Differing levels of technological sophistication and lack of compatibility can prove crucial around an acquisition. Especially, in today's world where there are hardly any businesses that are not dependent to a significant degree on technology.
In such a scenario, where IT plays an integral part in business operations, it's no big wonder that it can be a deal breaker in merger and acquisition talks. Margaret Harvey from law firm Addleshaw Goddard has some advice on how to make sure technology doesn't hurt your chances of M&A success.
The impact of differing levels of technological sophistication and lack of compatibility around an acquisition became blatantly clear in 2004 when supermarket chain Morrisons acquired its competitor Safeway.
The following year after relentlessly struggling and stalling with the integration of Safeway's IT systems, Morrisons announced it was switching off the supply chain management systems that it had inherited from Safeway - a surprising move, given that Safeway had invested heavily in systems which are generally considered to be far superior to those of Morrisons.
Today there are few businesses that are not dependent to a significant degree on technology. Savvy technology and data exploitation can create a real competitive edge and add value to the business. If your company buys a competitor and cannot exploit their data or systems, you have to wonder if you are getting maximum return on investment.
As a purchaser, seller or investor in the M&A world, assessing risks and opportunities around technology and data is a real challenge. And it's one that's ongoing - post deal, the strategy needs to capitalise on the investment. Ploughing endless funds into a poor strategy can eat profit and damage reputation. A seamless integration strategy is vital if full value potential is to be reached.
Companies embarking on M&A activity would obviously want to avoid any problems in IT integration, the likes of which Morrisons and Safeway encountered. A meticulous audit and thorough preparation of both organisations' IT systems is required before any deal is signed.
The level of thoroughness applied to the process will play a large part in the company's ability to assess value and set realistic expectations. One specific step that should but does not always appear on due diligence checklists is to review each potential party's strategic technology plans as well as the individual business plans around current technology investments or outsourcing arrangements.
Technology and communications are for many organisations major cost items, often ranking alongside people and property costs. There is therefore a lot to play for if a merger or acquisition can create synergies and/or economies in this area.
If one or both of the businesses have not yet invested heavily in technology, the merged company may be able to use technology-based business transformation to reduce cost and add value.
The costs associated with an IT transformation programme will be influenced by whether assets and licences held by one of the companies can be leveraged for the benefit of both. This will depend on a number of factors including the nature of the M&A activity (i.e. whether it is a share sale, business sale or joint venture) and the terms on which existing assets and licences are held.
Although a merger or acquisition can be an ideal time to retire outdated legacy systems, each of the companies may have made substantial investments in technology before the merger. In these circumstances the key issues will be the extent to which the systems are compatible and the cost of the integration or reinvestment required to make them work together.
Another technology-related value driver is outsourcing. Since the late 1980s companies have been outsourcing their technology and communications needs to external suppliers including major international players such as CSC, EDS and IBM. More recently there has been a growth in technology-enabled BPO.
When considering a transaction involving a company that is reliant on outsourced services, you need to review the reasons behind the company's decision to outsource and understand whether the business case will be relevant for the merged entity.
In addition, it is important to be aware of the target company's philosophical approach to outsourcing. Some organisations, such as BP, have a history of championing outsourcing as a business model. Others are reluctant - as a matter of corporate policy - to relinquish direct control.
Some companies will have an outsourcing history that will shape how they approach it in the future. This is true of companies such as Boots and Sainsbury's, which decided to bring IT staff back in-house - such a move would certainly affect how they would view outsourcing in the future.
A merger that brings together organisations with conflicting ideas or preconceptions about outsourcing will require a greater degree of planning and integration on both a practical and a political level.
An example of a merger that led to the early demise of an outsourcing arrangement was Halifax's acquisition of the Bank of Scotland. Two years before the merger, the Bank of Scotland had put in place a 10-year 700m Pounds IT outsourcing contract with IBM. Shortly after the merger the contract was terminated. The explanation given was "the original contract was not suitable for the combined organisation and the decision was taken to retain control of important infrastructure".
The full costs associated with the exit by HBOS from this contract have been confined to history. However, given a typical outsourcing cost/price profile, it is likely that termination so early in the 10-year term carried a fairly hefty price tag for HBOS.
Technology and outsourcing play a significant and increasingly pervasive role in business life. Understanding the constraints and opportunities they present in a merger situation will be key to assessing the potential value that a target company may have to add and the level of post-merger integration required to make it work successfully.