Technology – A Critical Driver of M&A Synergy

M&A value creation is traditionally viewed through the lens of three synergies: revenue, cost and capital. Technology is a fourth key driver of synergy that is often underestimated. Traditionally viewed as a subset of cost synergies, technology synergies account for more than 50% of the total synergy value in most transactions.

Value Creation – Five Enablers for Technology Synergy Realization

To realize the potential value of technology synergies, considerable IT due diligence and post-transaction technology transformation must be undertaken. Key results from conducting IT due diligence should serve as the core component of a post-acquisition 100-day plan. Technology transformation includes initiatives such as cloud application adoptions, ERP footprint rationalizations, process automation (e.g., RPA[1], AI[2], ML[3]), and IT operational model redesign to combine the two companies. Completing a current state assessment, future state design, and roadmap are integral to an effective technology transformation. This process can be complicated and costly if done incorrectly; however, we identified five key enablers that lead to successful technology synergy realization.

1. IT Operating Model

2. ERP & Business Applications

3. IT Infrastructure

4. Cybersecurity

5. Change Management

IT Operating Model

The IT operating model is the framework in which all IT systems, people, and processes are brought together to support the business. The IT integration process offers a unique opportunity to optimize the operating model with the future state in mind. Organizations should consider the following questions during due diligence and when developing the future state model:

Who will lead the IT function post-merger?
Which systems will be retained or sunset?
Should technology applications be cloud-based or on-premises?
How will the delivery of IT Services be structured (e.g., in-house, local, or outsourced provider)?
What reliance will be placed on third-party vendors?
How will data security be managed?
How will software licensing and ownership of all technologies be impacted/managed?
What will be the nature of IP and its ownership?
What is each significant operation’s dependency on technology?
What data privacy laws affect the target company (e.g., PII[4], GDPR[5], HIPAA[6], PCI[7])?

Asking such questions will allow the company to streamline its operating model, reduce costs, and enable long-term growth.

ERP & Business Applications

ERP systems in place before a transaction are typically not the best fit for the newly combined business. Therefore, companies should assess the existing systems’ ability to support critical business processes in the future state. This is accomplished by gathering and prioritizing functional and technical requirements, identifying improvement opportunities and, if necessary, conducting a vendor selection. These steps are the most important components of the ERP integration process. Optimal ERP and reporting systems will drive value by improving processes for greater efficiency and effectiveness, achieving economies of scale, and incorporating controls to mitigate IT risks. However, capturing this value is dependent on the effectiveness of an organization’s change management efforts.

In addition, combining, relocating, or consolidating business applications is often necessary to drive value, and this typically entails performing an Office 365 tenant-to-tenant migration, which can be challenging. Consolidating IT systems quickly and efficiently is crucial, as delays can negatively impact business operations. Employees can become frustrated, and customers may depart. We recommend developing a tailored strategy for tenant migration that addresses an organization’s unique environment and needs. Rationalizing software licenses can be addressed early to immediately reduce costs and drive ROI.

IT Infrastructure

IT infrastructure is the platform on which all business applications are run; however, despite its critical role, it is often overlooked due to its broad definition. During the due diligence and integration planning phases, organizations must assess the current state of servers, networks, and cloud applications to ensure optimal capacity and capability to support the combined business. Increasing the number of servers or expanding the storage capacity may not be sufficient. A complete infrastructure redesign may be required to maximize the synergy value of the transaction and mitigate risks. Determining the extent and effectiveness of software can expose technical debt (e.g., glitches, security vulnerabilities, code-modifying issues, compliance concerns). Consequently, the IT infrastructure landscape should be examined holistically to determine ability to scale, integrate and maintain current operational demands. Achieving economies of scale and centralized IT management are often key value drivers with IT infrastructure.

Cybersecurity

Largely due to the “COVID-19 era,” companies are investing in creating secure connections for the remote workforce. The rise in virtual work combined with the increased prevalence and sophistication of cyber-attacks catapulted cybersecurity into a top priority for companies across industries. During due diligence and IT integration, firms must identify potential exposure risks among the current and acquired IT systems. Many activities pose exposure risk (e.g., reprovisioning servers, re-imaging workstations); therefore, a complete assessment and mitigation plan should be developed prior to integration. Determining the future state cyber posture and developing requirements for implementation are essential for sustainable success. Due to the ever-changing nature of cybersecurity technology, firms should engage experts to assist with the assessment and implementation stages of the integration.

Change Management

Change management spans all aspects of the IT integration process and can make-or-break the ROI on an acquisition. Integration processes may seem to be progressing smoothly; however, failure can result due to ineffective change management. This broad term involves the use of effective program management, standards and protocols, communication, employee engagement, and end-user training to guide the organization through the massive amount of change involved with an integration. Companies should establish a Program Management Office (PMO) and a Change Management Office with experienced professionals to lead these efforts. Establishing processes to solicit, address and incorporate employee feedback during the integration is key to fostering employee engagement and ongoing success. Many organizations underestimate the amount of resources and time needed and the maturity of the organization when preparing for the change and, subsequently, are negatively impacted when the company’s health deteriorates.

Direct & Indirect IT Synergies

Organizations that successfully navigate the five key enablers (IT Operating Model, ERP & Business Applications, IT Infrastructure, Cybersecurity, Change Management) will find themselves with two primary sources of IT synergy: direct and indirect. Direct IT synergies are the tangible cost-reduction opportunities that result from the consolidation and optimization of the IT organization, processes, and systems. Indirect IT synergies encompass the plethora of opportunities from enhanced IT capability, including harnessing customer data for effective cross-sells, and enabling back-office process automation.

The opportunities for IT synergies are endless and are a major source of value. Focusing on direct and indirect IT synergies as a fourth driver of synergy value will result in companies experiencing elevated and more sustainable success.

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Geoff Harkness is managing director, information management & technology solutions lead at MorganFranklin Consulting, a Vaco Company. Andre Prince is managing director, private equity services at MorganFranklin Consulting, a Vaco Company.