IT Due Diligence Emerges as Key to Successful M&As (2/10)

IT Due Diligence Emerges as Key to Successful M&As

Experts say 1999 will see an increase in the trend toward mergers and acquisitions (M&A), however research indicates that as many as two-thirds of M&As do not result in the expected cost savings and revenue enhancement opportunities that drove the deal. Smart companies are beginning take a more in-depth approach to the due diligence process to prevent surprises by addressing marketing and human resource (HR) issues up front. However, in the midst of a technological revolution, experts strongly suggest conducting Information Technology (IT) due diligence when investigating a potential merger or acquisition.

Issues such as Y2K compliance and IT strategies are increasingly important across many industries as technology must enable business objectives in order for the merger to be successful. "The early involvement of IT experts can help companies avoid unpleasant surprises in a number of ways," says Douglas Hollander, M&A practice leader for IBM Global Services in the Americas.

"This ranges from Year 2000 compliance and core applications scalability through projecting and simulating the workload of the future integrated IT infrastructure," he explains. Hollander says businesses need this capability in order to identify and correct potential problems in areas directly affecting internal and external customers, such as response time and batch processing windows.

"For example, two companies may have similar core processing systems. The first company may be experiencing Year 2000 problems with its system, while the second company has solved the problem. IT experts can determine if there is good potential for the first company to buy its way out of the problem," says Hollander. He gives another example wherein IT experts can assess the benefits for a company with some processing constraints to target a company that has a very scalable solution or is hardware independent.

"Acquiring companies sometimes will use their own applications regardless of the systems in place at the target company. In these instances, the IT team can determine what is needed to quickly convert and scale the systems," explains Hollander.

Mark Clemente, author of "Winning at Mergers & Acquisitions and partner in New Jersey-based Clemente, Greenspan & Co., an M&A consulting and training firm, stresses, "Try not to let the dominant culture dictate which IT system to go with. Management really has to be objective, and if the acquired company has the better system, go with it." He says it is also important to recognize when neither system is capable of supporting the new company and its growth imperatives. As well, he urges companies to factor IT into their post-merger integration budgeting. "We see a lot of companies who fail to do adequate budgeting for the integration purposes."

Indeed, IT systems drive virtually every part of a business, from accounting systems to HRIS, but Clemente suggests that integrating customer databases is perhaps the most critical facet of IT to the growth of a company. "Today, having a customer database is no longer a luxury -- it's an absolute necessity," insists Clemente. He says it is important to have a smooth and speedy merging of customer databases in order to gain such synergistic benefits as cross-selling and new product offerings.

Hollander estimates at least one-third of companies are now engaging IT experts in the due diligence phase, but he says this is not enough. "Clearly, insufficient pre-deal analysis of IT is a cause-and-effect relationship," he explains. "Fully understanding the challenges going in, preparing thoroughly, paying attention to IT issues, executing with speed, and ensuring continuous improvement after integration are the key success factors in any merger or acquisition. Paying attention to these factors can make the difference between an acquirer becoming a target or emerging as a thriving new business entity."