The CIO's Survival Guide to M&A, Part 1: The Merger

By Matt Podowitz

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The M&A volume is expected to rise by 30 percent or more in 2011, and may increase even more in 2012 as the financial and lending environment returns to something resembling its pre-downturn state.

This “merger mania” is fueled in part by a heady combination of available capital and a target rich environment comprised of companies that remain vulnerable even as the economy recovers. The opportunity to snap up a struggling competitor, jump start a geographic expansion by acquiring a local player, or move upstream or downstream in the value chain may hard to resist for even the most conservatively managed of companies.

At the same time, the recognition that IT is pivotal to many of the financial synergies and other benefits used to justify these transactions is on the rise -- based on a combination of recently published research and horror stories of mergers that went awry when IT wasn’t able to make expected contributions to the effort to realize those benefits. With this increased recognition comes increased pressure on CIOs to contribute before and after the transaction closes to make the merger successful.

The opportunity

Mergers represent a tremendous opportunity for CIOs to shine, regardless of whether or not they expect to remain in place after a merger is completed. However, because the stakes are so high, CIOs can easily find themselves in a no-win situation that can haunt them for the remainder of their careers.

Four key strategies, implemented well, can improve a CIO’s odds of coming out on top:

Recognize that there is no “merger of equals" - Many merger are portrayed this way to assuage egos and keep key talent from fleeing before the transaction is completed. In reality, it is a myth.

Every merger will have a dominant player, the majority of whose culture, personnel, process and infrastructure are likely to survive the transaction. CIOs employed by the dominant player will be held accountable for a portion of the success of the transaction, and stand to gain tremendously (financially and otherwise) for helping make the merger successful.

CIOs employed by the company being merged probably are on their way out, but can significantly enhance their exit package and future employability by remaining in place for as much of the integration as possible. CIOs that don’t understand which position they are in, or buy into the “merger of equals” myth, are at much greater risk of losing out. Some CIOs may simply be able to ask, but it often takes some detective work to determine which company is the dominant one as it isn’t always the largest.

Find out as much as possible about the other party in the merger and what the companies are claiming as the reasons for the merger. Also look at how both companies have handled mergers in the past. It should become evident pretty quickly which company is being merged into the other.

Get involved early, whether officially or not - The earlier CIOs get involved in a merger, the more likely they are to be able to maximize their contribution and so increase the potential of benefitting personally and professionally.

The best time for a CIO to get involved is during due diligence, which takes place after the companies agree they both are interested in a merger but before the deal actually is signed. CIOs who don’t get involved until after the deal has been signed, or worse, until after the deal closes will have little ability to influence the terms of the deal and to set expectations for what they and their IT departments can contribute.

CIOs who determine that a merger transaction is in the works without their knowledge or involvement may want to make a case to having a seat at the table, whether by presenting case studies or research to support their involvement, or simply leveraging their relationship with executives and other business leaders within the company. Where that isn’t possible, CIOs should do as much detective work as possible to gain an unofficial understanding of the players in the transaction (the other company and any private equity firms or other capital sources involved), the rationale for the merger (why the companies are interested in the transaction) and the specific synergies or benefits expected to result (for example, cost savings or increased sales).

The CIO’s goal (whichever company they work for) should be to have a hand in the due diligence and post-merger integration planning that (optimally) begins even before the deal is signed whether officially and openly or unofficially as a shadow advisor to some of those who are involved.

Relate everything IT to the rationale and expected benefits of the merger - Psychologically and practically, a merger becomes the primary focus of executives from the moment due diligence begins until the transaction is scrapped (which sometimes happens) or the integration is completed. Whichever position a CIO is in, that CIO’s ability to protect their own interests, budgets and teams and ultimately come out of the merger on top is contingent on their ability to demonstrate how they and their departments will contribute to the success of the merger.

For each element of the rationale and each benefit that is being used to justify the merger, the CIO should determine which elements of the IT function (people, process and technology) can influence the realization of that outcome and how. A simple two-column matrix (with rationale or benefit on the left and the applicable IT elements on the right) can become a roadmap for discussions with the business to obtain or protect budgets, with employees to secure their temporary or ongoing commitment and to identify those people or bits of technology that can be let go in the name of short-term cost savings.

The more IT (whether people, process or technology) can demonstrate that contribution in terms of the rationale or benefits used to justify the merger, the more likely the more the CIO will be able to influence the merger and its IT outcomes.

Be ready to let go of the past and focus on the future - Mergers are to business as tumultuous and life-changing event as a marriage is to individuals. Once two companies have walked down the proverbial aisle, both will be irrevocably changed and equally incapable of maintaining the status quo that existed before the merger.

CIOs who work for the acquiring company and believe they are likely to remain in role should be prepared to abandon projects, eliminate technologies and give up people that may not make sense after the merger, and fight for the resources they will need to make the merger successful both short- and long-term.

Conversely, CIOs whose companies are being merged or who otherwise don’t expect to remain in role should concentrate on maximizing their importance to the success of the merger and thus their ability to negotiate favorable terms (for example, stay-bonuses) on behalf of themselves and their people.

CIOs who focus instead on “keeping things the same” are less able to contribute value to the merger and so may find themselves at increased risk of losing their budgets and people and potentially their own positions faster or less profitably than might otherwise be the case.

Head in the sand

The one strategy universally to be avoided is “blissful ignorance,” whether of how mergers really work, or of the potential for their company to be involved in a merger. The more CIOs can learn about the merger process before they are involved in one the better positioned they will be to implement these strategies when the time comes.

Where CIOs once had little opportunity to influence their own fate in mergers, in the post-downturn economy CIOs can position themselves to be heroes.

Future articles in this series will explore the opportunities and pitfalls for CIOs in other types of strategic transactions such as consolidations, restructuring and turnarounds.

Matt Podowitz is a strategic management consultant assisting entrepreneurial, middle market and Fortune 500 clients maximize returns on investment in operations and information technology and address business considerations in strategic transactions such as mergers, acquisitions and divestitures. He is a Certified Management Consultant and Certified in the Governance of Enterprise Information Technology, and specializes in leveraging business functions that historically have been viewed as cost centers to create tangible value for the business. Matt can be reached via the contact page on his personal business blog, ITValueChallenge.com.