The Importance of IT in the M&A Due Diligence Phase

About M&A transactions in the Orlando area. I read with excitement the other day that Orlando Inno reported the first Orlando-based Simulation company was recently acquired. This story is excellent news, yet this news also raised my thoughts and concerns about the M&A world. I have networked with people from the M&A world for years. In my contacts list, I know investors, valuation specialists, bankers, and, you name it, I know someone who does it.  

I educate people on the importance of having an unbiased person to help them understand how to merge the two enterprises with Legacy Systems. Because of the importance of these decisions, it opens an excellent opportunity for a Fractional CIO who can make these decisions without favoring one company over the other. Sometimes, the acquired company may have the better technology in today’s modern world, but will it work with the buyer’s legacy? 

In 2018, Deloitte Insights’ study mentioned that 46% of M&A executives reported that technology integration issues presented a significant post-merger challenge because of Inadequate planning for post-merger integration.

It’s important to note that while legacy systems can present challenges during M&As, they’re often just one part of a giant puzzle. Even if IT integration goes smoothly, cultural or strategic mismatches can cause an M&A to underperform or fail. While I can focus on just systems, it is equally important to know that IT staffing can also be an issue in the post-merger phase. The M&A plan needs to understand the required level of expertise or the IT team’s culture. 

A report by McKinsey & Company stated that IT-related issues are a common factor in M&A difficulties. One of their findings mentioned that merging IT systems post-acquisition can often take longer and be more complex than initially expected. Because of poor planning, there can be an increase in costs and lead to underperforming end-user services. 

A Real-World Example of an M&A Failed By IT.

The Merger:

In 2011, Hewlett-Packard (HP) acquired Autonomy, a UK-based software company, for approximately $11 billion. The acquisition was part of HP’s transition from a hardware-focused company to one emphasizing software and services. Autonomy was known for its IDOL (Intelligent Data Operating Layer) platform, a data search and processing tool.

The Aftermath:

A year after the acquisition, HP wrote down $8.8 billion related to the Autonomy deal and alleged that they had been the victim of a massive financial fraud orchestrated by Autonomy’s former management. However, amid these financial discrepancies, significant IT-related issues came to light.

IT Issues and Challenges:

Software Incompatibilities: Autonomy’s IDOL software, their flagship product, faced integration challenges with HP’s existing software and infrastructure. A proper Risk Management plan would have listed the two systems’ incompatibility during due diligence, but it didn’t, and it became evident only after the merger.

Culture Clash: Autonomy’s agile and entrepreneurial work culture clashed with HP’s bureaucratic structure. This cultural mismatch extended to IT operations, with different approaches to software development, project management, and IT problem-solving.

Lack of Synergies: Marketing the deal as a way for HP to bolster its software capabilities, the two companies needed more in common regarding technology offerings. This lack of commonality made it hard to find meaningful synergies or create integrated solutions for customers.

Inadequate Due Diligence: Some industry experts believe HP rushed the due diligence process, driven by the strategic desire to quickly move into the software space. Proper due diligence might have unearthed financial discrepancies and the vast technological differences and challenges in integrating Autonomy’s products into HP’s portfolio.

The Fallout:

The mismatch between HP and Autonomy and the alleged financial irregularities led to massive financial losses for HP. Legal battles ensued between HP and Autonomy’s former executives. The Autonomy debacle is now a cautionary tale in M&A circles about the importance of thorough due diligence, not just in financial terms but also in technological and cultural aspects.

While financial discrepancies were at the heart of the HP-Autonomy saga, the underlying IT and cultural challenges compounded the merger’s problems. The story underscores the importance of meticulous planning, especially concerning IT, in any M&A deal.

What specific IT-related issues do M&A executives face during post-merger integration? How do cultural or strategic mismatches affect M&A success rates? How can a Fractional CIO help with due diligence in a company merger or acquisition?

1. IT-Related Issues Faced by M&A Executives During Post-Merger Integration:

• Systems Integration: Merging distinct IT systems (ERP, CRM, financial systems, etc.) can be complex, mainly if the companies use different platforms or software. Because of this, a comparative analysis is essential to evaluate each system to ensure selecting the correct one for the entire enterprise. 
• Data Migration and Consistency: Transferring data between systems and ensuring data integrity can be challenging, primarily when the data structures differ.
• Cybersecurity Concerns: The merging process of two companies can expose vulnerabilities, especially if one company has weaker security protocols than the other.
• Redundant Technologies: Determining which technologies to keep and which to retire can be a contentious issue, often requiring decommissioning and data migration.
• Network and Infrastructure Integration: Merging networks, deciding on the proper infrastructure (like data centers), and ensuring continuity can pose challenges.
• Application Overlap: Multiple applications with similar functionalities can exist across merged companies, necessitating rationalization.
• Cost Overruns: Integration projects can exceed budgets due to unforeseen complexities or challenges.
• Regulatory and Compliance Issues: Ensuring that the merged entity remains compliant with industry-specific IT regulations can be a concern.

2. Impact of Cultural or Strategic Mismatches on M&A Success Rates:

• Cultural Mismatches: When two companies with distinct corporate cultures merge, it can lead to misunderstandings, decreased morale, increased employee turnover, and reduced productivity.
• Differing Strategic Goals: If the merging companies have different strategic directions or objectives, it can lead to confusion and misaligned efforts post-merger.
• Leadership Clashes: Differences in leadership styles or visions can cause friction and reduce decision-making effectiveness.
• Operational Differences: Varied approaches to operations, from project management to communication protocols, can hinder efficient integration.
• Values and Ethics Mismatch: Differing core values or ethical standards can lead to internal conflicts and harm the company’s external reputation.

3. Role of a Fractional CIO in Due Diligence During a Company M&A:

• Expert Assessment: A Fractional CIO can evaluate the IT landscape of the target company, providing insights into the state of their systems, technologies, and processes.
• Integration Planning: They can outline potential challenges and strategies for IT integration, setting realistic timelines and budgets.
• Risk Identification: By identifying IT risks early, from outdated systems to potential security threats, a Fractional CIO can help in informed decision-making.
• Cost Analysis: A detailed review of the target company’s IT expenditures and potential future costs aids in financial planning.
• Regulatory Insight: The Fractional CIO, with their knowledge, can ensure that the target company’s IT operations comply with relevant regulations for their industry to minimize compliance risks for the purchaser.
• Strategic Alignment: A Fractional CIO can review the alignment between the target company’s IT strategy and the acquiring company’s broader goals.
• Talent Evaluation: Assessing the capabilities and structure of the IT team of the target company helps in integration planning.

The complexities of merging IT systems and the potential pitfalls of cultural and strategic mismatches underscore the importance of thorough due diligence. A Fractional CIO, with their expertise and objective perspective, can be invaluable in navigating these challenges and ensuring a smooth, successful merger or acquisition.

What Can a Fractional CIO Do to Help with M&A?

A Fractional CIO is a professional who provides services to an organization on a part-time, temporary, or contract basis. This setup allows organizations to leverage executive-level IT expertise without committing to a full-time, salaried position and can augment the existing CIO. Here’s how a business merger can benefit from using a Fractional CIO:

1. Cost Efficiency: Engaging a Fractional CIO can be more cost-effective than hiring a full-time executive, especially for short-term merger projects. They can provide the necessary expertise for the merger duration without the long-term commitment.
2. Expertise on Demand: Fractional CIOs often have a wealth of industry experience and may have overseen multiple mergers. This expertise can be invaluable in navigating the challenges of integrating two distinct IT systems.
3. Neutral Perspective: Since a Fractional CIO isn’t beholding to either of the merging companies, they can offer an unbiased viewpoint on integrating systems, processes, and teams, which can help avoid internal politics and expedite decision-making.
4. Flexibility: Given their contractual nature, Fractional CIOs can be engaged for specific tasks or phases of the merger, ensuring that you have the right expertise at the right time.
5. Risk Mitigation: With their expertise, Fractional CIOs can help identify potential IT risks associated with the merger and provide strategies to mitigate any potential risks.
6. Strategy Alignment: Mergers often aim at strategic advantages, such as entering new markets or offering new services. A Fractional CIO can ensure that the IT strategy aligns with the overall business goals post-merger.
7. Resource Optimization: They can guide how to optimize and possibly consolidate the combined IT resources of the merging entities, ensuring that there’s no unnecessary overlap or redundancy.
8. Project Management: If the merger requires significant IT projects, such as data migrations, systems integrations, or new platform rollouts, a Fractional CIO can oversee these projects, ensuring the completion of each project or task efficiently.
9. Knowledge Transfer: A Fractional CIO can help train and transition responsibilities to the permanent IT team after the merger, ensuring that the combined organization is self-sufficient.
10. Cultural Integration: Beyond just technical systems, IT teams themselves have their own cultures and ways of working. A Fractional CIO can help smooth the integration of IT teams, addressing cultural differences and fostering a unified approach.

A fractional CIO can provide the high-level oversight and expertise required to guide the IT aspects of a merger without the need for a long-term executive commitment. This flexibility, combined with their expertise, can ensure that the merger’s IT integration is smooth and aligned with the broader business objectives.

What Can a Fractional CIO Do During the Due Diligence Phase of an M&A Tranaction?

A Fractional CIO can be pivotal during a company merger or acquisition due diligence phase. Leveraging their extensive IT expertise and strategic perspective on a part-time or temporary basis, they can provide valuable insights and guidance during this critical period. Here’s what a Fractional CIO can contribute during the due diligence phase:

1. IT Systems Assessment: Conduct a thorough review of the target company’s IT systems, including hardware, software, networks, data centers, and other technology assets. Identify any outdated systems or technologies that might require upgrades or replacements.
2. Data and Security Review: Assess how the target company manages and secures its data. This assessment involves evaluating cybersecurity practices, checking for past breaches or vulnerabilities, and ensuring compliance with industry regulations.
3. Integration Roadmap: Develop a preliminary plan for integrating the IT systems of the merging companies. This roadmap includes considering potential challenges, timelines, and costs.
4. Cost Analysis: Provide a detailed analysis of the current IT expenditures of the target company and predict future costs, especially concerning the integration and any necessary system upgrades.
5. Review of IT Contracts and Licenses: Examine existing IT-related contracts, including software licenses, vendor agreements, support contracts, and other obligations. This review determines potential liabilities, transferability, or contractual limitations.
6. Operational Continuity Assurance: Evaluate the IT operations for any potential disruptions during the merger, ensuring that business processes remain smooth throughout the transition.
7. Intellectual Property Evaluation: For companies with proprietary software or digital solutions, assess the value and potential of these intellectual assets, ensuring that IP rights are clear and protected.
8. Regulatory and Compliance Check: Ensure the target company’s IT operations comply with industry-specific regulations, standards, and best practices, especially data privacy and security.
9. Team and Talent Evaluation: Review the IT team’s structure, capabilities, and culture. This evaluation can anticipate potential challenges in integrating staff from the two merging entities and identify skills gaps.
10. Future Strategy Alignment: Evaluate how the target company’s IT strategy aligns with the acquiring company’s future goals and market demands, providing recommendations for adjustments if necessary.
11. Risk Assessment: Identify potential IT risks associated with the acquisition, ranging from security vulnerabilities to potential system incompatibilities, and recommend strategies for mitigation.
12. Stakeholder Communication: Facilitate clear communication between the acquiring company’s executives, IT teams, and other stakeholders about the IT implications of the merger or acquisition.

A Fractional CIO can provide a comprehensive and objective evaluation of the IT aspects of a target company during the due diligence phase. Their insights can inform negotiation strategies, integration planning, and post-merger IT decision-making, ensuring that technology-related risks are minimized and opportunities are maximized.

At JAYCO CIO Services

As consultants, we aim to become the preeminent provider of CIO Services by educating, mentoring, and helping move our clients forward. We understand the tremendous undertaking of merging and acquiring businesses. Our seasoned CIOs have been in the industry for over 20 years, strategizing IT in many industries. 

With our flexible engagement arrangements, there is no long-term commitment. Because you should only pay for what you need, whether you need someone for a few hours a week or on a project basis, we can help you now. 

As Fractional CIO providers, we understand that change can be scary. We are unbiased in our solutions. We will listen to your future vision and will put together a roadmap from where your current state of infrastructure is and where the future state will be. Every company has its intricacies that we understand will only fit some companies. 

JAYCO CIO Services, founded in 2018, services clients nationwide and offers various CIO services designed to help businesses improve their technology capabilities and move forward, such as M&A, Digital Transformation, blockchain, and ERP migrations. We Provide education, mentorship, and training on new technologies that can be valuable for organizations looking to stay competitive and streamline their operations. It is essential for businesses to continuously learn and adapt to keep up to date with the latest technologies and best practices, and the services we offer can be helpful in this regard.

At JAYCO CIO Services, We have a holistic approach to working with executive officers, stakeholders, and IT teams to understand the current state of a business’s technology and identify areas for improvement that can be an effective way to help organizations move forward and achieve their goals. We can provide an assessment and follow up with a report detailing the assessment findings. This report can be a valuable tool for helping businesses understand where to focus their efforts to make progress.