Value erosion and unrealized synergies begin when the pre-deal stages of a transaction do not give adequate attention or rigor to IT.
Only half of respondents conducted separate pre-deal IT due diligence for their latest transaction and only 21% of corporate and 11% of private equity respondents, feature IT-related considerations in transaction negotiations.
Whilst IT consistently emerged as a significant challenge to achieving transaction goals, the importance of IT in delivering deal success is often learned too late.
The corporate development officer of a global chemicals group says, "In our last deal, we went in with basic assumptions about the target's IT systems, but these assumptions didn't take into account the difficulties of doing a cross-border acquisition and integration."
For your most recent transaction, did you conduct separate pre-deal IT due diligence?
All respondents were particularly vocal when it came to identifying past pitfalls. One CIO of a Netherlands-based telecom business explains: "We think of IT-related problems in the context of operational synergies, which are always difficult to capture. In our last acquisition, the business processes and operations were largely the same for the merging parties, but to get them in a common frame, on the same IT systems, was not easy."
Another respondent, an operating partner at a Nordic private equity firm, says his team has learned the hard way that IT-related missteps can throw off cost estimates: "We knew before the deal that we would need to invest in new IT systems, but later found that the cost was much higher than anticipated."
In retrospect, could more detailed IT due diligence have reduced the amount of lost value?
Companies involved in M&A transactions need to get to grips with the target's IT set up as early as possible, in order to assess the value of existing systems and plan where savings can be made after the merger is completed. When asked about the accuracy of costs and time for IT in transactions, 51% said their time estimates were either too conservative or too generous. This figure was similar for accuracy of cost estimates — 49%.
Inaccurate figures often related to the value of targets and the overall costs of completing the deal. The CFO of an Italian chemicals company recognizes the importance of IT in integration planning, "IT is one of the most important factors in medium and long-term plans, even though these plans are built on a financial basis."
In your experience, how often do IT-related considerations feature in transaction negotiations?
In the current environment, corporate buyers are held fast to their deal rationale. The synergies they lay out in public announcements and the timelines they put forth to shareholders and private equity firms must derive value from portfolio companies without the use of financial engineering. This means that value creation is top of the agenda.
It is even more important during pre-merger negotiations, where the costs of upgrading a system cannot be calculated as part of the purchase price unless the buyer has a clear understanding of what is required.
In your experience, how does the estimated time and cost of an IT integration (or carve-out) compare to actual time and cost?
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