M&A Consultative Services

Give IT a fighting chance

An M&A information technology integration framework
By James Mark Andrews, Colleen Chan, and Kenneth Wu
The big question Your CEO has determined that your companys growth strategy over the next 10 years will be largely driven by future acquisitions. Your CFO has figured out how to finance these acquisitions. The consultants hired by your CEO have done the requisite market research and due diligence and have developed a list of potential acquisition targets. And now, the $64,000 question: Is your Information Technology (IT) organization ready? Moreover, will a series of acquisitions topple your current IT infrastructure? Will you be able to deliver the IT synergies that your shareholders are looking for? Have you ever considered what it would take to give your IT organization a fighting chance to smoothly integrate these new business entities? We believe getting IT ready to support business growth by acquisition is clearly one of todays critical business challenges. IT readiness is dependent on many factors; there is no one element that is common to all acquisition scenarios. IT organizational profiles can vary greatly, from a loosely knit conglomerate of dissimilar entities supporting heterogeneous platforms to a tightly focused group intent on unifying disparate IT applications and infrastructure and aligning them with an overarching strategic IT-enabled business vision. It is tempting to assume that a tightly integrated platform is preferable, but that is not always the case. Companies that have grown primarily organically tend to have a more unified and tightly integrated IT architecture, which can often result in increased difficulties with respect to acquisition integration. In contrast, companies who have modularized their IT environment often as a result of their acquisition experience, and in anticipation of future acquisitions, usually have an easier go of it. Additionally, modularized environments typically have superior associated tools and techniques that can accelerate capture of integration benefits. An M&A and IT integration framework Before examining different strategies that CIOs can adopt to prepare their organizations to effectively execute the integration of an acquisition (or a divestiture of a division), its important to note that there is no one-size-fits-all solution. Acquisitions are so varied and dynamic, and the nature of each transaction so potentially unique, that it is virtually impossible to establish an IT environment that is perfectly prepared for all potential acquisition scenarios. However, focused planning and preparation is critical. To that end, this document presents a discussion of some key principles for developing an effective strategy that will prepare an IT organization and the IT infrastructure it maintains to effectively execute the integration of an acquired entity. It provides an overview of Deloittes plug and play M&A IT Integration framework and describes the fundamental elements of the framework.
As used in this document, Deloitte means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

Figure 1: An M&A and IT integration framework

M&A business direction

Strategic M&A goals and objectives Business capability requirements Business imperatives for IT

IT architecture M&A business direction IT organization

IT architecture
Future state application architecture Information needs and data architecture Enterprise infrastructure Enterprise architecture standards

IT funding and governance

M&A IT execution

IT funding and governance

Strategic IT planning and investment (portfolio management) IT spend analysis Target portfolio mix IT governance, program structure, and management

IT organization M&A IT execution

Integration program management office Transaction governance Synergy capture and validation Communication and change management IT organization structure Capacity management and strategic sourcing Skills and competencies Facilities and work environment

Source: Deloitte Consulting LLP

Figure 1 above depicts the overall plug and play framework. The framework does not present a one-size-fits-all solution to the challenge of M&A IT integration. Instead, it provides a set of guiding principles to increase the potential for an effective integration. These principles encompass the development of a plug and play, flexible, and open IT function to effectively establish an IT ecosystem that allows acquiring companies to easily plug in new IT components or environments from acquired companies and operate (i.e., play) them to support the newly combined businesses. The plug and play framework is comprised of the following five components: M&A business direction: A key driver in defining business objectives and requirements of the merger and/or acquisition, which, in turn, defines every other aspect of the IT integration IT architecture: A plug and play architecture defined by open and flexible enterprise application and technology infrastructure for effective M&A IT integration IT funding and governance: Forward-thinking IT spending and governance models that effectively prepare companies for M&A IT integration IT organization: A nimble and flexible IT organizational structure and operating model that can simplify M&A IT integration M&A IT execution: Effective processes, tools, and governance that are needed to smoothly execute post-merger IT integration

M&A business direction For most companies, the IT organizations strategic direction is driven by the overall business strategy. Therefore, for an IT organization to execute in a plug and play environment effectively, it must align its operations with the business strategy. Thus, the M&A business direction is a driver for other components of the framework. The business strategy for any merger or acquisition will often determine post-merger business operating requirements, which, in turn, will help determine the scope and degree of business process integration (e.g., tightly vs. loosely) for the combined company. Further, IT integration requirements are driven largely by the business process integration requirement. With that understanding, its crucial to consider the trade-off between the cost and the degree of business process integration, hence IT integration. From a systems integration standpoint, the cost of achieving a fully integrated and rationalized environment could be quite high. Consequently, to completely integrate an acquisition may not make financial sense. First, a complete IT integration could take a long time and consume key resources. So, in some circumstances, it may be better to have legacy systems continue to run independently and add a financial consolidation solution, rather than perform a costly conversion of the acquired systems. Second, size, cost-of-effort, and turnaround time are all key factors in determining the most effective level of business process integration and IT core application integration. For example, suppose a fully rationalized Enterprise Resource Planning (ERP) environment would require a $20 million investment, but would generate a savings of $10 million per year in operating expenses. A consolidated reporting solution, at a cost of $5 million, may only generate a savings of $5 million per year. Thus, the payback on the fully rationalized environment is greater long term, but so are the initial investment and the risk. The consolidated reporting system provides less benefit, but delivers results more quickly, with less investment and risk. Figure 2 below illustrates the differences between the two solutions. Figure : Rationalization vs. consolidation
5 0 15 10 5 0 -5 -10 -15 -0 -5 0 15 10 5 0 1 -5 -10 Source: Deloitte Consulting LLP  3 4 5 Consolidated reporting solution 1  3 4 5 Rationalized ERP

Middleware Middleware, especially middleware that is capable of facilitating EAI, can play a key role in effective post-merger integration. A strategic buyer that has a robust EAI middleware infrastructure will likely have a much easier time integrating an acquired companys applications and related key business processes. Further, when one company acquires another, one considerable challenge is to integrate the companies business processes. EAI middleware is especially useful for those strategic buyers that operate in a process intensive business, such as insurance companies. For example, insurance companies typically require tight business process integration. Processes such as underwriting and claims management can be ideally orchestrated and enabled by a BPM (Business Process Management) tool, which is often an integral part of an EAI middleware platform. A middleware platform facilitates the automation of the business processes by providing seamless integration between the applications supporting these processes. Having a robust EAI middleware infrastructure can also facilitate the business process integration by enabling the application integration. This integration can be achieved because EAI middleware usually provides the following two key functionalities. Facilitating data transmission between applications. From a business perspective, having access to data, as well as the ability to manipulate that data, is one key to completing an effective transaction. As an example, take an insurance company that decides to acquire a competitor and decides to consolidate the claims processing function once the transaction is complete. Using EAI middleware, the buyer could integrate the targets underwriting system with its middleware platform, which would transmit the underwriting data from the targets system to the buyers existing claims processing system. The claims processing personnel at the acquirer could then work with the underwriting data from the target company to process a claim. Facilitating workflow. Workflow integration is key to business process integration. Most top-tier EAI middleware includes a robust workflow engine that orchestrates work activities among business users. Highquality workflow features provide a collaborative and integrated work environment for all business users involved in executing a business process. For strategic post-merger integration, workflow integration between the acquirer and the acquired entity is usually the first step in achieving smooth business process integration. Lets examine the merger of two banks as an example. If an acquiring bank decides to centralize the loan approval process after the acquisition is complete, the acquirer could require the acquired bank to send loan applications across its system boundary to the acquirers loan approval system. With an EAI middleware infrastructure, the acquiring bank could achieve such workflow integration with relative ease. Service-oriented architecture If middleware provides a quick and easy way to integrate applications and business processes between companies, then an SOA lays a solid foundation for the combined entity to achieve long-term post-merger integration excellence, both for IT and the business. Theres no doubt, SOA is a hot topic. It has been for several years, and only recently have more companies taken significant steps to implement an SOA. This migration toward SOAs has been partly driven by the maturing of SOA technology and widespread vendor support for SOA. Another driver has been the appealing values and capabilities an SOA brings to solve some of the most common challenges of post-merger integration. Such challenges include: Ability to implement and support new business requirements and processes. Merged entities often create a new vision or strategy for going forward, and the new vision and strategy often leads to new business requirements or processes. Further, executive management sometimes asks the IT organization to quickly develop a solution to support the newly created business processes. This is often a failure point, and it can sometimes be attributed to inflexible and rigid architectures that do not respond well to changes. However, with a robust SOA solution, IT should be able to quickly create service components as needed and reconfigure the IT capability to meet the new business demand.

With these factors considered, we can begin to look at the standard components of a plug and play IT environment. IT architecture Enterprise application architecture The enterprise application architecture is the cornerstone of an overall IT architecture. A robust, open, and flexible enterprise application architecture is one key to the effective execution of the plug and play principle for post-merger IT application integration. One enabler of a plug and play application architecture is the implementation of Enterprise Application Integration (EAI) using middleware and a Service-Oriented Architecture (SOA) framework.

 Ability to protect existing IT investment at both the acquirer and the acquired. In some cases, a company may take a rip and replace approach to legacy applications that are deemed too difficult to integrate. This drastic approach is usually an enormous multiyear effort, a significant disruption to business operations often requires a multimillion-dollar investment. SOA gives companies another option. Instead, companies that implement an SOA can treat their existing applications functionality as reusable service components to be consumed as needed by other applications, and hence improves the Return on Investment (ROI) on existing applications. Ability to integrate heterogeneous IT environments. Sometimes, IT organizations have little experience with the task of integrating disparate IT environments which is typically required in an M&A transaction. Further, custom-developed applications are often difficult to integrate, because they require custom-written interfaces in order to integrate them. However, the component-based structure of an SOA facilitates a more straightforward process of IT application integration. The Figure 3 depicts how SOA architecture helps to facilitate post-merger integration. Figure 3: Potential integration scenario for merged companies

Line of business-specific instance. Most companies base their ERP instance strategy on either geographic or business groupings. For companies that intend to go through a series of acquisitions or divestitures, it may be wise to consider grouping like businesses on the same instance. This greatly eases the carve-out of the business to be sold. Data Tagging. No matter what strategy a company chooses to integrate acquired businesses, one important consideration is the tagging of data according to business unit. Technology and industry standards Certain applications seem to be de facto industry standards. Choosing a particular application built specifically for an industry increases the likelihood that the acquisition target also operates on the same platform, and it eases the integration effort. Although implementation standards at companies involved in an M&A transaction may be different, choosing to implement industry de facto standard applications can facilitate easier integration. It can also allow the acquirer to realize benefits by strengthening its negotiation position with software vendors to restructure the terms and conditions of software contracts. Therefore, even though companies might have unique requirements and may contemplate building custom applications to accommodate those requirements, the use of de facto standard applications may meet the requirements and save costs in the long run. Infrastructure architecture

New business process Systems supporting new business process

While it is important to maintain a plug and play enterprise application architecture, it is equally important that the underlying infrastructure supporting the applications is plug and play enabled. One way to enable a plug and play infrastructure is to use virtualization technology.
Services Services

Services

Services

Services

Services

Virtualization technology Virtualization technology can be key to enabling a plug and play technology infrastructure. And, it can be crucial to capturing major IT cost savings and operational efficiencies post-merger. Just a few years ago, the concept of a Virtual Machine (VM) was indeed more concept than reality. Now, its one of the hottest trends in IT, getting attention both inside and outside of corporate boardrooms. CIOs of big and small companies alike are increasingly leveraging the latest VM technology in making their IT operations lean, yet effective. One key challenge most strategic buyers face post-merger is how to effectively and efficiently integrate fragmented and disparate IT infrastructures. Each companys IT environment may include numerous data centers at multiple locations across the world, with heterogeneous server hardware environments used by different businesses for different purposes. The issue becomes one of integrating such a massive and messy environment. The advantage of VM technology is that it allows companies to plug heterogeneous systems onto a common hardware platform and allows the existing systems to continue to operate (i.e., play) as they do currently, with low disruption or downtime. With this technology, an acquirer can also take advantage of the merger situation and quickly improve the IT infrastructure for the combined entity. By using VM technology, infrastructure optimization can be achieved in the following ways: Combine underutilized server hardware resources at both companies onto a single VM platform. This approach not only can increase the server utilization (i.e., better ROI), it can also reduce the number of servers that must be maintained at the combined company. The reduced number of servers could also result in considerable savings on data center power consumption and facility rental expenses. Upgrade legacy hardware platform via VM. One common theme in any M&A transaction is the likely discovery of certain mission-critical applications still running on outdated server hardware platforms, which could fail at any moment. VM technology can help avoid expensive one-to-one server replacement by bringing the company onto a flexible VM-enabled server platform. Leverage the VM environment to streamline and simplify the infrastructure support and maintenance. Bringing servers onto a common VM platform can facilitate a unified and centralized server monitoring and control mechanism. Centralized maintenance and support can increase overall server availability. In addition, the provisioning of a new server can be easily handled by adding a new server instance on an existing VM server, thus improving provisioning speed and user satisfaction.

SOA foundation

SOA foundation

Legacy system

Proprietary system

Other custom system

Legacy system

Proprietary system

Other custom system

Acquirers SOA environment

Source: Deloitte Consulting LLP

Targets SOA environment

An SOA is not only valuable in the post-merger integration process. It offers a significant advantage in improving internal IT operations and efficiencies for the combined company in the long run. It is a strategic architectural foundation to build on. Consolidation packages vs. ERP level consolidation In an M&A transaction that involves large companies, theres a good chance that ERP systems will be part of the IT environment at both companies. Integration of ERP systems is typically one of the biggest IT challenges in an M&A transaction. Moreover, given the importance of ERP systems, ERP is, and will always be, one of the critical components in any enterprise application architecture. At one extreme of the application consolidation spectrum lies the strategy of consolidating all acquisition targets onto a single ERP platform; the other extreme is to leave both ERP systems intact and separate and perform financial consolidation and management reporting at the corporate level using business intelligence toolsets. Every M&A transaction is unique, and there is no definitive answer as to which strategy is correct. However, there are certain considerations that a strategic acquirer or seller should keep in mind when deciding how to effectively integrate the ERP of an acquired business. These considerations are: Industry-specific ERP. As an example, lets say an acquiring company wants to maintain multiple ERP platforms. This decision may seem odd, given the rise of total cost of ownership of maintaining multiple platforms and vendor relationships. However, the company may elect this strategy based on its growth strategy, such as varied acquisition. And, if the company operates in multiple industries, the choice is clear to us: run specific, industry-standard ERP platforms for each managed division, and do not try to integrate all businesses on a single ERP platform. This strategy could reduce risk and increase the likelihood that an acquired company is ready for business on Day One post-merger.

As an example, lets consider a merger of two Internet hosting companies. Both companies are operating on a dedicated server hosting model for their clients. The operating model has led to an increasing demand on the data center, server power consumption, and space usage. All of which have become major cost factors impacting the companies financial performance. As part of the post-merger integration plan, the companies could implement VM technology to dramatically reduce the number of dedicated servers by virtualizing them via VMWare. As with any technology, VM technology is a solution meant for certain situations and scenarios; it is, by no means, a silver bullet for all IT issues. The level of virtualization is also an important consideration that varies by company. Some applications and servers are perfect candidates for virtualization while others are not. Companies must strike an effective balance between the virtualized and traditional environments, not only in preparation for a potential future acquisition, but also in improving their own internal IT operations. Platform flexibility For most post-merger integration scenarios, the IT platform of the acquiring company has to be flexible enough to absorb the infrastructure components of the acquired entity. SOA and VM technology are currently the prevailing methods of delivering that flexibility. Regardless of the chosen method, an acquiring companys priorities should be focused on its own IT infrastructure. The focus should be on implementing technology and processes that provide a high level of performance and flexibility and equip the company to integrate with acquired companies quickly and effectively. IT organization The plug and play characteristics of an IT organization usually mean the IT organization has to be nimble and flexible enough to accommodate change or allow speedy integration with the targets IT organization. Some of the key areas to consider for a nimble and flexible IT organization include the following: Core skills (IT management, business analysis, etc.) In any IT organization, its important to identify industry-specific IT roles and recruit talent that are both common and mainstream within the industry. Its also important that there is low dependency between roles so that they can be easily changed. With strategic acquisitions, it is quite common that the acquirer and target are players in the same market segment and sell similar products or services. This sometimes simplifies the integration (applications are similar, staff are familiar with the business concepts, etc.). However, differences may exist concerning ITs role or strategy. Existing IT management processes and company cultures can play a crucial role in the initial stages of assimilation. Organizational differences should be given due consideration before beginning the IT integration process. For example, a globally centralized IT organization may require different skill sets and experience than an IT organization that is federated and regionalized. Many companies have found positive results by taking a phased approach to integration, allowing for a natural mapping of skills, thus facilitating long-term synergies. Organization structure There are many ways to structure an IT organization. Common organization methods include by function, by business units or departments, or by geographic locations. Regardless of the IT organizations structure, the roles and responsibilities between internal IT departments and business functions should be clearly defined, and the structure should be aligned with the overall business objectives. A decentralized IT organization, with dedicated IT support for each business unit or departments, will lend itself more easily to a plug and play structure, with the retention of knowledge of IT systems and infrastructure within the business units. As with core skills, the acquirer and target might have similar IT organizational structures (e.g., organized by business units) if they operate in a similar business. In any case, a clear structure definition and its alignment with business goals can facilitate post-merger IT organization integration and lead to the organizational synergies that shareholders expect. Ooutsourcing More and more, outsourcing is an integral part of any IT operation. Many companies now rely on outsourcing relationships for many critical services, from application maintenance to telecom and data network support. To stay plug and play on the outsourcing operation, an IT organization should

be familiar with the terms and conditions of the outsourcing contracts and should try to negotiate contracts in a way that is flexible and easy to terminate or change, in the event of a merger or acquisition. In addition, outsourcing relationship evaluations are also an important consideration for future M&A transactions. In choosing an outsourcing relationship, their ability to expand its services quickly could have a direct impact on the timeliness of integrating an acquisition or divesting a part of the business. Some key attributes of typical outsourcing providers are: Rapid access to additional hardware, server, and storage space Swift access to additional network bandwidth More robust skills to assist with disparate systems integration More flexible architecture to take on additional hardware (server, storage, etc.) from acquired business IT funding and governance IT cost structure Cost structure is a major issue in M&A transactions, and companies should determine whether their current cost structure allows for quick plug and play transactions. Costs can be divided into: Ongoing costs (fixed or variable recurring costs) Project costs (discretionary; currently in flight) This division allows for greater opportunity to achieve synergies and reduce costs. Contract terms Another important consideration is the expandability, or reducibility, of software or hardware licensing agreements. Any company that anticipates acquiring or divesting a business in the near term should only have licensing agreements that can be expanded (to allow for an increase in the number of users) or reduced (to allow a reduction in the number of users, or a transfer of a portion of the licenses to a buyer) economically. This upfront planning and negotiation can make for an easier transition during deal time. In addition, many buyers (strategic and financial) request that sellers provide IT services via Transition Services Agreements (TSAs) over a predetermined period of time. In many instances, much time and effort is spent on determining and negotiating with vendors as to whether the existing software or hardware licensing agreements allow the seller to provide such services to a third party. Though problems may never be fully avoided due to individual vendor issues, savvy negotiations up front and well-kept records of each agreement can save effort and avoid delays when the transaction closes. Also, due diligence is more effective with target companies where a paper trail is organized and available. Any steps that management can take to simplify the due diligence process will ultimately result in efficiency and help avoid delays in closing and/or ill-informed decisions. IT governance The enterprise IT governance model is another important factor. Some effective IT organizations are organized around decentralized IT, with key business and IT roles existing at the line of business or business unit level. Though decentralization may increase the cost of IT operations, it usually facilitates a quicker IT decision-making process and can simplify integration, or divestiture, of the IT organization through an M&A transaction. M&A IT execution Last, but not least, is the execution capability of the IT organization. Even with the right components, the effectiveness of the plug and play model depends greatly on a companys processes and tools. Three relevant focus areas are: M&A transaction governance Change management M&A IT processes and tools Also, even with appropriate planning for the M&A transaction, the IT organization must still be able to execute the plans effectively. Typically, experience breeds effectiveness, and companies that have participated in multiple M&A transactions often fare better than companies that are undergoing the process for the first time. The execution of the IT integration process is where third-party integration advice and assistance can often be extremely valuable, especially to companies that are attempting post-merger IT integration for the first time, or that lack a series of deals to draw upon.

Wrapping it up Across all industries and despite the presence of numerous integration methodologies that permeate the marketplace, the rate of merger effectiveness continues to be disappointing; most studies suggest that 50 to 70 percent of mergers fail to create incremental shareholder value.1 The reasons for failure are myriad and include poor strategy, bad deal-making, and, most notably, failed IT integration which our research shows is the reason for close to half of all failed mergers. Most of these failed IT integrations are due to the lack of preparation or planning or to poor integration execution. The plug and play M&A IT integration framework presented here is by no means a silver bullet that addresses all of the IT challenges that can result from a merger or acquisition. However, it does present a time-tested and well-structured approach to consider for any M&A IT integration effort. It can also be used to help prepare IT organizations as they face the many possible challenges ahead.

Contacts James Mark Andrews, Director Deloitte Consulting LLP +1 973 602 6133 jaandrews@deloitte.com Colleen Chan, Senior Manager Deloitte Consulting LLP +1 415 783 4139 cochan@deloitte.com Kenneth Wu, Manager Deloitte Consulting LLP +1 617 585 5873 kennwu@deloitte.com

1 Solving the merger mystery: Maximizing the payoff of mergers & acquisitions, Deloitte, February 2000.

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