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June 26 2022 5 minutes read

M&A: UNDERSTANDING THE DUE DILIGENCE CHALLENGE

The COVID-19 pandemic and subsequent lockdown has shown the benefits of mergers and acquisitions (M&A) in detail, as large incumbents eye competitors, nimble entrants, and fin-tech companies as potential targets.

Business synergies will presumably be clear, but the IT synergies that underly them need to be assessed in detail. Due diligence is the key to making systems work and M&A programs succeed.

IT can then help identify the opportunities and estimate the costs associated with realizing them. Lack of due diligence has costs. Deloitte research from 2019 shows that, “Lack of integration has created between 5%-8% of additional run-rate costs for organizations, roughly $6 to $8 billion per year industrywide.”

With financial services companies subject to pressure not just from customers and shareholders but also regulators, there is not much room for error.

Managing M&A risk: The transaction and integration gap

According to a second Deloitte report, published in 2019, there are two common ‘gaps’ in any M&A deal.

First is the ‘transaction gap’ between what was paid and the actual value of the company. This is typically in the region of 30% and is a failure of ‘early’ due diligence to get a handle on the target, perhaps because of too little time, poor negotiation, or a host of other factors.

Second is the ‘integration gap’ which accounts for the remaining 70% of the integration deficit and represents benefits that were not delivered. IT benefits or disbenefits will be found in this second ‘integration gap’. To reduce this, “A key mitigation of deal risk is making sure that all the major integration issues are outed as early as possible,” reads the report, which outlines five basic steps to minimize problems:

  • First, focus on a future-state strategy. Building a vision of an ideal future state will help focus integration and which legacy systems, if any, will ‘win’.
  • Second, a thorough financial plan, to make IT decisions as rational and neutral as possible using the future-state strategy.
  • Third, robust project management is essential. Experienced project managers must be there to keep one eye on maintaining business as usual while simultaneously considering integration.
  • Fourth, develop a detailed communication and change plan. While many see IT as a ‘back room’ activity, it is central to providing services for customers, and business-critical services such as HR. Communicating and managing expectations to staff, stakeholders and shareholders is crucial to minimize surprise and disruption.
  • Finally, structural alignment is needed, where businesses look at strategic advantages rather than preserving the status quo. Key people from the new business will help drive the combined business forward, and this may be crucial in IT where there is a known skills gap.

 

Managing M&A risk: Compatibility

Due diligence must examine systems in detail to give a realistic steer for the M&A to follow.

Firstly, compatibility, as the UK Deloitte report makes clear. “It is crucial to agree early on what the operating platforms will be”, and then whether back-end services are internal or outsourced.

Deloitte is also strongly in favor of moving Enterprise Resource Planning (ERP) to the cloud as a way to rapidly upgrade systems in preparation for M&A activity.

Hybrid IT gives organizations more flexibility according to McKinsey, but businesses only benefit if they can address a few key questions – whether your business has:

  • The talent available – forward planning should help IT leaders set up integration solutions in the post-M&A period, when organizations are most accepting of upheaval. Clearly the right talent needs to be both in place and motivated.
  • The right metrics for growth – how will IT leaders know they are effectively adding value, and over what time period?
  • Maximum automation – what functions are enabled by IT? Services like anti-money laundering, customer checks, claims, policy quotes, and shared services can all be enabled by IT.
  • Security by design – the demands of regulation and brand security demand effective security to maintain shareholder value.
  • Reductions in time to release new products and services – M&A will not be the end of something, but the beginning of something new, and developing innovative products and services will be an essential part of this.

Managing M&A risk: Costs

Finally, every M&A program will come down to one factor more than any other – costs.

M&As are one of the most expensive and time-consuming operations a business can engage in. In the final analysis – is it worth it? Good due diligence here will give the answer. Smart investment in Hybrid IT, Colocation, and Edge systems for fast transactions in trading will help prepare the ground.

The price of an incompatible alliance will be high – due diligence will help you understand the difference.

Conclusion:

Understand your M&A target. The better you know their systems, the more potential savings emerge. Panduit is the enabler to make sure your systems marry so you get the best from both.

IT considerations are only part of the solution. Talent, metrics to track progress, automation of integration, security, and continuity are all essential parts of this journey.

Panduit, alongside our vast partner ecosystem, gives your business the most secure foundation to take advantage of any merger or acquisition through the right mix of Hybrid IT, Colocation, and Edge computing.

To learn more, read our eBook here.

* This article was originally posted on Panduit Connections Blog.

Author

Jennifer Vallarautto

Jennifer Vallarautto is the Global Account Manager at Panduit.

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