The Role of IT in the Success of Mergers and Acquisitions

The Role of ITin the Success of Mergers

and Acquisitions

Carol V. Brown, Ph.D.Distinguished Professor

Howe School of Technology ManagementStevens Institute of Technology

[email protected]

HSATM – November 19, 2008

Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008 2

Personal Research Interests

IT Strategy and Management issues… that keep CIOs awake at night

Field-based research: case studies & surveys “Best practices” and new IT management capabilities

Publications: academic readers and practitioner readers

Editorships: MIS Quarterly Executive (editor-in-chief eff. Jan. 2009)


Agenda: the IT Role in M&A

The Motivation

– CIO “awake at night” Topic– Knowledge Gaps in Prior IS Research

Case Study Research

– Merger-of-Equals (n=3)– Smaller Acquisitions (n=6)

Some Concluding Thoughts


The Motivation: CIO perspective

Today’s Business environments (dynamic, global) more frequent Business restructuring

eventsMergers and Acquisitions (M&A)DivestituresJoint ventures & other strategic alliances

What IT Capabilities are needed to effectively support these Business restructuring events?


The Motivation: Gaps in IS Research

M&A events have different characteristics (intent, size): What characteristics of the M&A event influence

the IT role?

Mergers-of-Equals involve large-scale, complex IT projects:– IT Application rationalization (App Rat)– Other Technology rationalization (data centers, networks)– IT Talent selection: retaining and downsizing

What are some “best practices”?

Multiple IT Merger strategies exist: Support IT of Firm B (leave as is)

Replace IT of Firm B (with IT of Firm A)

Adopt IT of acquired Firm B Synthesize or “Greenfield” IT project (to replace IT of Firm A and Firm B)

Is the same IT merger strategy used for all acquired systems? Why or why not?


Case Study Research

Descriptive Case Studies:3 Merger-of-Equals

– Compaq buys Digital (with J.Ross, MIT)– Sallie Mae buys USA Group (with IT leaders)– Sprint buys Nextel (with IT leaders & B.Wixom,

UVA)

Grounded Theory Studies:

– Smaller Acquisitions (with B.Reinicke, UNC-W)2 events in 3 companies, no merger-of-equals

– Merger-of-Equals (with B.Wixom & E.Goren, SIT)2-year longitudinal study, early access (two locations)


Deal Closes: July 31, 2000

$14 billion public firm based in Reston, Virginia

$50 billion student loan portfolio

Public firm with employee stock option program

Largest guarantor of student loans based in Indianapolis

$16 billion student loan portfolio

Not-for-profit with growing fee-based businesses

Old Sallie Mae

USA Group

# 1 GuarantorNew Sallie Mae

# 1 Funds Source

# 1 Servicer


Only 12% of mergers led to significant growth during 3 years after acquisition; 42% actually lost ground.

Bekier, Bogardus, and Oldham. McKinsey Quarterly, 2001 (No.4)

Key employees typically receive external job inquiries within 5 days of a merger announcement.

Kay and Shelton. McKinsey Quarterly, 2000 (No.4)

Business Metrics:Increased market share

Public goals met for cost reduction: headcount by 25%, other costs by 40%

IT Metrics:No major service interruptions during first peak season (less than 30 days after data center relocation completed)

Key IT talent retained as needed for 12+ months, despite “hot market” conditions

Industry M&A Record

Record

Success Metrics


1. Credible IT Leadership (supports Linder 1996)

– Announce IT leaders as soon as possible– Leverage prior relationships (IT business, IT project teams)

2. Common Direction & Compelling Deadlines (supports Linder 1996)

– Set direction, remove roadblocks, and empower others to act– Make customer-facing applications a priority

3. Intensive Collaborative Planning – Firm A + Firm B pairs to rationalize technologies

4. Retention of Key IT Talent (supports Watson Wyatt 1999 survey)

– Generous severance packages– Incentives to ensure knowledge transfer

4 Success Factors Identified

These Practices are NOT characteristics of Compaq-Digital case study


Deal Announced: Dec. 2004

100-year-old company, 60K workersbased in Kansas

Local, long-distance, wireless

Systematic consensus management, butIT credibility problems with business

15-year-old company, 20K workers based in DC corridor

Wireless; innovative push-to-talk

product

Entrepreneurial management, withstrong IT track record with business

Old Sprint Old Nextel

Sprint Nextel

Sprint

“Merger-of-equals” with Adopt-and-Go approach


$400 Million Cost Savings over 3 years

$424 Million Cost Savingswithin 2 years

Reduced operational expenditures andavoided new capital IT expenditures for:

IT ApplicationsIT Operations

IT Synergy Target IT Synergy Achieved

Success MetricsSprint

Includes integration of other business restructurings:

- spinoff of major business unit (required for government approval)

- acquisition of former alliances (Nextel Partners, Sprint affiliates)


1. Credible IT Leadership– Early “wins” (Day 0, Day 1)– Constant, consistent communications

2. Common Direction & Compelling Deadlines– “Adopt-and-Go” approach embraced by IT– Integration Management Office to keep IT focus on synergy targets

3. Intensive Collaborative Planning – “Rational” process for application “domains”: Pairs of leaders, clear

criteria & use of multi-criteria decision-making tool to selected “winners”

4. Retention of Key IT Talent – In-source and reallocate people across IT units– Early voluntary separation package

Success Factors for IT Role

4 Factors identified for Sallie Mae also found in Sprint case

Sprint


4 © 2005 Sprint Nextel. All rights reserved.

IT Synergy Communications – 09.28.2006Jun-2006 Jan-2006

I have good understanding of synergy 90.43% 88.76%Synergy is critical, most important 91.95% 90.93%Synergy is most, very urgent 83.94% 80.77%VP has responsibility for synergy 95.49% 91.40%Supervisor has responsibility for synergy 92.14% 87.61%I have responsibility for synergy 90.78% 86.91%

Jun-2006 Jan-2006I have responsibility for synergy (agree & somewhat agree)

Director 100% 97.44%Manager/supervisor 94.71% 93.16%Individual contributor 90.04% 85.40%

2/ 06 3/ 06 4/ 061/ 06 Owner: Bill Branch

I T Scorecard – April 2006 Sprint Nextel Restricted

Synergy Tracker

>= 90% of targets achieved

80% - 90% of targets achieved

< 80% of targets achieved

S1 – Meet or exceed synergy targets

Objective:

ShareholderPerspective:

? Remediation plan: Focus on starvation of non-adopted applications and project rationalization.

Actions

? Objective performance and forecast: 1Q06 synergy targets exceeded.

? 1Q06 success due to vendor contract renegotiations (EDS, IBM, etc.) and preliminary data center consolidation activities.

? Risks:

– April plan is currently $6.0M short of target. Still working through $3.4M in pending synergy for April.

? Dependencies: Prioritization and de-selection for pipeline management.

Analysis, Opportunities, and I ssues

Achieve merger synergy targets by execution of initiatives addressing I T operations, billing and application rationalization.

S1 – Meet or exceed synergy targets

Objective:

ShareholderPerspective:

? Remediation plan: Focus on starvation of non-adopted applications and project rationalization.

Actions

? Objective performance and forecast: 1Q06 synergy targets exceeded.

? 1Q06 success due to vendor contract renegotiations (EDS, IBM, etc.) and preliminary data center consolidation activities.

? Risks:

– April plan is currently $6.0M short of target. Still working through $3.4M in pending synergy for April.

? Dependencies: Prioritization and de-selection for pipeline management.

Analysis, Opportunities, and I ssues

Achieve merger synergy targets by execution of initiatives addressing I T operations, billing and application rationalization.

2006 Cumulative Targets

$0

$50M

$100M

$150M

$200M

Q1 -$21.9M

Q2 -$86.0M

Q3 -$157.3M

Q4 -$244.8M

Cumulative Actuals

Dec $245M

Nov $215M

Oct $186M

Sep $157M

Aug $133M

Jul $110M

Jun $86M

May $63M

Apr $42M

Mar $22M

Feb $10M

Jan $6M

MAY TARGET $62.7M

Synergy actuals for Jan - $9.5M

Synergy actuals for Mar - $12.9M

Synergy actuals for Feb - $13.0M

Synergy pending for Jan - $0.9M

Synergy pending for Feb - $1.1M

Synergy pending for Mar - $1.3M

Monthly target

Cumulative synergy actuals tracked YTD

Synergy actuals pending YTD

Cumulative synergy target missed

Monthly target

Cumulative synergy actuals tracked YTD

Synergy actuals pending YTDSynergy actuals pending YTD

Cumulative synergy target missed

Synergy actuals for Apr - $14.2M

Synergy pending for Apr - $3.4M

Synergy pending for May - $8.3M

Synergy actuals for May - $15.4M

$65.

0M$1

5.0M

IT Shooters 1Q 2006

Top 10 Award

Presented to

<Winner Name>In recognition of your leadership in the pursuit of IT synergy goals through application elimination.

Dick LeFave

Sprint CIO

March 16, 2006

Scorecard

Ops Reviews

IT All-Hands

Surveys

IT Synergy Newsletter

Initiatives

I T All Hands Meeting

August 2006


Case Study Research

Descriptive Case Studies:3 Merger-of-Equals

– Compaq buys Digital (with J.Ross, MIT)– Sallie Mae buys USA Group (with IT leaders)– Sprint buys Nextel (with IT leaders & Barb

Wixom, UVA)

Grounded Theory Studies:

– Smaller Acquisitions (with B.Reinicke, UNC-W)2 events in 3 companies, no merger-of-equals

– Merger-of-Equals (with B.Wixom & E.Goren, SIT)2-year longitudinal study, early access (two locations)


Preliminary Findings: Smaller Acquisitions

Factors that influence system-level Strategies

IT factors IT standardsSecurity issue

Business factors Regulatory issueFinancial issue (of acquired)Unique business function/processCorporate governance/culture

IT Role: Success Factors Repeatable processes

Dedicated team

IT Merger StrategiesReplace IT of Acquired* Goal: Minimum cost &

Maximum speed

Support IT of Acquired

Goal: Alignment for

short-term...or long-term

Adopt or Synthesize IT

Goal: Increase IT Assets

* Includes Replace with IT Standard

…and these may change over time



IT and Business factors influence the IT Merger Strategy selected; different strategies for the same M&A event are typical, and the Year #1 strategy may differ from Year #2

- Replace, Support, Adopt, Synthesize/Greenfield

“Best practices” for merger-of-equals events include:

– Credible IT leaders, dedicated project office and compelling deadlines, collaborative “rational” planning processes, and retention of key IT talent

Characteristics of the M&A event influence the IT role:Combination Potential – not just Size, but “merger-of-equals” mindset

Competitive Environment – not just hyper-competitiveness, but also if Public



IT Role Success is Necessary, but not Sufficient, for M&A Success

IT Role Metrics: not just IT Cost Savings, but also Business Revenues

Today’s dynamic Business environments require a new type of IT Capability:

“Reconfiguring IT Resources”


M&A Articles & Teaching Cases Published

Articles

Clancy, G., C.V. Brown, and R. Scholer. “A Post-Merger IT Integration Success Story: Sallie Mae.” MIS Quarterly Executive, 2:1 (March 2003), pp. 15-27.

- SIM Best Paper Award, 2002

LeFave, R., W. Branch, C.V. Brown, and B. Wixom. “Sprint Nextel IT Leadership: Reconfiguring IT Resources for Results.” Forthcoming in MIS Quarterly Executive, 7:4 (Dec. 2008).

- SIM Best Paper Award, 2008

Teaching Cases

Brown, C.V. and J.Ross. “Merging Information Technology and Cultures at Compaq-Digital.” Managing Information Technology, 5th ed. (Prentice Hall, 2005).

Part A: Meeting Day One ObjectivesPart B: Becoming a Single Firm

Brown, C.V. with R. Scholer. “FastTrack IT Integration for the Sallie Mae Merger.”

Managing Information Technology, 6th ed. (Prentice Hall, 2009).


The Role of IT in the Success of Mergers and

Acquisitions

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The Role of IT in the Success of Mergers and Acquisitions

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