Mergers & Acquisitions: The Buy Blueprint

For IT leaders who want to have a role in the transaction process when their business is engaging in an M&A purchase.

EXECUTIVE BRIEF

Analyst Perspective

Don’t wait to be invited to the M&A table, make it.

Brittany Lutes
Research Analyst,
CIO Practice
Info-Tech Research Group

Ibrahim Abdel-Kader
Research Analyst,
CIO Practice
Info-Tech Research Group

IT has always been an afterthought in the M&A process, often brought in last minute once the deal is nearly, if not completely, solidified. This is a mistake. When IT is brought into the process late, the business misses opportunities to generate value related to the transaction and has less awareness of critical risks or inaccuracies.

To prevent this mistake, IT leadership needs to develop strong business relationships and gain respect for their innovative suggestions. In fact, when it comes to modern M&A activity, IT should be the ones suggesting potential transactions to meet business needs, specifically when it comes to modernizing the business or adopting digital capabilities.

IT needs to stop waiting to be invited to the acquisition or divestiture table. IT needs to suggest that the table be constructed and actively work toward achieving the strategic objectives of the business.

Executive Summary

Your Challenge

There are four key scenarios or entry points for IT as the acquiring organization in M&As:

• IT can suggest an acquisition to meet the business objectives of the organization.
• IT is brought in to strategy plan the acquisition from both the business’ and IT’s perspectives.
• IT participates in due diligence activities and valuates the organization potentially being acquired.
• IT needs to reactively prepare its environment to enable the integration.

Consider the ideal scenario for your IT organization.

Common Obstacles

Some of the obstacles IT faces include:

• IT is often told about the transaction once the deal has already been solidified and is now forced to meet unrealistic business demands.
• The business does not trust IT and therefore does not approach IT to define value or reduce risks to the transaction process.
• The people and culture element are forgotten or not given adequate priority.

These obstacles often arise when IT waits to be invited into the transaction process and misses critical opportunities.

Info-Tech's Approach

Prepare for a growth/integration transaction by:

• Recognizing the trend for organizations to engage in M&A activity and the increased likelihood that, as an IT leader, you will be involved in a transaction in your career.
• Creating a standard strategy that will enable strong program management.
• Properly considering all the critical components of the transaction and integration by prioritizing tasks that will reduce risk, deliver value, and meet stakeholder expectations.

Info-Tech Insight

As the number of merger, acquisition, and divestiture transactions continues to increase, so too does IT’s opportunity to leverage the growing digital nature of these transactions and get involved at the onset.

The changing M&A landscape

Businesses will embrace more digital M&A transactions in the post-pandemic world

• When the pandemic occurred, businesses reacted by either pausing (61%) or completely cancelling (46%) deals that were in the mid-transaction state (Deloitte, 2020). The uncertainty made many organizations consider whether the risks would be worth the potential benefits.
• However, many organizations quickly realized the pandemic is not a hindrance to M&A transactions but an opportunity. Over 16,000 American companies were involved in M&A transactions in the first six months of 2021 (The Economist). For reference, this had been averaging around 10,000 per six months from 2016 to 2020.
• In addition to this transaction growth, organizations have increasingly been embracing digital. These trends increase the likelihood that, as an IT leader, you will engage in an M&A transaction. However, it is up to you when you get involved in the transactions.

The total value of transactions in the year after the pandemic started was $1.3 billion – a 93% increase in value compared to before the pandemic. (Nasdaq)

Virtual deal-making will be the preferred method of 55% of organizations in the post-pandemic world. (Wall Street Journal, 2020)

Your challenge

IT is often not involved in the M&A transaction process. When it is, it’s often too late.

• The most important driver of an acquisition is the ability to access new technology (DLA Piper), and yet 50% of the time, IT isn’t involved in the M&A transaction at all (IMAA Institute, 2017).
• Additionally, IT’s lack of involvement in the process negatively impacts the business:
  • Most organizations (60%) do not have a standardized approach to integration (Steeves and Associates).
  • Weak integration teams contribute to the failure of 70% of M&A integrations (The Wall Street Journal, 2019).
  • Less than half (47%) of organizations actually experience the positive results sought by the M&A transaction (Steeves and Associates).
• Organizations pursuing M&A and not involving IT are setting themselves up for failure.

Only half of M&A deals involve IT (Source: IMAA Institute, 2017)

Common Obstacles

These barriers make this challenge difficult to address for many organizations:

• IT is rarely afforded the opportunity to participate in the transaction deal. When IT is invited, this often happens later in the process where integration will be critical to business continuity.
• IT has not had the opportunity to demonstrate that it is a valuable business partner in other business initiatives.
• One of the most critical elements that IT often doesn’t take the time or doesn’t have the time to focus on is the people and leadership component.
• IT waits to be invited to the process rather then actively involving themselves and suggesting how value can be added to the process.

In hindsight, it’s clear to see: Involving IT is just good business.

47% of senior leaders wish they would have spent more time on IT due diligence to prevent value erosion. (Source: IMAA Institute, 2017)

“40% of acquiring businesses discovered a cybersecurity problem at an acquisition.” (Source: Okta)

Info-Tech's approach

Acquisitions & Divestitures Framework

Acquisitions and divestitures are inevitable in modern business, and IT’s involvement in the process should be too. This progression is inspired by:

1. The growing trend for organizations to increase, decrease, or evolve through these types of transactions.
2. Transactions that are driven by digital motivations, requiring IT’s expertise.
3. A maturing business perspective of IT, preventing the difficulty that IT is faced with when invited into the transaction process late.
4. There never being such a thing as a true merger, making the majority of M&A activity either acquisitions or divestitures.

The business’ view of IT will impact how soon IT can get involved

There are four key entry points for IT

1. Innovator: IT suggests an acquisition to meet the business objectives of the organization.
2. Business Partner: IT is brought in to strategy plan the acquisition from both the business’ and IT’s perspective.
3. Trusted Operator: IT participates in due diligence activities and valuates the organization potentially being acquired.
4. Firefighter: IT reactively engages in the integration with little time to prepare.

Merger, acquisition, and divestiture defined

Merger

A merger looks at the equal combination of two entities or organizations. Mergers are rare in the M&A space, as the organizations will combine assets and services in a completely equal 50/50 split. Two organizations may also choose to divest business entities and merge as a new company.

Acquisition

The most common transaction in the M&A space, where an organization will acquire or purchase another organization or entities of another organization. This type of transaction has a clear owner who will be able to make legal decisions regarding the acquired organization.

Divestiture

An organization may decide to sell partial elements of a business to an acquiring organization. They will separate this business entity from the rest of the organization and continue to operate the other components of the business.

Info-Tech Insight

A true merger does not exist, as there is always someone initiating the discussion. As a result, most M&A activity falls into acquisition or divestiture categories.

Buying vs. selling

The M&A process approach differs depending on whether you are the executive IT leader on the buy side or sell side

This blueprint is only focused on the buy side:

• More than two organizations could be involved in a transaction.
• Examples of buy-related scenarios include:
  • Your organization is buying another organization with the intent of having the purchased organization keep its regular staff, operations, and location. This could mean minimal integration is required.
  • Your organization is buying another organization in its entirety with the intent of integrating it into your original company.
  • Your organization is buying components of another organization with the intent of integrating them into your original company.
• As the purchasing organization, you will probably be initiating the purchase and thus will be valuating the selling organization during due diligence and leading the execution plan.

The sell side is focused on:

• Examples of sell-related scenarios include:
  • Your organization is selling to another organization with the intent of keeping its regular staff, operations, and location. This could mean minimal separation is required.
  • Your organization is selling to another organization with the intent of separating to be a part of the purchasing organization.
  • Your organization is engaging in a divestiture with the intent of:
    • Separating components to be part of the purchasing organization permanently.
    • Separating components to be part of a spinoff and establish a unit as a standalone new company.
• As the selling organization, you could proactively seek out suitors to purchase all or components of your organization, or you could be approached by an organization.

For more information on divestitures or selling your entire organization, check out Info-Tech’s Mergers & Acquisitions: The Sell Blueprint.

Core business timeline

For IT to be valuable in M&As, you need to align your deliverables and your support to the key activities the business and investors are working on.

Info-Tech’s methodology for Buying Organizations in Mergers, Acquisitions, or Divestitures

Potential metrics for each phase

The IT executive’s role in the buying transaction is critical

And IT leaders have a greater likelihood than ever of needing to support a merger, acquisition, or divestiture.

1. Reduced Risk

   IT can identify risks that may go unnoticed when IT is not involved.

2. Increased Accuracy

   The business can make accurate predictions around the costs, timelines, and needs of IT.

3. Faster Integration

   Faster integration means faster value realization for the business.

4. Informed Decision Making

   IT leaders hold critical information that can support the business in moving the transaction forward.

5. Innovation

   IT can suggest new opportunities to generate revenue, optimize processes, or reduce inefficiencies.

The IT executive’s critical role is demonstrated by:

• Reduced Risk

  47% of senior leaders wish they would have spent more time on IT due diligence to prevent value erosion (IMAA Institute, 2017).

• Increased Accuracy

  87% of respondents to a Deloitte survey effectively conducted a virtual deal, with a focus on cybersecurity and integration (Deloitte, 2020).

• Faster Integration

  Integration costs range from as low as $4 million to as high as $3.8 billion, making the process an investment for the organization (CIO Dive).

• Informed Decision Making

  Only 38% of corporate and 22% of private equity firms include IT as a significant aspect in their transaction approach (IMAA Institute, 2017).

• Innovation

  Successful CIOs involved in M&As can spend 70% of their time on aspects outside of IT and 30% of their time on technology and delivery (CIO).

Playbook benefits

IT Benefits

• IT will be seen as an innovative partner to the business, and its suggestions and involvement in the organization will lead to benefits, not hindrances.
• Develop a streamlined method to valuate the potential organization being purchased and ensure risk management concerns are brought to the business’ attention immediately.
• Create a comprehensive list of items that IT needs to do during the integration that can be prioritized and actioned.

Business Benefits

• The business will get accurate and relevant information about the organization being acquired, ensuring that the anticipated value of the transaction is correctly planned for.
• Fewer business interruptions will happen, because IT can accurately plan for and execute the high-priority integration tasks.
• The business can make a fair offer to the purchased organization, having properly valuated all aspects being bought, including the IT environment.

Insight summary

Overarching Insight

As an IT executive, take control of when you get involved in a growth transaction. Do this by proactively identifying acquisition targets, demonstrating the value of IT, and ensuring that integration of IT environments does not lead to unnecessary and costly decisions.

Proactive Insight

CIOs on the forefront of digital transformation need to actively look for and suggest opportunities to acquire or partner on new digital capabilities to respond to rapidly changing business needs.

Discovery & Strategy Insight

IT organizations that have an effective M&A program plan are more prepared for the buying transaction, enabling a successful outcome. A structured strategy is particularly necessary for organizations expected to deliver M&As rapidly and frequently.

Due Diligence & Preparation Insight

Most IT synergies can be realized in due diligence. It is more impactful to consider IT processes and practices (e.g. contracts and culture) in due diligence rather than later in the integration.

Execution & Value Realization Insight

IT needs to realize synergies within the first 100 days of integration. The most successful transactions are when IT continuously realizes synergies a year after the transaction and beyond.

Blueprint deliverables

Key Deliverable: M&A Buy Playbook

The M&A Buy Playbook should be a reusable document that enables your IT organization to successfully deliver on any acquisition transaction.

M&A Buy One-Pager

See a one-page overview of each phase of the transaction.

M&A Buy Case Studies

Read a one-page case study for each phase of the transaction.

M&A Integration Project Management Tool (SharePoint)

Manage the integration process of the acquisition using this SharePoint template.

M&A Integration Project Management Tool (Excel)

Manage the integration process of the acquisition using this Excel tool if you can’t or don’t want to use SharePoint.

Info-Tech offers various levels of support to best suit your needs

Diagnostics and consistent frameworks used throughout all four options