(Updated Dec 1, 2022)
While M&A activity in 2020 was very slow due to COVID, deals in 2021 surged past pre-2019 levels and hit record-breaking numbers. But after another slump in 2022, activity in 2023 is not expected to rebound much. And as companies are leveraging transactions to drive shareholder value in a post-pandemic economy, increased pressure on cost control and operational efficiency is generating more transparency into the value of information and technology for many.
Common M&A Drivers
The explicit objectives or reasons for a merger or acquisition – particularly involving publicly traded companies – typically surround improvements in shareholder value. A specific transaction can accomplish this in a number of ways, including cost reduction, increased market share and improved operational effectiveness. Cargill entering into an agreement to purchase a Singapore-based chocolate manufacturer to significantly expand its global footprint is just one recent example.
In addition to the stated objective goals often included in M&A announcements, companies often realize secondary “soft” benefits during integration operations. Transactions can often be a catalyst for process innovation and optimization. Effective integration leaders will fully capitalize on the knowledge transfer, access to methodologies, culture and industry experience that transactions typically present. 117 year-old Beckton Dickinson updated their purpose and recrafted the company values when they acquired CareFusion, a much younger, more progressive company.
The Dark Side of M&A
At the same time, there are countless intangible risks that accompany M&A activity. Just one of the many that teams must mitigate is unexpected and unwanted attrition. Sprint was hoping to adopt the entrepreneurial and customer-service oriented approach that Nextel had through their acquisition, but saw an unexpected mass exodus of executives and mid-level managers soon after the merger. And while this is true across all organizational functions, it can be particularly relevant among IT staffs. Technology roles are often seen as fixed operating expenses, and many could be considered redundant following a merger. This poses a critical risk to post transaction operations.
One of the most important aspects of realizing the full value from an M&A transaction is the rapid integration of disparate IT systems. The more quickly the post-close enterprise can align systems, applications and data, the more quickly it can realize synergies and achieve cost optimization. And on the flip side, the longer the integration takes, the more difficult it is to reach these goals. In fact, one 10 year study of M&A activity showed that the speed of IT systems integration correlates with revenue and cost synergies realization.
This path to systems integration is highly complex and often underestimated by M&A planners. There are typically four different approaches that companies will take based on the individual acquisition situation and both the short- and long-term objectives of the newly formed company.
- Stand Alone. This approach leaves the two companies’ systems primarily in place to run independently. While this method may seem counterintuitive to economies of scale often pursued via an acquisition, it is common when the transaction is purely financial or when the two businesses are very different from each other. While systems are left to run independently, there can often be data integration needs for analytics and reporting.
- Fully Absorbed. When one organization is significantly larger than the other, it will typically bring the entire smaller enterprise onto its systems, processes and platforms. While relatively straightforward from a planning perspective, this approach can take a long time to execute depending on the scope and size of the acquisition. Additionally, it can require data and application migrations that can become quite complex.
- Adopt & Go. The Adopt & Go method involves identifying and adopting the best-of-breed technology components from each organization involved in the transaction. It is often used when both companies have mature systems and similar business operations, and can have the longest adoption cycle due to the complexity of legacy environments. And like Fully Absorbed approach, it can result in complex data and application migrations.
- Hybrid Integrate / Migrate. This is an approach that combines elements of the other integration strategies in order to realize short-term acquisition value while creating an architecture that supports long-term innovation and success. This method involves quickly integrating key transactional systems and data for immediate operational efficiencies and alignment. Meanwhile, best-of-breed systems are identified and migrations are carefully planned. While this is an approach that seeks to not only drive acquisition value quickly but also create a foundation for long-term innovation, it carries complexity and risk and requires careful planning and tooling.
The keys to a successful IT integration are identifying the right approach, creating a plan and having the processes and tools to execute. While these three things seem obvious, they can be particularly problematic for companies that use mainframe computers – especially when it comes to execution.
In 2020, 53% of all M&A activity came from the Finance, Manufacturing and Government sectors – industries that happen to have disproportionally high mainframe usage. In nearly all cases, these legacy systems were custom-built decades ago and they were never designed to merge easily with other systems or data.
The good news is that integrating or migrating data and applications to and from these core systems – and doing it quickly – is a critical M&A problem that can be partially solved by the right tooling. Adaptigent’s Adaptive Integration Fabric is a no-code platform that creates highly sophisticated multi-point integrations that can easily incorporate both mainframe applications as well as modern, distributed sources into integration workflows.
We’ve helped some of the world’s largest companies streamline their post-transaction M&A operations and speed time-to-value. Click here to learn more about how two airlines were able to consolidate their maintenance systems and meet regulatory requirements following a merger.