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September 2004
Is There a Merger or Acquisition in Your Future? Don’t Forget IT!
By Kathy Burkle, MAD IT Consulting
As the economy strengthens, businesses are again evaluating their portfolios and developing strategies
for growth and profit improvement. A strategic acquisition or shedding of a less-than-stellar division or
unit is often the solution of choice when driving toward shareholder satisfaction. It’s well documented
that close to 70 percent of mergers and acquisitions fail to meet expected results. All too often an
information technology (IT) professional isn’t included in the group of trusted advisors who are assembled
to identify the risks of a proposed deal.
Assigning accountability for all IT-related aspects significantly contributes to the success rate of
an acquisition. Therefore, during due diligence and prior to finalizing the purchase, make sure you’ve
assessed and quantified the following five common IT landmines for their impact on the valuation:
Software and Hardware Licenses
A license is required for nearly every component of a company’s technical architecture. The types of
licenses, as well as the terms and conditions, are as varied as the number of software vendors existing
in the enterprise today. You can no longer assume that all licenses are transferable to the new company
in an acquisition. With subscription services becoming more prevalent in the IT industry, you can’t even
assume that the acquired company owns the licenses! Do your homework on this one and analyze every agreement
that exists for equipment and software critical to supporting the business. Finding out post-close that you
don’t have legal rights to the software that’s running your business—or that you have a huge
liability—can lead to months in court (if audited) and an unexpected expense that directly affects your
bottom line.
Outsourcing Agreements
Outsourcing as a model for delivering IT services to an organization is no longer the exception. It’s
not uncommon to find deals with terms of 5, 8, or even 10 years at a cost of millions of dollars. The
service being provided is often core to running the business, but even if the service is terminated, the
contract obligation can be sizable and the penalties steep. The negotiation team needs to be fully aware
of the potential financial impact these agreements represent.
Transitional Services Agreement
It’s rare when a company can be completely integrated into a new organization on the closing date. If
the acquired company is part of a larger entity, or has outsourced all IT-related services, you need to
put agreements in place to ensure business continuity during ownership transfer. A short transition period
is desired, but the time could exceed a year or more depending on the complexity of the systems. Establishment
of appropriate service-level agreements—in conjunction with a reasonable transitional services
agreement—provide the foundation for a cost-effective continuity plan.
Penalty Clauses
If you’re acquiring a portion of a larger entity, beware that there may be penalty clauses tied to the
successful disentanglement of infrastructure and systems from the selling organization. Your IT-knowledgeable
advisor is invaluable in this assessment, as the process requires someone with a high level of experience with
implementing architectures and applications. There are documented cases of sophisticated corporations
seriously underestimating the task at hand, resulting in hundreds of thousands of dollars in penalties
per month.
Post-merger Integration (PMI) Costs
IT is the largest cost driver when integrating companies. Give full consideration to the approach that
you will take to merge the organizations and systems during the due diligence phase. If the ultimate business
objective is to have the operations under one set of systems, factor the cost projections (which can be quite
extensive) into the deal.
Conclusion
To help ensure a winning merger or acquisition, successful organizations must know the importance of
remembering IT and be certain to implement the following best practices into their procedures:
- Assign an IT professional as a trusted advisor from day one
- Stretch due diligence beyond the financials and include a comprehensive IT review
- Include your IT representative in the review and negotiations of all transitional service agreements
required for business continuity
- Outline a PMI strategy during the due diligence phase, making sure you know the risks and costs and have
factored them into the final deal
- Build in the time necessary to find the devil buried in the details
MAD IT Consulting is committed to ensuring that their clients
fully understand and effectively manage the IT issues associated with mergers, acquisitions, and divestments.
As a result, their clients realize tremendous cost savings and achieve timely completions with fewer legacy
issues and lawsuits.
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