IT DECISIONS - MERGER INTEGRATION - Building systems synergies

[QQ]Consider the following situation: the board has identified a suitablegrating IT systems can make or break the deal. acquisition target. Alternatively, it is deep in confidential discussions with a potential merger partner. Due diligence is taking place at many levels and it reveals that the two new partners’ IT systems are completely incompatible. Moreover, there would be considerable disruption and cost involved in making them compatible. Would that be enough to call off the acquisition or merger? Could it be a deal breaker?[QQ] Yes, says George Cox, chairman of IT company Unisys UK, who takes a special interest in post-merger IT integration. “I have known at least one acquisition that didn’t go ahead because of this issue,” he says.[QQ] At PA Consulting Group, Steve Harris and Ian Murray agree. Harris, global service leader for mergers and acquisitions, and Murray, a member of PA’s management group and an information systems specialist, have worked together on more than a dozen post-merger IT integration projects.[QQ] But just as IT can be a deal breaker, it can also give a proposed merger or acquisition an unexpected lift. Harris cites the case of a large retail merger. “One of the companies was looking to upgrade its point-of-sale systems and the other had already invested a great deal of money in this area. For the acquiring company, that bit of investment information saved it some £15m.”[QQ] The merger between the Halifax and Leeds building societies is also cited as a merger where the IT integration issues were handled effectively and contributed to the overall success of the deal. In this case, it was essential for customers of the enlarged society to receive a uniform service, whichever branch they happened to visit.[QQ] The need to look at integration from the customer’s point of view is stressed by Bryan Foss, a consultant at IBM. Customer service is now so intimately entwined with IT that it is impossible to think of the two separately. “After a merger, you should look at your combined customer base and then rationalise your product set to serve it,” he says.[QQ] But is post-acquisition IT integration always necessary? Cox says it depends on the purpose of the take-over. “It really depends on the philosophy,” he says. “If you are simply picking up an organisation to fit within a company and you plan to leave it very much as a stand-alone subsidiary, then integration is not so critical. But if there is a great deal of synergy with the existing business and you want to merge the two, then it becomes an important issue.”[QQ] Cox believes that integration is so important when there is synergy and the decision is taken to merge the businesses, that it alone determines the timescale over which you are likely to reap the benefits of synergy.[QQ] “It is the determinant,” he says.[QQ] And integration is not simply a question of technicalities. The fact is that the culture of an organisation is reflected subtly in its information systems. For example, if a company believes in devolving and sharing information, then its IT systems will enable that. Conversely, a company that centralises information will support its approach with centralised IT. Suddenly, the problem of integration becomes not just one of deciding what to do about the IT, but one about conflicting company cultures.[QQ] Then there is the question of how companies define data. Cox recalls an oil industry merger where this proved to be a major obstacle. “They had a great deal of difficulty in merging because their respective systems measured oil-well production on different bases,” he says.[QQ] Other companies do things such as define geographies, sales or headcount differently. Across a major company, there are potentially thousands of datasets where definitions can diverge. Multiply that by two and it is not difficult to see the problem for merging organisations. And there is no magic bullet for dealing with these kinds of issues. But research Harris and Murray are currently working on is likely to point to some key lessons.[QQ] Harris says one lesson is that integration should take place as quickly as possible after the two organisations come together. “That is easier in a takeover than a merger, where there is more of a consensus environment,” he adds. He warns that, given their complexity, there is always a temptation to push back decisions on IT integration. “But we believe that if you do so, you are pushing back what you can do with the business.”[QQ] Given that it is important to face up to IT integration rather than slide it onto the back burner, it is important to focus integration effort on those issues that will release the earliest benefit. And, as Murray points out, that does not necessarily mean replacing systems.[QQ] Take the case of financial reporting systems, for example. It might be tempting to replace two incompatible reporting systems with a new one.[QQ] But it may also be possible to create what Murray calls “a veneer” between the existing systems, so that they provide a common set of reports for the whole company. “You haven’t got the immediate problem of replacing and migrating the existing systems but you have started to release the benefits of integration,” he says.[QQ] Whatever the approach, Harris and Murray stress the significance of developing a “route map” for the integration. It is important to understand the destination and the steps that are required to reach it.[QQ] Another key area to manage is the tensions within the IT department.[QQ] “If one of the benefits of a merger is to rationalise IT, you can understand the tensions between the two merging IT departments,” says Murray. “We had some interesting meetings with one investment bank where, in the early stages, we had six people from IT around the table, and we knew before long there would only be three. Those meetings were tense to say the least.”[QQ] Above all, it is important to keep in view the fact that the point of IT is to add value to the business, an objective clearly in John Handby’s sights at Merial (see box). But adding value and releasing benefits requires relentless focus. Where it comes off, the rewards can be huge. Harris and Murray recall a company where IT integration work contributed around £75m to shareholder value, largely through cost reduction. And far from being a deal breaker, that kind of saving might just be a deal maker.[QQ] [QQ] TACKLING GLOBAL IT INTEGRATION[QQ] John Handby faced a beast of a problem when he was handed the job of integrating the IT operations of key parts of pharmaceutical companies Merck and Rhone-Poulenc, when the two merged their animal health divisions in 1997 to form Merial, a $1.8bn company trading in 30 countries.[QQ] Handby, the chief information officer, had taken on other giant-sized IT challenges in the past (at Post Office Corporation, National Power and Glaxo) and he had written a book about them*. But in this case, he found that IT investment in both parts of Merial was well below what the new company needed to strut its stuff confidently in a competitive international marketplace.[QQ] As Handby saw the issue, developing an integrated IT infrastructure for Merial was more than simply a question of sorting out the technicalities, important as they proved themselves to be. “It was more about maximising the potential of IT resources to deliver real value to the business,” he says.[QQ] As a result, integrating the technologies was one aspect of a three-pronged strategy. The second prong focused on developing world-class core applications for the business, and the third exploited the technology so that it provided real competitive edge.[QQ] The first of these prongs – integrating technologies – itself had three main elements. The first part was to install a global data network. This will be in place by May, and will operate across all 30 countries where Merial has bases. It provides, among other services, access to the Internet and remote dialling. “People travelling with portables will be able to dial into their nearest link,” says Handby.[QQ] Next, Handby moved to standardise desktops throughout the new company.[QQ] Both previous companies had used Windows 3.1, which is not millennium compliant. With an eye on year 2000, Handby has standardised on Windows 95 and Office 97 across the 3,500 desktops in the new company. This is important to ensure that documents can be transferred around the world and read easily wherever they are.[QQ] The third key part of the technology strategy was e-mail. Handby selected Microsoft Exchange, which will be running across the company by the middle of this year. “That will be a massive step forward,” he says.[QQ] A key element of the infrastructure strategy is to reduce the number of different technologies in operation. For example, old IBM minicomputers and mainframes will be phased out. Instead, there will be new network servers operating from three service management centres, in New Jersey, Lyon and Singapore. These service centres will also provide help desks, and between them they will offer a follow-the-sun service for what is a 24-hour company.[QQ] Handby found that it is important to integrate people as well as technologies when building a new IT function. “It is very important to emphasise team work,” he says. “It is essential to get people moving around and meeting one another, even if it does cost money in terms of flights and hotels.”[QQ] Above all, having a clear view of the purpose of the technology is key.[QQ] For example, Merial is now looking at how to use the Internet to communicate more effectively with its customers.[QQ] The importance of IT’s role in the new company is underlined by the fact that Handby reports directly to the chairman. “We are placing a lot of emphasis on using IT in our competitive positioning,” he says. “We are making absolutely certain that every pound or dollar spent on IT really counts.”[QQ] [QQ] * Ahead of the Game: real-life experience winning competitive advantage with IT. Published by Management Books 2000.