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.