Monster mergers

Ian Glanville, chief financial officer at Azzurri Communications, the converged voice and data communications consultancy, knows a thing or two about integrating IT systems after a merger or acquisition. But then, he ought to. Since 2000, Glanville has overseen 15 acquisitions by the telecoms group, which has built revenues from nothing to more than £100m in six years.

Each has involved ensuring that its IT is integrated into the entire group to deliver more value. And Glanville is impatient for results. “When we acquire a company, we have a post-acquisition plan, which starts on day one after the completion. We have 90 to 120 days to integrate the target.”

Azzurri, more often than not, hits this tight timescale because it sets up its post-acquisition integration team even before it has completed its due diligence on the target. The cross-disciplinary team includes finance, HR, operations, management information systems and marketing. The team, many of whom have been together for most of the 15 acquisitions, are studying what needs to be done even while the finance people are haggling over the final terms.

This is quite different from the situation in some other companies, which have struggled to integrate IT after a merger or acquisition – and, as a result, failed to harvest as much value from the deal as they expected.

Fragmented systems

Contrast Azzurri’s experience with Interpublic Group, a global marketing services provider, which embarked on an aggressive buy-and-build strategy, coincidentally also in 2000. It bought more than 400 companies around the world, but took the decision to allow each to run with its existing IT rather than develop an integrated global approach. As a result, the company experienced difficulty consolidating financial results and meeting its obligations under US GAAP.

This failure contributed to $588m (£315m) losses in 2004 and $139m in 2005, not to mention the $300m in consultants’ fees to get Sarbanes-Oxley compliance in place. No wonder Michael Roth, IPG’s chief executive, told a newspaper last year: “Get accounting systems in place before you go global. Interpublic’s financial woes have been compounded by a failure to unify its operation’s IT systems.”

As Glanville has discovered, when you integrate an acquisition, the devil is in the detail. Azzurri’s post-acquisition team focuses on 120 line items, which are key to integrating the companies. From an IT perspective, that’s partly about checking through to make sure that all financial definitions in the acquisition are aligned with what Azzurri already uses. But it’s also about a number of other factors such as standard terms and conditions and whether websites carry compatible information.

Most critical is the job of sorting out the data issues. “We look at whether the acquisition is tracking data in the way the group needs and how we can get systems to talk to one another,” Glanville explains. That task is usually easier because Glanville and his colleagues will have closely examined what information the acquired business uses – and how its IT is structured to deliver that information – even before they take a decision about buying it. “Potentially, we are looking for a customer relationship management (CRM) system,” says Glanville. “If they are tracking that kind of information, they’re likely to be a good target and we can work with them.”

It’s significant that Glanville focuses on the information rather than the IT systems that crunch it. As he says: “If the information is available, there are proprietary systems you can use to migrate it and blend it with your own.”

Yet what’s clear from talking to people who’ve worked on post-merger IT integrations is that the issues that are most important vary depending on factors ranging from the power politics of the merger through to the egos of the main players. Jason Knight, a director at PIPC, a global project management con sultancy, worked on IT integration after the ShopDirect-Littlewoods merger in 2003.

The aim, says Knight, has been to migrate systems from ShopDirect across to Littlewoods. But that is a long process – it won’t be completed until next year – and it’s been complicated by the need to update basic technology such as desktop systems. However, Knight says the biggest issue to manage has been the need to keep ShopDirect’s key IT professionals motivated during the three-year transition period. Their skills are needed to keep key systems operating until the final switchover. Failure could mean that customer service declines.

Knight says: “Clarity and simplicity of approach is the key, backed up by a sound communication strategy to manage the impact on customers. Rigour in planning is also important. You have to allow for multiple layers of checking and financial reconciliation and as many live scenario trials as possible to prepare for the critical transition states.”

Preparation pays

For Resolution Life Group, the closed fund insurance consolidator, which started in 2003 and is now a £2bn business on the back of takeovers such as Royal & SunAlliance Life and Swiss Life UK, focusing on IT pre-deal is also key to success. Sean Wells, managing partner for financial services and mergers and acquisitions at Atos Consulting, who has worked on IT integration at Resolution, says: “It’s vital to get an understanding of the IT architecture of the proposed takeover. This is sometimes overlooked. It’s easy to take it for granted that it will be simple to integrate after an acquisition.”

It is not a mistake that Resolution makes. “They define a target operating model, which sets out for the business they acquire what they want to move towards,” explains Wells. There are a number of priorities. “First, they look for stability, which is vital as they’re working in a regulated environment. The second is cost savings – they want to define a target operating model that can drive cost savings. The third factor is the implementation plan – they will put that in place before the deal is done.”

Of course, this approach implies a co-operative target, not always the case in M&As. Wells points out that even if a target is co-operative, it may not want to wash all its dirty linen in front of its prospective purchasers. To get round this problem, Resolution has developed a sophisticated approach to using the ‘data room’, often set up to share information in takeovers. “They certainly use the information in the data room, but they also bring in specialist advisers to add to the information and interpret it. They’re looking to understand the hidden cracks in the data and the hidden costs,” says Wells.

Andrew Morlet, who heads Accenture’s UK Strategic Information Technology Effectiveness practice, says he’s worked on M&As where they’ve used a variation on the data room – a ‘clean room’ – in order to advance the release of information that will be needed for integration work post-deal. “We work with the two parties to the merger and devise legal arrangements that allow us to have access to information that wouldn’t normally be released between the parties,” he says. “This allows much more in-depth planning for post-merger integration and accelerates the time to capture the synergy benefits of the integration.”

Current figures show that IT can account for4 between 20% and 30% of the post-acquisition benefits in a merger or acquisition, says Frank Vielba, head of VICL, a consultancy that specialises in post-merger IT integration. But IT integration also runs up costs. “In one merger in the utilities area, IT synergies accounted for 30% of the benefits of the transaction but IT generated 50% of the total integration costs,” says Vielba.

Few UK mergers have realised IT integration benefits as great as those in the Royal Bank of Scotland-NatWest marriage. Martin Williams, now a Capgemini consultant, saw the merger at first hand while working at RBS. “Even though RBS was the smaller bank, the merged company used its systems because they worked off a lower cost model,” recalls Williams. “There were a few minor exceptions where NatWest was offering a unique service that RBS didn’t have.”

The final switch-over, mostly done over a long weekend, involved migrating 250Gb of data and transferring 14 million customer records and 33 million direct debit records. The entire integration project took two-and-a-half years – six months less than originally planned – and included 9,200 planning milestones. According to one source, it reduced annual spending on IT by £350m.

Pick and choose

RBS faced the same dilemma as most firms that set out on the acquisition trail. Should they focus on one of the parties’ systems or cherry pick from both? RBS chose the first course. “Adopting RBS’s systems was more straightforward than cherry-picking, even though some of NatWest’s systems were more sophisticated,” says Williams.

Taking the right strategic decisions about IT integration are vital, but the hard work is realising the synergies. Williams says he sometimes finds expected benefits over-played. “If you can shake out cost from IT that’s good, but you have to be certain that what you’re left with is capable of taking the business forward in the direction you want it to go,” he says.

At Azzurri, Glanville is in no doubt that the biggest pay-off from successful integration comes from improved business efficiency. “Certainly there are savings in areas such as software licensing, but that’s largely the low-hanging fruit. In acquisitions where you’re blending customers and suppliers, you get increased performance just by tracking on a larger number.” Glanville points out that by focusing on giving operational, sales people and engineers the same information post-integration, it’s possible for them to communicate between themselves more easily within the enlarged group, an important benefit.

“Integrations are never easy,” he says. “But they are the key determinates of value.” It’s a lesson that those who are gung-ho for a deal at any price – and forget the consequence – are likely to learn at considerable cost.