How IT Integration Can Make or Break Your M&A Deal
Mergers and acquisitions (M&A) are common strategies for firms to grow their business, diversify their offerings, or access new capabilities. But M&A deals are not easy to execute, especially when it comes to integrating the IT systems of the acquirer and the target.
IT integration is the process of aligning, consolidating, or transforming the IT systems, data, and processes of the two firms to support the business objectives and operations of the merged entity.
IT integration can enable the business benefits and synergies from M&A, such as economies of scale, economies of scope, process improvement, or organizational transformation.
But IT integration can also be a major challenge and a source of failure for M&A deals.
According to Bain & Co, over 50% of business synergies are technology-enabled, meaning that the acquirer seeks to profit from the technology that the target has developed or acquired.
Moreover, Accenture reports that among the recent high-value transactions, 80% of companies placed a significant emphasis on technology.
However, many leaders tend to underestimate the importance of IT integration in M&A.
Only 56% of decision-makers took IT issues into consideration during the due diligence phase.
This is a major oversight because the costs and complexities of IT integration can stall operational plans and dramatically increase the timeline of the project.
For example, a bank acquiring a payment company may overlook the fact that their legacy core systems are not technologically compatible with modular, microservices architecture, used by the acquired payment app.
Post-M&A, this would leave the IT team under pressure to re-architect the existing systems, build new data integration, and otherwise technologically reconcile the two different products.
Also, if you lack in-house expertise for such projects, this would create further chaos and delays.
In this article, we’ll go through why IT integration is crucial for M&A success, the main challenges and best practices of IT integration, the four IT integration strategies that you can choose from, and examples of successful IT integration in M&A.
Why IT integration is crucial for M&A success
IT integration is the process of aligning, consolidating, or transforming the IT systems, data, and processes of the acquirer and the target to support the business objectives and operations of the merged entity.
IT integration can enable the business benefits.
However, IT integration is not a one-size-fits-all solution. Firms need to choose the right IT integration strategy that matches their business objectives, IT capabilities, and target characteristics.
There are four main IT integration strategies that firms can choose from:
- IS (information system) absorption: The acquirer’s IS is chosen to be the IS for the merged organisation. As such, the other organisation is migrated entirely onto the chosen IS. This strategy is suitable for firms that have a dominant or superior IS, or that seek to achieve high standardization or consolidation of systems or processes.
- IS co-existence: Almost the opposite to absorption, co-existence aims to keep each company operating on their own IS platforms with minimal standardization of IS functions. This strategy is suitable for firms that have incompatible or diverse IS, or that seek to preserve autonomy or flexibility of systems or processes.
- IS best of breed: One IS platform is the desired goal for best of breed strategy. However, as opposed to picking outright one organisation’s IS over another, the firms select which system best performs each function from the catalogue of the two firms. This strategy is suitable for firms that have complementary or specialized IS, or that seek to achieve optimal performance or functionality of systems or processes.
- IS renewal: In renewal, the IS of the two firms are replaced with a new IS setup specifically for the newly formed, single organisation. This strategy is suitable for firms that have outdated or inadequate IS, or that seek to achieve transformation or innovation of systems or processes.
Each IT integration strategy has its own advantages and disadvantages, and requires different resources and capabilities to implement successfully. Firms need to carefully evaluate their options and select the best IT integration strategy for their M&A deal.
What are the main challenges of IT integration
IT integration is not a trivial task. It involves many technical, organizational, and strategic challenges that can affect the success of M&A. Some of these challenges are:
- High investment costs and risks: IT integration requires significant investments in hardware, software, or human resources, and entails high risks of failure or obsolescence due to technical issues, compatibility problems, or security breaches.
- Reduced focus and flexibility: IT integration may distract firms from their core competencies or sources of differentiation, and make them less flexible or responsive to changing customer needs or market opportunities due to increased complexity or rigidity of systems or processes.
- Increased complexity and coordination costs: IT integration may increase the complexity and coordination costs of managing multiple systems, data sources, or processes across different functions or units due to the need for interoperability, standardization, or alignment.
- Potential conflicts of interest or goals: IT integration may create potential conflicts of interest or goals between different functions or units that have different stakeholder expectations, performance metrics, or incentives.
What are the best practices of IT integration
To overcome the challenges and achieve successful IT integration in M&A, firms need to follow some best practices, such as:
- Define the IT integration strategy and objectives: Firms need to assess their own and their target’s IT capabilities, systems, data, and processes before initiating any deals. They need to identify the strategic objectives and expected benefits of IT integration, such as enhancing performance, creating synergies, or enabling innovation. They also need to choose the appropriate IT integration strategy, such as absorption, co-existence, best of breed, or renewal, depending on the characteristics and fit of the acquirer and the target.
- Establish the IT integration governance and communication structure: Firms need to involve IT executives and experts in the due diligence phase to provide valuable input on the feasibility and practicality of IT integration. They also need to define clear roles and responsibilities for each activity, allocate adequate resources and time for each activity, and establish clear governance and communication mechanisms for each activity. They also need to monitor and control their IT integration activities, using regular checkpoints and feedback loops to track their progress, performance, and quality.
- Use appropriate tools and methods for data and system integration: Firms need to use appropriate tools and methods to migrate, consolidate, or transform their systems, data, and processes. Depending on their IT integration strategy and objectives, they may choose from different data integration methods and strategies, such as manual, application-based, uniform access, common storage, or virtual integration (Talend, n.d.). They may also choose from different system integration approaches and tools, such as continuous practices (e.g., continuous integration, delivery, and deployment), which can reduce build and test time, increase visibility and awareness on build and test results, support (semi-) automated continuous testing, detect violations, flaws and faults in CI, address security and scalability issues in deployment pipeline, or improve dependability and reliability of deployment process.
- Train your teams and end-users on the new or changed systems, data, and processes: Firms need to train their IT staff and end-users on the new or changed systems, data, and processes. They need to provide adequate documentation, guidance, and support to facilitate the adoption and use of the new or changed systems, data, and processes. They also need to solicit feedback and suggestions from their IT staff and end-users.
What are some examples of successful IT integration in M&A?
IT integration can be applied in different industries and sectors, such as IT, technology, and AI. Here are some examples of successful IT integration in M&A:
- Microsoft: Microsoft is a leading example of IT integration in M&A. Microsoft has acquired over 200 companies since its inception, including LinkedIn, Skype, GitHub, and Nuance. By integrating these companies’ IT systems, data, and processes with its own, Microsoft has enhanced its product portfolio, expanded its customer base, accessed new capabilities or resources, and created new business opportunities. Microsoft has used different IT integration strategies depending on the target characteristics and objectives. For example, Microsoft used IS absorption for Skype and LinkedIn, IS co-existence for GitHub, and IS renewal for Nuance.
- Amazon: Amazon is another example of IT integration in M&A. Amazon has acquired over 100 companies since its inception, including Whole Foods, Zappos, Twitch, and Ring. By integrating these companies’ IT systems, data, and processes with its own, Amazon has diversified its product portfolio, increased its operational efficiency, improved its customer satisfaction, and captured more value from customers or suppliers. Amazon has also used different IT integration strategies depending on the target characteristics and objectives. For example, Amazon used IS absorption for Zappos and Twitch, IS co-existence for Whole Foods and Ring, and IS best of breed for Kiva Systems (a robotics company).
- Google: Google is a third example of IT integration in M&A. Google has acquired over 200 companies since its inception, including YouTube, Waze, DeepMind, and Fitbit. By integrating these companies’ IT systems, data, and processes with its own, Google has enhanced its product quality and innovation, increased its market share, accessed new capabilities or resources, and created new business models. Google has also used different IT integration strategies depending on the target characteristics and objectives. For example, Google used IS absorption for YouTube and Waze, IS co-existence for DeepMind and Fitbit, and IS renewal for Motorola Mobility (a smartphone company).
Conclusion
IT integration is a vital component of M&A that can enable the business benefits and synergies from the deal. However, IT integration is also a challenging and complex process that requires careful planning, execution, and evaluation. Firms need to follow some best practices to achieve successful IT integration in M&A. Firms also need to learn from some examples of successful IT integration in M&A in different industries and sectors.
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