Mergers and Acquisitions’ report - claimed that deciding on an IT approach early in the M&A process will be most effective. This means that, based on what the due diligence process throws up, the buyer will decide whether to integrate the target’s IT function with its own, or set up new ones after the deal is complete.
Deloitte’s report states that synergies “are realized through effective planning and execution of pre- and post-merger activities – especially the integration of the merging entities’ IT processes and systems.”
However, whether to integrate or not is an important consideration and one that should be given plenty of thought during the early stages of the M&A process. The E&Y survey found that 25 percent of those questioned said that problems with IT post-transaction often prevent business objectives being fulfilled. This underlines the vital nature of making the right decision, as when done properly, integration can bring with it many advantages, such as reducing operations costs or scaling a business.
Software giant Oracle, for example, managed to successfully consolidate 70 different systems through a single enterprise resource planning system, which helped it to support the acquisition of 50 firms between 2005 and 2009, saving it an estimated $1 billion a year. This kind of integration can only be a success if both parties understand how the systems work and whether they are compatible with existing systems.
If a firm decides the target’s IT systems are not compatible, they may look into building their own, post-deal. This is often the case when firms realize that the target’s IT systems are just too different. Looking at new technologies such as virtualization and other cloud computing options can help to reduce costs.
In conclusion, due diligence is not an optional process when undertaking an M&A deal, and IT should never be seen as an optional part of due diligence. After all, due diligence is not just there to identify risks, it can also identify opportunities to improve IT effectiveness, cut costs and fully leverage resources.