Don't fear the merger

Merger and acquisition (M&A) activity is currently booming, yet for the executive tasked with integrating the merging companies, it can be a daunting challenge. Cliff Longman, CTO of Kalido asks if this concern is justified and looks at ways to lessen the fear.

In recent months, we've seen a real boom in M&A activity across several different industries. In telecoms, for example, the Alcatel / Lucent and Telefonica / 02 deals spring to mind, and Deloitte counts 12 cross-border financial services mergers over $3 billion in the last two years. 

Indeed, in 2005 a Bain and Company survey of 960 global executives found that 'acquisitions will be critical to achieving [their] growth objectives over the next five years'.

Many perceive the world of M&A to be rather glamorous, with sharp-suited lawyers and bankers signing multi-million deals. But once all the glitz and razzmatazz has subsided, and the bankers and lawyers have taken the fees and moved on to another project, what happens next?

Well, you can be sure that it will fall on the shoulders of someone - usually the CFO - to deliver all the vast synergy benefits that were promised to the market. Although a talented and capable individual, the CFO responsible for ensuring these savings can often be plunged into uncharted territory by a merger.

It's no wonder they feel the pressure: according to Deloitte, between 50-70 percent of mergers fail to deliver shareholder value. So the heat is on to deliver savings against the odds.

Speed is of the essence too: Accenture revealed that for an acquirer expecting to reap $500 million in yearly cost savings from an M&A transaction, a mere one-month delay reduces the net present value of the deal by more than $150 million (assuming a 10 percent cost of capital).

A seven-month delay costs nearly $1 billion in lost value, or approximately $3.5 million per day. With figures like these, it is no wonder that many CFOs approach a merger with a sense of trepidation.

It certainly sounds like an almost impossible task, but should a merger really strike so much fear into the CFO's heart? Not necessarily. In fact, forward-thinking CFOs could actually view mergers as a golden opportunity to not only progress the success of a company, but also make a name for themselves and delight their bosses. So the question is: How?

First, before the merger, successful acquirers need to ensure that their due diligence efforts incorporate fast, accurate assessments of both short and long term success.

Superior information management technology is crucial, as companies with access to accurate, reliable data are able to precisely measure not only the potential synergies, but also the 'dis-synergies' that need to be divested.

The best practice is to implement a flexible information management approach that accommodates scenario planning - that is to say, one that enables reporting requirements to be continuously modeled on the fly to examine 'what was,' 'what is,' and 'what could be'.

In doing this, both the business and IT are able to examine what the new business model would look like post-merger. This helps to avoid unpleasant surprises and costly delays after the merger has taken place. It also means that the project can gradually be extended to other areas of the business after the event.

As well as looking forward, the capability to look back is also very important, especially in this heightened regulatory climate. It is imperative that the CFO can report on old information using the structure that was appropriate at the time, while running the business on a post-merger model.

These historical structures are necessary for compliance initiatives and trend analyses, thus, a solution needs to be implemented that keeps track of business model representations pre- and post-merger.

In order to attain meaningful reporting information post-merger, the CFO has to both see how the new business is performing in order to develop financial and market results, and appease stakeholders as they eagerly await information on the merger’s success. But when two companies of significant size come together, merging IT systems overnight is clearly impossible.

A solution is needed that allows companies to rapidly integrate management information from disparate systems without the need for standardisation or invasive change to source systems.

It can be tempting to choose one company's system over the others', but this will only serve to alienate both customers and employees, according to analysts. Moreover, any CFO who attempts this will soon realise that rapid standardisation is pretty much impossible - there will always be diversity in large organisations due to varying data structures and systems.

It is more important to quickly implement a system that will give a cross-company perspective and so immediate benefit than to waste time on the never-ending task of standardising systems through the company.

This is all very worthy, but what you need immediately is to understand the gross margins of all the product lines, channels and global accounts across the newly acquired entity.  Switching off old systems can wait.

Clearly, any M&A signals a time of upheaval within a company. But this isn’t the only time major changes will impact operations, so the merger provides an excellent opportunity to make sure any systems and processes to acquire post-merger data are flexible enough to cope in the future.

This is particularly relevant if the market is at a turning point with a potential to move in another direction. Therefore a solution that provides adaptability to post M&A business and market changes, such as competitor activity, reorganisations or market consolidation, is crucial.

Labatt Breweries was one particular company going through major organisational restructuring a few years ago, moving from a regionally federated business to a national business.

When Labatt was involved in the merger with AmBev not long after, by taking this approach and deploying flexible data warehousing software, its executives were well-prepared to handle this major upheaval with minimum disruption.

Companies would do well to look towards one of the largest mergers in recent years - Halifax and the Bank of Scotland's venture to form HBOS plc – where they chose a flexible data warehouse to get a consistent view of procurement data held in disparate systems.

HBOS was realistic enough to recognise integrating operations and IT systems from different divisions was a long-term endeavor. But implementing an iterative approach - taking the project in bite-sized chunks - and using a data warehouse to sit above their underlying systems, their business users were able to gain the necessary insight to drive significant cost-savings. Above all, these savings were delivered quickly.

Any merger or acquisition of any size is going to present significant challenges when it comes to integrating the disparate systems of the two companies involved. However, with the right approach, CFOs can make it the defining moment of their career. 

This article first appeared in ITNOWextra November 2006.