The combined value of all of the mergers and acquisitions in 2019 is estimated to be $3,9 trillion — making it one of the most valuable industries on the planet. Mergers and acquisitions are powerful tools. Apart from the corporate synergy and economies, firms can also use M&As to acquire market share, proprietary technology, and competitive advantage… but it all comes at the cost of risk — a lot of risks. The failure rate of mergers and acquisitions, according to the Harvard Business Review sits between 70 percent and 90 percent.
That’s pretty grim. Yet it’s one of the most powerful ways to expand a business. This article is a small peek into what I do as a veteran of the M&A industry.
What Does an M&A Consultant Do?
Saying an M&A consultant provides advice and shares years of expertise to achieve results through the path of least resistance may be true but it’s also an oversimplification. As an M&A Technology consultant, I have to understand every aspect of the organization that will be affected by the merger and more importantly, how that aspect will be affected. Technology cuts through all departments of a firm. Consultants work closely with decision-makers, employees, and vendors and even interview them regularly to paint a more complete picture of the internal cultural environment — one of the key reasons behind failures of mergers and acquisitions.
Challenges M&A IT Consultants Face On The Job
Problems are bound to pop up, it could be managerial inefficiency (too many chefs), lack of infrastructure, and the most common in 2019: technological gaps and incompatible IT systems — my specialization.
Technologies of the two companies pose some of the biggest challenges to a successful merger or acquisition. For instance, when working with two companies of similar sizes, technical and structural changes of equal magnitude are needed in both their IT infrastructures. This starts the process of searching for any technical debt, overcoming any security issues, making both systems compliant with the industry regulations, etc. However, this step is complicated if one of the companies (generally the target company) is running on legacy systems.
It’s not impossible for a company running legacy software to merge with one that isn’t, but it is a lot of work. Take, for instance, private equity firms who place scalability and maintainability at the top of their concerns. That means private equity firms tend to avoid companies with IT that is outdated or incompatible to reduce any additional costs related to doing a full-feature rewrite of the system. An incompatible system also throws a wrench in the works as it may not be able to handle the increased traffic/usage the PE firm’s growth projections and investment thesis portend.
The Biggest Challenges in M&A Come After The Deal
I am an M&A IT consultant and in a nutshell, my job is to ensure that the merger/acquisition I am handling is part of the 10 percent success stories. I do that by focusing on the most expensive part of any merger — operational platforms of the business (think ERPs, CRMs, and core proprietary technology).
Things can go horribly wrong if the company’s IT infrastructure isn’t prepared for a merger/acquisition. A great, albeit a bit extreme case of acquisition going wrong, is of Banco Sabadell’s acquisition of TSB in 2015. As part of the acquisition, 1.3 billion records were supposed to transfer from TSB’s IT system to Banco Sabadell’s. But due to a computer meltdown in 2018, thousands of customers faced glitches, were locked out of their own accounts, and in some cases had their credentials compromised. In the end, failure to properly integrate their computer systems cost Banco Sabadell tens of thousands of customers and £176 million in additional integration costs.
(Similar examples and case studies would be mentioned and analyzed in future articles. However, I would like to note that I did not make any contributions to the mergers/acquisitions that I talk about. In fact, confidentiality is just one another requirement of an M&A consultant.)
As I see it, there are two main reasons why Banco Sabadell’s acquisition and many others fail: they either skip the proper diligence before the acquisition/merger and fail to understand the full extent of work required to integrate the underlying technologies or they don’t allocate enough time, money, and manpower into post-close activities. Integration of TSB’s legacy system and Sabadell’s Proteo was a rush job of the worst kind as upper management didn’t take into account the actual time and money it would take to make the IT systems compatible while pulling the trigger on the acquisition. However, had they performed due diligence BEFORE signing the deal, they would’ve realized that this acquisition might not be worth it or properly factored in the remediation costs expected to modernize target’s systems.
The world of mergers and acquisitions is a challenging environment which forces us to make the most out of information on hand. It’s challenging and often risky but it can also be the only way of attaining rockstar personnel, patented technology, and valuable trade secrets. All you have to do in return is to focus on the problems most common and whatever happens — don’t stop right after the deal closes.
Thanks for reading. Hope you learned something new. If you have any questions, please feel free to ask — this is what I do on a day to day basis.