Managing IT Integration for M&A Initiatives

Brian KemperDirector, IT Program Management

Hospira, a Pfizer Company

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Topics

• Deal Types & Integration Approaches

• Integration Process - Steps & Key Milestones

• The Strategic Value of IT in M&A

• M&A Integration Best Practices o Top 10 Planning Guidelines

o Unique Aspects of Managing M&A Projects

o Value Realization in IT

• ERP Integration Options

• “Typical” IT Integration Scope of Work

• Summary – Getting Started

Introduction

Why Integration Matters

Companies spend more than $2 trillion on acquisitions every year. Yet studies say the failure rate of mergers and acquisitions is ~50% * - or even as high as 70% to 90% **

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“Many acquisitions fall short of expectations because executives incorrectly match candidates to the strategic purpose of the deal…. and integrate the acquisition in the wrong way.

“Most deals look great on paper, but few organizations pay proper attention to the integration process”

Why is M&A success such a crap shoot?

* Why Half of All M&A Deals Fail, and What You Can Do About It, Forbes, Mar 19, 2012 ** The Big Idea: The New M&A Playbook, Clayton M. Christensen, Richard Alton, et alHarvard Business Review, March 2011 Issue

M&A Deal TypesGeneral Descriptions

1. MergerTwo companies combine and create a new jointly owned and operated company – i.e. a “merger of equals” – a relatively rare transaction type.

2. AcquisitionThe most common transaction type, where one company takes complete ownership of the other for either strategic (e.g. to expand product lines) or financial reasons (e.g. for cost synergies).

3. Divestitures, Carve-outs Acquiring another company’s subsidiary or line of business, or selling one of your existing business units to another company• Divestitures require separation of shared services from the Seller, and

are often complex due to dependencies on the Seller.

4. Joint VentureInvestment in an independent company with one or more partners, which typically is not fully integrated into either parent’s operations.

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Introduction

M&A Deal ObjectivesUnderstanding Deal Objectives is Essential in Planning Integration

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Introduction

Most M&A deals are driven by one or more of these objectives, which heavily influence the integration strategy to capture deal value.

* Source: M&A Partners, 2012

General Integration Strategies

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Introduction

Type Integration Strategy

Merger Assess Acquirer and Target to select the best people, processes, & technology to support operations – “Best of Breed” approach.

Do not assume Acquirer’s operating model is an ideal future state.Acquisition Leverage Acquirer’s IT environment for cost efficiencies.

Synergy opportunities lie in org consolidation, app rationalization, leveraged purchasing, etc – “Absorption” approach.

Divestiture / Carve-out / Spin-off *

Plan for Seller to provide IT support as a “transition” service (TSA)Extend Acquirer’s IT infrastructure, applications, and support services to quickly replace those provided by Seller.

Joint Venture

Typically operate independently, with segregated IT systems; focus is on IT compliance – “Stand-alone” approach.

• Most Acquirers use the “Absorption” approach – i.e. when significantly larger, or when having more mature processes / technology, than the target.

• “Absorption” requires significant effort to migrate to the Acquirer’s IT systems.

IT Integration ProcessMajor Phases

Preliminary Diligence

Confirmatory Diligence

Pre-day 1 Integration Post close Integration

Sign Contract

Close / Day 1

SLT / BoD Approval

The 4 major phases of an acquisition are referenced to structure IT integration activities.

Introduction

• Many M&A deals start diligence but never receive SLT approval, or do not reach successful purchase contract.

• Occasionally, deals with signed contracts are derailed before closing.

Dark Period – Highly Confidential Post Contract - Public disclosure

Integration costs must typically be incurred within

12 months of close

IT Integration Process Steps and Key Milestones – Level 1

Post CloseSign to CloseDue Diligence

Assess the IT Environment

Key Business Issues, Integration Needs, IT Functional Gaps

IT Diligence Report – Integration Scope, Cost, Risk

ContractSigning

Launch the Integration

Prepare IT systems and Services for “Day One”

Plan post close projects, Align system roadmaps, support models, etc

Drive Value / Synergies

Execute “100 Day” Plan; Transition IT support services

Start Integration / Rationalization: migrate key systems and data, refresh IT infrastructure, etc.

Day 100 *

Introduction

Close / Day 1

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Includes ‘Demand’ & ‘Initiating’ phases of the

PPM lifecycle, and ‘Planning’ for Day 1 scope

‘Planning’ and ‘Execute’ phase of the PPM lifecycle for Day 1 integration scope

‘Planning’ and ‘Execute’ phase of PPM lifecycle for

post-Day 1 integration scope, and ‘Closing’.

IT Integration Process Steps and Key Milestones – Level 2

Execute 100 Day Plan

Plan Long Term Activities

Deliver Integration Value / Synergy Benefits

Launch the Integration

Design the Future State

Plan for “Day One”

Profile the As-Is Environment

Identify Key Deal Issues

Prepare for Integration Launch

Post CloseSign to CloseDue Diligence

1 Preliminary Analysis

Conduct On-Site Interviews

Identify Key Deals Issues

Executive Report Out & Cost Estimate

Identify IT Team

Project Budgeting and Administration

CFT Kick-off WorkshopLaunch IT Integration Team Kick-off

Confirmatory Diligence

X-Functional Dependency Meetings

Day 1/100 Day Plans

Phase 2 PlanningExecutive Read Out

Finalize Phase 2 Plans

Execute, Monitor, & Track Realization

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Executive Read Out16

Stan

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Inte

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Proc

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Step

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10Business Operating Model Meeting

Lessons Learned

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Post CloseSign to CloseDue Diligence

Signing Close / Day 1

Day 100

Introduction

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Execute long term plans

Dark Period – Highly Confidential

The Strategic Value of IT in M&A

“We have found that 50 to 60% of the initiatives intended to capture synergies are strongly related to IT”

10 Source: McKinsey, “Understanding the strategic value of IT in M&A” 2010

Introduction

The Strategic Value of IT in M&A

“More synergies are driven by IT through enabling business process integration than by reducing IT cost”

11 Source: McKinsey, “Understanding the strategic value of IT in M&A” 2010

Introduction

Enabling business integration has implications for IT – successful companies do these before acquiring:1. Get their own IT house in shape.

• Rationalize IT systems e.g., one ERP rather than multiple instances When IT architecture is fragmented, risk of integration failure is high

• Have well defined data models and data governance If an acquirer has optimized IT platforms, it can rapidly integrate a

target, e.g. enable data migration in less than six months.

2. Engage IT leaders with business teams in joint due diligence• Synergies for many business functions (e.g. finance, HR, logistics, sales)

depend on integrated IT systems - joint integration planning is critical.

Focus on Value drivers – these typically spawn IT integration initiatives, e.g. to support cost cutting, business process integration, or revenue / growth initiatives.

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Drive Business Alignment ProactivelyIT is not responsible for most decisions about the scope of integration - however, IT should clarify the decisions needed, present options, and identify their implications.

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Drive Organizational Change -- The CIO should communicate org changes and accountability / reporting changes before close - communicating early prevents confusion.

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Engage SMEs -- Integration requires insight into both companies’ infrastructure, applications, support models, etc – plan to backfill key SME’s to free them for integration.

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IT Standardization -- transition to shared networks, collaboration & conferencing tools, email, domain structures, support services, etc

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Integration Best PracticesTop 10 Planning Guidelines

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Introduction

Integration Best Practices Top 10 Planning Guidelines

Business Applications -- Initiate planning with Business Owners before close to define integration requirements & migration roadmaps, and request integration funding.

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Information Security and Compliance • Information security and compliance are crucial – “gap remediation”

must be part of the integration plan • Reviews controls for SOX compliance, roles / segregation of duties,

production changes, data security, etc, before close.

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Leveraging 3rd Parties – Consultants can help plan & execute integration, but IT leaders must be actively engaged to provide oversight and resolve issues.

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IT Sourcing -- Define the future state for all outsourced services, and develop a plan prior to close for driving service transition.

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Financial Reporting -- Anticipate need to enable key reporting tools at Day 1+ to consolidate financials shortly after close.10

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Introduction

Integration Best Practices Unique Characteristics of M&A Programs

What is different in the IT program management process?

Characteristic Unique M&A Project requirements Urgency -Time Sensitivity

• Projects need to move quickly in diligence to meet deal model and close date timelines Performing diligence quickly may require extra resources

with specialized knowledge / regional presence.

Broad Functional Scope

• M&A projects are more than just app development Multiple, diverse workstreams including data migrations,

service transitions, network and infrastructure, etc

Confidential - Diligence is “Dark”

• Demand, Initiate, and Planning phases for Day 1 typically must be done with very select involvement. May not be able to engage all process owners

Limited Duration

• IT integration must often be executed within 12 months of close due to accounting rules on one-time costs M&A Activities need resources on a priority basis.

Introduction

Integration Best Practices Value Realization in IT

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Introduction

Maximum value is realized when Integration extends to Rationalization

* Source: M&A Partners, IT Integration vs. Rationalization 2014

Integration Best Practices Value Realization in IT

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Introduction

* Source: M&A Partners, IT Integration vs. Rationalization 2014

IT rationalization is the logical end of an M&A integration • Eliminates inefficiencies from redundant systems and services, over-

investment in low-utility solutions, etc.

What are the typical outcomes from IT rationalization?

• Reduce technology spend by 30% or (much) more• Reduce data center space by ~90%• Reduce app portfolios to <40% of previous size. • Reduced complexity => improved manageability and faster delivery. • Improved governance => “standards-based” technology decisions.

What are the budget / resource requirements of rationalization?

• Start with a definition of the rationalized future state environment, then create an executable program plan for implementation.

ERP Integration Guidelines Strategy Options

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Introduction

SOURCE: GARTNER, Determining the ERP suite strategy for a newly merged Enterprise, NOVEMBER 2011

• One ERP is mandated as the solution for the new entity, and all operations are moved to it quickly.

Aggressive Standardization

• The new entity selects a preferred ERP but migrates systems gradually (e.g. when needing major upgrades), while using a “loosely coupled” ERP strategy.

Pragmatic Standardization

• Provides limited “integration” via financial consolidation app (e.g. HFM), and a common BI layer for finance, sales, marketing, and other operational data.

Loosely Coupled ERP

• When it’s not practical to adopt one ERP suite across all business / process areas - a two-tier strategy uses different ERP systems at different layers of the org

Two-Tier ERP

• Provides the least business disruption, but it ignores any possible cost savings and business benefits.

Do Nothing / Manual

ERP Integration GuidelinesStrategy Options

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Introduction

SOURCE: GARTNER, Determining the ERP suite strategy for a newly merged Enterprise, NOVEMBER 2011

ERP Option Benefits / Challenges

Aggressive Standardization

Offers faster realization of operating cost savings and process rationalization, but risk of business disruption is high and up-front costs are significant.

Pragmatic Standardization

Reduces business disruption, but defers realization of business and IT synergies - takes longer for the entire entity to adopt the preferred suite.

Loosely Coupled ERP

Business process integration can be enabled via middleware, consolidation tools, and best-of-breed solutions to link the multiple ERP systems.

Two-Tier ERP One ERP is the global backbone for financials, HR and procurement, harmonized across all divisions. Other ERP systems support subsidiary operations / functions, e.g. sales, field services, local manufacturing.

Do Nothing / Manual process

Requires manual processes to report consolidated financials and sales data at minimum - still need to standardize data and reporting structures.

Summary Key Considerations for Getting Started

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1. Engage seriously in the Due Diligence phase• Proper diligence insures that key decision makers understand the

costs and risks of IT integration, and that IT costs are included in the deal model - before a purchase decision is made.

2. Carefully select the “Day One” Scope of Work• Limit “Day One” to essentials for collaboration, financials, & HR -

use it strategically to get “early wins”, and clearly articulate what will / won’t change on Day One to insure success.

3. Carefully plan your Integration team• Diligence should be led by an IT leader, often with consulting help,

but key SMEs are critical to assess issues in their domains and to insure alignment with other IT initiatives.

4. Plan for Value Realization through IT Rationalization • Rationalization wrings out complexity as well as redundancy.

Introduction

Thank You

Brian KemperBrianRKemper@Comcast.netBrian.Kemper@Hospira.com

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“Typical” IT Integration ScopeIntegration Projects are Broad in Scope and Very Complex1. Deploy infrastructure components & services

• Site to site VPN, new WAN services, Hospira Intranet access, IT Security & compliance remediation, LAN separation (carve outs)

2. Transition email services • Mail client re-configuration (manual or scripted), Active Directory

enrollment, migration of legacy email content, email forwarding.3. New Application development & Roadmap alignment

• ERP development (e.g. for new mfg sites) & support consolidation• Align ‘roadmaps’ for target company apps with business teams,

plan application and data migration4. Staffing, Contracting, and Vendor Management

• Define future support model; acquire contractors or consultants to fill resource gaps at target or hire new IT staff (e.g. for carve-outs)

• Review and transition management of IT vendor contracts and IT software licenses to acquirer.

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Introduction

“Typical” IT Integration ScopeContinued5. Infrastructure support transition

• Knowledge capture for EUC, Server maintenance, network, etc• Remediate sub-standard support processes and security issues• Refresh site assets as needed

6. Application support transition • Knowledge capture for all apps – especially those not currently

supported by acquirer • “Run to Run” transition, document and maintain system validation

7. Corporate Intranet and Website transition• Transition company websites to the acquirer’s support model, and

domain names to acquirer’s registry8. Facility shutdown / consolidation (e.g. consolidating operations)

• De-commission servers, extract historical data and transfer to acquirer’s sites, etc

• Ship retained assets / salvage, cancel vendor contracts22

Introduction