An organization's technology systems are an integral part of its business. Integrated into all aspects of its operations, the possible failure of these systems has been the top concern in Allianz Group's survey of over 1,900 risk management experts for six straight years. High profile incidents such as the Visa service outage, where a systems error shut down all Visa transactions in the UK and Europe demonstrate that even large, sophisticated companies are at risk.
Given the considerable risk and consequences of technology errors, it is surprising that information technology (IT) systems are often an overlooked element in mergers and acquisitions. Largely inseparable from crucial considerations such as supply chains, the finance department, and data management for everything from payroll to project management, it is not surprising that a study of 141 acquisitions by Fortune 1000 firms found that high levels of IT integration capabilities corresponded to significantly higher performance in both the short and long terms.
Successful IT integration starts early in the M&A process and follows the entire M&A lifecycle. Working with lawyers, consultants, and internal teams, companies considering a transaction should create an M&A IT playbook, a prescriptive guide that documents which tasks are necessary to integrate new IT systems based on the deal parameters. Transactions come in all forms, and the playbook should be adaptable to a variety of situations, providing general guidance and checklists to reduce ad hoc decision-making. The type of target, the deal size, and the complexity of the business architecture must all be considered and accounted for to capture the full value of a deal.
It is critical to involve IT as early as possible during the pre-merger due diligence phase. This allows a greater understanding of the risks and the requirements to complete the deal. By identifying issues early on, parties can identify necessary divestments or carve-outs of IT systems that may be necessary to satisfy regulatory or competition requirements and would otherwise unnecessarily delay the transaction. In one study by Ernst & Young, almost half of the 220 senior executives surveyed said that more detailed IT due diligence could have prevented the deal's value from eroding. The US National Institute of Standards and Technology's (NIST) Special Publication 800-39, Managing Information Security Risk is an important tool to use to help create a playbook.
Overall, the key steps are to know your systems, involve IT early on, communicate deal objectives and synergy potential to the IT team, design a migration strategy, and create transitional service agreements to maintain continuity of previous operations. By prioritizing IT concerns early and throughout a transaction, organizations can better succeed in managing the risks associated with crucial IT infrastructure and unlock the full value of the transaction.
The author would like to thank Jamie Parker, articling student, for his assistance in preparing this legal update.
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