An Is Perspective of Mergers and Acquisitions

R-14-6198 R. Mack, M. Gerrard, N.
Frey
Strategic Analysis Report
17 April 2002
An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook
Gartner provides comprehensive guidance for IS organizations on the planning, preparation and activities required during all six stages of the merger and acquisition process from initial candidate screening to post-transformation review. Management Summary Between 80 percent and 90 percent of Gartner's midsize-to-large client enterprises will be involved in some form of merger and acquisition (M&A) activity during the next three years, either as an acquirer, a target or part of a divestiture (0.8 probability). For many of these transformations, IT considerations will hold the key to success or to failure. This Strategic Analysis Report provides a guide for enterprises and their IS organizations on how to approach a merger or acquisition particularly the IT component. It examines the factors that dictate the strategy and rationale of the M&A transaction, which help to set the agenda for IT change. It also provides guidance on what enterprises and IS organizations must do during each step of the M&A process, using a six-stage framework that highlights the activities appropriate for each stage: Screening: During this stage, acquisition candidates are considered by the enterprise's finance, marketing or business development groups. Because financial models drive the decision process, realistic cost/benefit analyses for the IT management aspects of potential targets are important for managing the eventual expectations of IS contributions. Initial Candidate Evaluation: At this point, a specific candidate has emerged and the bidding process begins. Typically, little in-depth IT information is available at this stage, but judicious use of public information can provide educated guesses for inclusion in the financial model. Detailed Candidate Evaluation (i.e., Due Diligence): This is probably the most important stage for the IS organization, as it provides the final opportunity to obtain factual information to estimate the ITrelated costs and risks of the transformation. Closing the Deal: This is where the final contract terms and conditions are hammered out. Because the IT transformation effort is typically greater than perceived, the quality of due diligence will serve well in keeping the realities in view during this negotiation period. Executing the Merger or Acquisition: After the deal is done, the transformation begins i.e., tackling the operational business transformation processes, and preparing employees for the new operational environment.
Gartner
Entire contents 2002 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Operational Review: A post-transformation review helps determine what went well and what didn't. By building up this knowledge over time, the enterprise can reap the benefits of its M&A experience in future transformations.
The report concludes with general recommendations to help IS and enterprise management successfully negotiate the M&A transition and integration process. (For an examination of four related M&A considerations i.e., new U.S. accounting rules, preparing for divestiture activity, the challenges of cross-border deals, and advice for IS organizations whose own enterprises are acquisition targets see the companion Strategic Analysis Report, "An IS Perspective on Mergers and Acquisitions: Special Considerations," R-15-8953.) IS and business managers must carefully examine the impact of a merger or acquisition on established projects and infrastructures. Choosing the appropriate systems to integrate, and the timing of the integration process, will depend on strategic, cultural and competitive considerations. During the transition, a new culture will emerge and information sharing will be critical to enable that evolution. More importantly, because IT will be a critical component of the deal's success, IT issues must not relegated to the position of an afterthought in the M&A process.
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CONTENTS 1.0 1.1 1.2 1.3 2.0 3.0 3.1 3.2 4.0 4.1 4.2 4.3 5.0 5.1 5.2 5.2.1 5.2.2 5.2.3 6.0 6.1 6.2 6.3 6.4 7.0 7.1 7.1.1 7.1.1.1 7.1.1.2 7.1.1.3 7.1.1.4 7.1.1.5 7.1.2 7.1.3 7.1.3.1 7.1.3.2 Introduction................................................................................................................................7 M&A Business Drivers...............................................................................................................7 Why Mergers Fail .......................................................................................................................9 The M&A Approach: Three Models.........................................................................................11 M&A Process Stages: An Overview........................................................................................12 Stage 1 Screening ...............................................................................................................12 Screening Activities.................................................................................................................13 What IS Can Do ........................................................................................................................13 Stage 2 Initial Candidate Evaluation ..................................................................................14 Action Items Resulting From Screening ................................................................................14 Preliminary Analysis................................................................................................................15 What IS Can Do ........................................................................................................................15 Stage 3 In-Depth Candidate Evaluation: Due Diligence....................................................16 Due-Diligence Assessment Criteria........................................................................................16 What IS Can Do ........................................................................................................................17 Preparation...............................................................................................................................18 On Site ......................................................................................................................................20 Wrap-up ....................................................................................................................................21 Stage 4 Closing the Deal.....................................................................................................22 Negotiation ...............................................................................................................................22 Due Diligence II ........................................................................................................................22 Transition Planning .................................................................................................................23 What IS Can Do ........................................................................................................................24 Stage 5 Executing the Merger or Acquisition....................................................................24 The Integration Process ..........................................................................................................25 Integration Planning ................................................................................................................25 The Core Transition Team.......................................................................................................26 Defining the Scope of Work To Be Done................................................................................26 Schedule Development............................................................................................................27 Personnel .................................................................................................................................27 Communication........................................................................................................................28 Early Projects...........................................................................................................................29 Operational Business Process Projects.................................................................................29 Project Definition: Absorption Model .....................................................................................29 Project Definition: Stand-Alone Model ...................................................................................30
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7.1.3.3 7.1.4 7.2 7.3 8.0 8.1 8.2 8.2.1 8.2.2 8.2.3 8.2.4 8.3 9.0 Project Definition: "Merger of Equals" Model ........................................................................30 Employee Change Projects .....................................................................................................32 Sample Template For Stage 5 .................................................................................................32 What IS Can Do ........................................................................................................................33 Stage 6 Operational Review................................................................................................33 Determining Whether Acquisition Value Expectations Are Likely To Be Met......................34 Determining How to Improve the Process for the Future......................................................36 Was It Based on a Faulty Assumption? .................................................................................36 Was It the Result of Poor Execution?.....................................................................................37 Was It a People Problem? .......................................................................................................38 Can the It Be Corrected Now, and Is It Worth It? ...................................................................39 What IS Can Do ........................................................................................................................39 Conclusion: M&A Recommendations for Business and IS Management ............................40
Appendix A: M&A Screening 20 Questions for the Initial Contact..................................................41 Appendix B: ............................................................................................................................................43 Due-Diligence Focus Areas ...................................................................................................................44 Appendix C: ............................................................................................................................................50 Sample Due-Diligence Questionnaire ...................................................................................................51 Appendix D: ............................................................................................................................................53 Acronym Key ..........................................................................................................................................54
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FIGURES Figure 1. M&A Activity, 1996-2001...........................................................................................................7 Figure 2. Change Absorption Rate........................................................................................................11 Figure 3. Sample Due-Diligence Checklist ...........................................................................................17 Figure 4. Sample Template for M&A Integration ..................................................................................32
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1.0 Introduction
Mergers, acquisitions and other forms of corporate consolidation can pose something of a "forced march" for IT managers. Often lost in the M&A process is the importance of information sharing as a means of enabling a new culture to emerge a transformation for which IT will be a critical component. The goals of the M&A process might be compared to taking two buildings and combining them to become one or, alternately, to moving them closer together and building bridges across various levels. In this process, IT infrastructure and business applications form the combining infrastructure and the "bridges." It is critical, therefore, that IS managers understand the strategic factors governing M&A activity, and the key considerations that enterprises and their IS organizations will face during each stage of the process. This section examines strategic considerations such as M&A business drivers and pitfalls, and the various forms that M&A activity can take. Subsequent sections will explore each of the six phases of the M&A process in detail. 1.1 M&A Business Drivers
During most of the past six years, the number of acquisition deals has held relatively steady in the United States and climbed elsewhere in the world, although it dropped markedly in 2001 (see Figure 1). The total value of these deals, while also dropping last year, has grown considerably over 1996 levels. Although the pace of M&A activity slowed dramatically in 2001, the underlying drivers have not gone away.
Number of Deals 20,000 17,500 15,000 12,500 10,000 7,500 5,000 1996 1997 1998 1999 2000 2001 Value ($ in Billions) 2,000 1,750 1,500 1,250 1,000 750 500 1996 1997 1998 1999 2000 2001

Source: Securities Data
U.S. Non-U.S.
Figure 1. M&A Activity, 1996-2001 The most striking component of these recent changes has been the growth in the size of global M&A transactions. Since 1999, U.S. transaction volume has been less than half that of the worldwide total. The repercussions of the failed GE/Honeywell merger in 2000 and the circumstances resulting from the Daimler/Chrysler merger have in all likelihood contributed to the recent slowdown. Recent terrorist attacks against the United States and a stagnant economy have introduced even more uncertainty for the future.
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The drivers for mergers and acquisitions can be classified into several categories, but at the heart of each is growth. Senior management teams are driven to increase the size of their organizations, which must grow to be viewed as successful. As organizations grow, most eventually run into a "growth wall" in their internal operations and are forced to look outside. The mind set becomes "buy or die." It isn't unusual to see a corporation report revenue growth of 12 percent to 15 percent, but with only 5 percent to 8 percent of that growth coming from internal operations and the rest coming from acquisitions. Below, we examine the most frequently expressed M&A drivers and objectives that Gartner has encountered. Multiple objectives for a single acquisition are not uncommon, and the list below is not meant to imply an order of preference. Economies of Scale (Market Share): Perhaps the most significant driver is business leaders' desire to leverage increased size to reduce the per-customer costs incurred by the enterprise. Typically, mergers or acquisitions driven by this goal are executed within the same or similar markets, thereby reducing the time and cost of integration, and leveraging increased size, geography or product "reach." This approach is sometimes referred to (although not by its participants) as "buying market share." The typical promise to shareholders is that consolidation will net savings that will increase earnings, often through the merging of IT infrastructures, consolidation of production, and reduction of operations or selling, general and administrative (SG&A) costs. Customer Demand (Market Awareness): As consumers become more knowledgeable and demand lower costs and better service, competition for customer "hearts and minds" is on the rise. At the same time, customers are more in control of the terms of this competition than ever. Increasingly, we are seeing acquisitions driven by the objective of "capturing" more customers to ensure a constant revenue stream, or to expand the market within which new products and services can be delivered. This facilitates cross-selling and common branding. Changing Business Models (Market/Channel Creation): With its emergence as a viable approach to reach customers, the Internet has progressed from a new market to just another channel. The initial frenzy to attack this new capability may have cooled down, but the changes it has wrought are permanent. As a result, many businesses are rethinking not only how they interact with customers, but who their customers are. This has led many to acquire firms that provide complementary products and services, and to divest themselves of business units that cannot compete in the new economy. Globalization: The emergence of a truly global economy in recent years has increased opportunities not only to ship manufacturing offshore, but also to tap the global workforce to supplement internal staff or to extend the enterprise. As a result, we've seen more activity in acquiring offshore subsidiaries and service organizations to extend the enterprise's business or add needed skills. "Going global" naturally brings a need to acquire, as the time required to establish and grow new foreign businesses, especially in unknown markets, far exceeds that needed to execute an acquisition strategy. For the past two years, among the U.S. mergers shown in Figure 1, 17 percent have involved acquiring a non-U.S. target. The consolidation of currencies and policy in Europe has contributed to increased M&A activity there, making it potentially more profitable to create North American/European conglomerates. Diversification: Acquisitions are often pursued to fulfill a need externally, rather than in-house. Such deals are often driven by the need to obtain external competencies that cannot or, for reasons of economy, should not be developed internally. Such competencies include: Knowledge (e.g., intellectual capital, skills or innovative techniques)
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Products (e.g., to build a wider range of products and services that address convenience-based competition and keep the customer from looking elsewhere) Technology (e.g., infrastructure, processes and capital)
Ego: The vision of business leadership (or lack thereof) is an important component in any M&A activity. It is worth considering the degree to which the restructuring serves the personal agenda of enterprise leadership, or helps to establish senior management's "place" in history. A number of acquisitions, notably among technology vendors, appear to be largely driven by personal, often competing, criteria. Scavenging for Value: A number of acquisitions are made with the sole intention of imposing new management and cost-cutting practices, and then reselling the company. This has been the domain of venture capital firms for some time, and is not the typical acquisition strategy of most other types of businesses. Why Mergers Fail
1.2
It has been widely reported that M&A failure rates are high anywhere from 30 percent to 70 percent, depending on studies' methodologies and definitions of "failure" (which range from "broken" to "didn't achieve expectations"). A recent study conducted by KPMG's Transaction Services group, "Mergers and Acquisitions Unlocking Shareholder Value: The Keys to Success," examined success in terms of shareholder value, which is now more of a focus than ever given goodwill (i.e., possible overpayment) issues (see "An IS Perspective on Mergers and Acquisitions: Special Considerations," R-15-8953.). Using a survey of 118 international companies, the KPMG study compared how companies approached M&A deals with how successful their transactions were in building shareholder value. While 75 percent of the companies responding felt that their transactions had been "successful," the study found that only 30 percent of these deals created shareholder value while 31 percent actually reduced it. Given that most of the companies engaged in M&A deals are primarily beholden to shareholders, it is interesting to note that the top three reasons cited for acquisitions were to increase market share (29 percent), to expand geographically (28 percent) and to increase shareholder value (23 percent). In contrast, another study that looked at M&A activity from 1984 to 1994 found that 80 percent of leveraged buyout (LBO) firms reported a return that matched or exceeded their cost of capital. Clearly, therefore, successful approaches exist to managing M&A activity. In general, the causes for M&A failure are well-documented and observable throughout the M&A stages. The following are among the most common causes that Gartner has observed: "The Vision Thing": Time and time again, visions are mistaken for strategies. Visions are about some lofty ideal, basically setting up an infinite number of choices to achieve. Strategies are about bounding these visions so that the enterprise can focus on where to go by implementing tactical projects to achieve strategic goals. (For example, "to be No. 1 in our industry" is a vision, while "doubling our market share for X family of products" is a strategy.) A strategy recognizes resource constraints and directs enterprise activity to maximize the deal's effectiveness. It's not unusual to see the purported strategy for acquisition to be "to become the most dominant player in the market." Clearly, this doesn't provide direction for how to structure or execute the merger. An effective strategy would address the desired business model, critical success factors, how to achieve competitive advantage and how to create shareholder value. Failure often occurs when, partway through the
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implementation, no one is certain what the business model should look like and how it should operate. Unless quickly corrected, these situations can result in the merger deal actually terminating. Culture Shock: Culture boils down to decision making, and how individuals will deal with each other as they perform their roles. It is defined by the decision processes that will be used in the new organization. Most merger public-relations messages focus on how wonderful the new organization will be, and how well everyone will work with each other. In reality, however, most "mergers" turn into acquisitions, with the acquired organization forced to adopt the acquirer's decision processes. These processes are embedded in all business management practices (e.g., decentralized vs. centralized management, authoritative vs. team-based management, strong vs. weak financial control, the treatment of people as valued resources vs. expendable commodities, and defined vs. ad-hoc processes). Failure sets in when these processes disenfranchise groups of employees, making them feel like they are on the outside looking in. Mergers are intense, complex activities and need everyone pulling in the same direction. Again, as with strategy, if this point is ignored a quick remedy will be needed to keep the merger from grinding to a halt. Overpayment: When the understanding sets in that an acquirer paid too much, this usually involves the realization that expectations were set too high. This realization usually arrives in the form of lowerthan-expected revenue or higher-than-expected costs. IT involvement is more closely associated with the cost side. Failure in this case is a financial one; it usually does not mean that the merger cannot be completed. Inadequate Due Diligence: The three above-mentioned failure factors can be mitigated through effective due diligence. Due diligence is about understanding risk and reducing it to its minimum. This is where the acquirer gets to probe deeply into an acquisition's assets and operations, forming an opinion of its value and creating a basis for all implementation plans. Failure sets in when the execution slows down or stops after encountering the reality of the unknowns missed during due diligence. Poor Execution: This simply means that the acquisition process has not been managed properly. In these cases, Gartner often sees a lack of involvement by senior management, and of individuals assigned the responsibility for making the acquisition happen. Decisions don't get made and the process drags on indefinitely. The transaction may not be deemed a "failure" in technical terms, but everyone comes away with a sour taste in their mouths. A common aspect of this form of M&A failure is the inability to create a "new" entity. Execution gets so fuzzy that there isn't a clear picture of what the combined organization will look like and how it should operate. The severity of this pitfall will be influenced by the M&A model used (see Section 1.3): If one side dominates, the new entity will simply look like the dominant partner's old one. In a "merger of equals" deal, however, the risk of not clearly identifying the new entity rises substantially. Negative Market Response: This happens when the acquirer fails to anticipate what others may do to counteract the deal's benefits. Executing an acquisition can take anywhere from six months to three years, and during this period the acquirer is committed to a course of action. If the market is at a flex point and can move in a different direction, the competition can trump the acquisition by changing the game, leaving the acquirer with a bad investment. This is less likely to happen in a known market (i.e., one in which the acquirer already competes), but it is much more likely to occur when an acquirer enters a market as a neophyte. Failure here is measured by the end value of the acquisition. Too Much Change: Gartner has developed a framework with which to examine an organization's capacity to absorb change (see Figure 2). Every organization has its own absorption threshold after
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which less, not more, change can be assimilated. Management can improve this capacity through effective change management, but the extent of this improvement will also be limited. Enterprises executing mergers often set high expectations for achieving a high degree of change within a short time frame. Failure occurs when organizations are pushed past their thresholds the transformation slows down, and the harder senior management presses, the less gets accomplished. Compounding this problem is that because many organizations are dealing with absorbing the impact of the Internet an increasing number of acquiring companies are working on changing their business models while simultaneously making acquisitions. This makes today's deals more difficult to execute compared to past acquisitions, where the business models were more static.
100%
Change Management Effect Absorption Threshold
Percentage of Organizations Capacity for Change
0%
Low
High
Amount of Change That Can Be Absorbed in a Given Period

(Volume, Velocity, Complexity)
Source: Gartner Research
Figure 2. Change Absorption Rate 1.3 The M&A Approach: Three Models
At an early stage certainly by Stage 3 (see Section 2) a sense should emerge of the approach that will be used to combine the organizations. Gartner sees three main models for the forms that corporate consolidation activity can take. These models focus on the different process types for executing a merger, specifically as they affect business processes that define the IT effort in M&A events. Absorption: The acquired organization is completely absorbed by the acquirer. The acquirer's business processes dominate, and the acquired organization must adopt them. This focuses the IT effort into one of understanding how much difference exists between the target organization's former business processes and the new ones it must accommodate. These differences typically center on how the business sells to its customers and the contracts being used. Stand-Alone: The acquired organization remains independent. In this approach, the acquiree remains a separate, stand-alone organization with only some integration of support services (e.g., phones and networks) to achieve economies of scale. Financial reporting is the one business process that typically must conform to the acquirer. This is by far the least disruptive model. Merger of Equals: A "best of breed" organization is developed from both parties. In this approach, the strongest components of each organization are used to build a new business model. Each business process in the merging firms is evaluated, and the best are selected and integrated into a new set of
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processes to serve the new business model. This model entails the highest degree of both change and risk. These models are important to the IS organization because they influence strategic and planning factors related to the IT integration effort, as well as IT-related cost estimates (see Section 3.2). 2.0 M&A Process Stages: An Overview
The M&A process consists of six stages, each of which has a distinct purpose and depends on the stages that precede it: Stage 1 Screening: Most acquisition opportunities don't just "come along"; usually, the acquiring enterprise has had a small group working internally, "trolling" for opportunities. These groups typically are involved in finance, marketing or business development. Because financial models drive the decision process, realistic general cost/benefit analyses for the IT management aspects of potential targets are important for managing the eventual expectations of IT contributions. Stage 2 Initial Candidate Evaluation: In this stage, a specific candidate has emerged and the bidding process starts. Typically, little in-depth IT information is available at this point, but judicious use of public information can provide educated guesses for inclusion in the financial model. Stage 3 Detailed Candidate Evaluation: The principal activity in this stage is due diligence. For the IS organization, this is probably the most important stage, because it provides an opportunity to see how the target truly operates its business. This is the final opportunity to obtain the factual information needed to estimate the costs of the transformation and to understand the underlying risks. Stage 4 Closing the Deal: The agreement is not truly a "deal" until the final contract terms and conditions have been hammered out. This is where "the squeeze is applied," and cost take-outs often grow to justify the offer price. For the IS organization, the transformation effort is usually greater than perceived. The quality of due diligence will serve well in keeping realities in view during negotiation. Stage 5 Executing the Merger or Acquisition: There are four phases to this stage: Intensive planning for business and IT projects, and the resolution of personnel-related issues A focus on early transformation projects to achieve momentum (e.g., infrastructure, finance and human resources) Tackling all the operational business transformation processes Preparing employees for the new operational environment
Stage 6 Operational Review: This is the process employed to help the newly consolidated organization get past the problems of newness and stabilize enterprise operations. A posttransformation review is used to learn what went well and what didn't. In this way, knowledge is built up over time by learning from mistakes and enhancing the decision framework, so that everyone involved in the M&A process can benefit from the experience by applying the lessons learned to the next project. Stage 1 Screening
3.0
As mentioned previously (see Section 1.2), a key contributor to M&A failures is the lack of a clearly defined strategy or, if one does exist, the failure to communicate it completely and effectively. The screening stage is focused on defining the goals, strategies and initiatives of the acquiring enterprise or

business unit. In larger companies, this is typically the responsibility of business unit management, with the participation of the enterprise business development team. In smaller companies, this activity would typically be managed at the enterprise level. It is relatively rare for anyone from the IS organization to be directly involved at this stage. As will be seen below, most of the available information at this stage is financial or demographic; almost nothing of an operational nature is in the public domain. The following sections examine what happens during the screening stage, and how IS can contribute. 3.1 Screening Activities
Key enterprise activities during the screening phase include: Developing the business strategy that will become the bounded framework for candidate selection. Identifying and prioritizing potential markets or business areas of interest. Evaluating the enterprise's own strengths and weaknesses. Risk will be proportionate to the organization's ability to support its extension into other (e.g., global) markets. Selecting and prioritizing possible acquisition candidates. Seeking firms to help with the acquisition activities that can strengthen capabilities (i.e., offset weaknesses). Conducting an initial investigation of an acquisition candidate (i.e., gathering information about the target enterprise), which may include a preliminary, exploratory meeting with the candidate's management or other principal players. This investigation may be undertaken by individuals within a specific business unit, or it may be conducted by the enterprise's business development team. The person responsible for the initial contact should complete a set of questions about the situation (see Appendix A for a sample questionnaire). Care should be taken at this point to create a positive impression on the people from the potential target. First impressions are quickly formed, are difficult to change and can have a significant effect, positively or negatively, on stakeholder behavior. Holding preliminary "get acquainted" and "determine mutual interest" discussions with company's initial contact. What IS Can Do
3.2
In the end, every merger comes down to integrating the operations of two or more companies, and this is where IT lives. The ultimate success of the merger will greatly depend on understanding the operational variables involved. At the heart of all acquisition efforts is a spreadsheet or a database, if more sophisticated tools are used that models the financials of the deal. At this early stage, financial data will be slim, so many estimates will be used to fill out the picture. The spreadsheet will attempt to predict cash flow streams that will balance revenue and expenses, providing the basis for an eventual price. A good place for IS people to start in supporting this stage is to lend their expertise on what it costs to provide and run the IT infrastructure to support the enterprise's operations. Much of this knowledge will feed the estimates used in the spreadsheet.
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At this stage there should be emerging a sense for which of the three M&A models will define the acquisition's approach (see Section 1.3). Each has a dramatically different cost profile, which will affect the values used in the spreadsheet: In the "absorption" approach, the candidate is typically within the acquirer's industry. In this case, the IS organization's financial data is likely to be quite accurate and should be incorporated into the estimates. The "stand-alone" approach would simply use the candidate's own financials, although there could be some infrastructure consolidation estimates used in areas such as phones, data networks and data centers. The "merger of equals" approach is the most difficult for which to estimate integration costs. To resolve this, the IS organization can work up scenarios to be used as templates by the business development team, so it can apply the appropriate scenario depending on how it views the situation.
The important IS contribution for this stage is to be involved in determining appropriate estimates to set up evaluation of the candidates. Because financials can be "set in stone" quickly often long before necessary details are known it will behoove the IS organization to get its perspective on "what it will really take to do the job" incorporated into the financial-planning process as early as possible. 4.0 Stage 2 Initial Candidate Evaluation
This stage begins when a specific candidate has emerged and the bidding process starts. As in Stage 1, little in-depth IT information is typically available at this point, but judicious use of public information can provide educated guesses for inclusion in the financial model. The following sections examine the activities within this stage, and how the IS organization can contribute. 4.1 Action Items Resulting From Screening
Stage 2 starts with a series of steps resulting from the activities performed in the screening stage (see Section 3). These steps include: Debrief the initial contact, and brainstorm possibilities with business development staff. Consider integration with established company priorities. Perform an analysis of each acquisition candidate to determine whether to proceed, defer action or remove it from consideration. If a decision is made to proceed, consolidate information from the initial contact. Schedule initial meetings and invite appropriate participants from the following organizations: Sales (e.g., U.S., Europe and Asia/Pacific) Marketing Finance Legal Market research IS Human resources
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4.2 Facilities Preliminary Analysis
In preliminary analysis, the target enterprise is mapped against the business unit requirements. Initial synergies, market opportunities, and "stalking horse" revenue and growth assumptions are articulated. The following are typical questions to be answered during this phase: 4.3 Does this candidate offer products similar to ours? What are the gaps and how significant are they? To what extent do these products account for the candidate's total revenue? How much profit is derived from these products' revenue? Does this candidate sell products in a manner similar to ours? How do the geographies line up between the organizations? Is this candidate "engaged" by us now, or has it been during the past 12 months? What does the culture of this candidate look like, and how is it different from ours? Does this acquisition lead to market consolidation, or does it extend our breadth? Does this company have a "good reputation"? Does it have significant brand equity? Is any significant legal action pending against this company? What is the likelihood of retaining key people? Is there a possibility that some part of the candidate enterprise will be divested? What does the industry think of its management team? Do our associates know of any adverse reaction to the candidate? What IS Can Do
With a specific candidate in mind, more-refined information can be gathered by the IS organization. For example: The principal focus is to try to enhance the accuracy of the financial estimates embedded in the controlling spreadsheet. If the candidate is in the same industry, a better understanding can often be gained from contacts in the IT or enterprise community. For example, an employee who participates in a best-practices group with someone from the target enterprise may have valuable insight to deliver. These contacts may also be able to provide valuable "soft" information, which should be reported to the business development group. This includes information concerning the target firm's reputation, its recognition as a leader in certain areas, or key projects or initiative that may be in trouble. Some employees may have once worked for the candidate firm and have detailed knowledge of various operations, which can be translated into better support cost data.
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If a potential exists for divestiture, the associated costs must be added to the spreadsheet. The IS organization should establish a set of assumptions to be used by the business development group analyzing the candidate. If it looks like this will be a hostile takeover, remember that "hostile" is just a term meant to reflect the opposition of the target's board and senior management, and does not extend below that. Because a confrontational attitude will increase the risk of failure during integration, the people involved in the merger must take as nonhostile an approach as possible. Stage 3 In-Depth Candidate Evaluation: Due Diligence
5.0
Every acquisition goes through a due-diligence process, which is designed to gather the information needed to determine whether, and how, an acquisition offer will be made. Most early due-diligence activity is hidden from view, but at some point it usually becomes necessary for the acquiring organization to conduct an on-site visit with the acquisition target. As discussed in Section 2, this is probably the most important stage for the IS organization, because it provides an opportunity to see how the target enterprise operates its business. Therefore, in addition to examining general due-diligence criteria, this section contains extensive guidance on the IS organization's role in conducting an on-site due diligence visit with an acquisition target. 5.1 Due-Diligence Assessment Criteria
A typical feature of successful M&A programs is the development of a series of questions or criteria, which are designed to help gain an understanding of the "gaps" between one organization and the other. This gap analysis should lead to a sense (whether formal or informal) of the size of the integration effort. The ability to make these assessments is the essence of the due-diligence phase. In addition, information is collected to estimate the value of assets and expose potential risks, both financial and operational. Because this phase is often very short, IS management can only make educated guesses regarding many of the issues raised. For firms that have a business strategy of growth through acquisition, it is increasingly common to have a designated team of M&A specialists and a defined process for integration, which stands ready to be activated at any point in time. In reality, however, few enterprises have fully defined the due-diligence process or instituted a formal M&A team with significant experience. Those that have done so tend to belong to industries, such as financial services, that are undergoing massive convergence. Gartner recommends, however, that all enterprises anticipating that repeated acquisitions will be a function of their growth strategy create a formal due-diligence strategy. A sample due-diligence checklist related to IS issues is shown in Figure 3. It is not intended to be complete; rather, it is designed merely to suggest the direction an enterprise should take. Appendix B of this Strategic Analysis Report provides a detailed list of Gartner's suggested focus areas for the duediligence effort. In addition, as a means to compare different approaches, Appendix C contains a sample questionnaire used by one company as part of its due-diligence efforts.
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1. Purpose/function of each site 1. Purpose/function of each site 2. Number and type of employees at each 2. Number and type of employees at each site (including IT staff) site (including IT staff) 3. IT skills and critical staff 3. IT skills and critical staff 4. IT reporting structure 4. IT reporting structure 5. Major contracts (e.g., hardware, software 5. Major contracts (e.g., hardware, software and services) and services) 6. IT environment and services 6. IT environment and services A) Network architecture A) Network architecture Network and telecommunications Network and telecommunications components components E-mail E-mail Domains Domains LDAP/GDS LDAP/GDS Internet/intranet access and addresses Internet/intranet access and addresses B) Operational support structure and tools B) Operational support structure and tools Data center facilities and operations Data center facilities and operations Server architecture and components Server architecture and components Security strategy and considerations Security strategy and considerations Desktop applications (packaged and Desktop applications (packaged and custom) custom) Call center/help desk Call center/help desk Asset management tools and process Asset management tools and process Knowledge management tools Knowledge management tools
IT methodology and tools (e.g., project IT methodology and tools (e.g., project management, CASE, development management, CASE, development testing, network, configuration and testing, network, configuration and documentation management, help desk, documentation management, help desk, and desktop management) and desktop management) Data warehouse architecture and strategy Data warehouse architecture and strategy C) Business and Manufacturing C) Business and Manufacturing Applications Applications EMU compliance EMU compliance Finance, tax and administrative Finance, tax and administrative applications applications Sales, marketing, distribution and Sales, marketing, distribution and communications applications communications applications Engineering (design, layout, quality Engineering (design, layout, quality assurance, prototype) assurance, prototype) Manufacturing applications Manufacturing applications Customer-service applications Customer-service applications Human-resources applications Human-resources applications Legal applications Legal applications External-entity and e-commerce External-entity and e-commerce applications applications 7. Financial spending on IT staff, operations and 7. Financial spending on IT staff, operations and services (spreadsheet at each site) services (spreadsheet at each site) 8. Restructuring and consolidation changes 8. Restructuring and consolidation changes based on business restructuring (e.g., based on business restructuring (e.g., finance, sales/marketing, customer service, finance, sales/marketing, customer service, manufacturing, engineering, legal, human manufacturing, engineering, legal, human resources) resources)
CASE EMU
Computer-aided software engineering Economic and monetary union
GDS LDAP
Global Directory Service Lightweight Directory Access Protocol
Figure 3. Sample Due-Diligence Checklist 5.2 What IS Can Do
If the IS organization has been engaged in the first two stages, it will be in an excellent position to support the due-diligence stage. Unfortunately, Gartner has found that such prior IS involvement has not usually taken place. More typically, this is the first stage in which IS managers become aware of that any M&A activity is taking place. As a result, IS managers often have little time to assess and integrate all of the factors that might affect the successful transition and integration of technology-based infrastructure and applications. It is not uncommon for the IT due-diligence phase of the M&A process to be allotted only two or three weeks to accomplish. For most acquisitions, the IS organization has "one shot to get it right" the due-diligence on-site visit. Within a typically tight time frame, IS must develop credible cost and time estimates for executing the

integration. To accomplish this, IS must gain concurrence from each functional group regarding which applications will be used, and what modifications will be necessary to effect the transition. The sections below focus on the due-diligence visit, which typically consists of three phases: Preparation On-site execution Wrap-up Preparation
5.2.1
Assume that the following organizational elements are in place: Enterprise leadership that is committed to a strategic outcome for the M&A. A senior-management sponsor either an individual, or a steering committee composed of business and IS leaders responsible for overseeing the M&A's progress. A business program manager or similar leader responsible to the senior-management sponsor who is in charge of the execution of all of M&A projects (including IT-related ones). An IT program manager (who may also be called the due-diligence team leader), responsible to the business program manager. A set of IT project leaders, who are responsible to the IT program manager for the execution of focused projects (e.g., data integration and network convergence). A formal due-diligence team, consisting of all of the personnel necessary to assess the acquisition target's (AT's) infrastructure and IT assets. An AT team whose members will serve as interfaces for the acquiring enterprise.
Typically, the IS organizations most effective at performing due-diligence work have implemented a reasonably formal process (i.e., one that can be repeated and improved on) to integrate their and the AT teams' work. Careful preparation prior to the due-diligence visit will maximize the effectiveness of interaction with the AT. Courteous, thoughtful questioning will lead to valuable insights on how the AT operates, and provide a sound foundation on which to make preliminary integration estimates. During the on-site visit, it will be important to gain concurrence on integration options with functional counterparts on the AT due-diligence team. As mentioned above, this visit will typically be a "one-shot" opportunity to get the information needed, since access to further information will likely be limited once the visit is over. During visit preparation, a team leader is appointed, who in turn selects knowledgeable people across the domain of the business processes affected. The total size of the team will usually be limited by the AT, but can typically range from 10 to 50, depending on the scope of what is being acquired. IS people on the due-diligence team will usually include one or two experts on IT infrastructure, and one to three experts on application software. At this point, the integration approach that will be used should be known, or at least limited to two of the three potential M&A models (see Section 1.3): If an absorption approach is expected, the focus is on understanding the changes that may need to be incorporated into the acquirer's systems and processes.
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For the stand-alone option, because the focus is on the quality and integrity of the AT's systems, the approach used will be more akin to an audit. If a best-of-breed approach is anticipated, the focus will be on a strong dialogue between functional counterparts, with the objective of establishing some mutual agreement on which systems are best. A common problem is that this effort can quickly become one-sided because the AT cannot examine the acquiring enterprise's systems. To offset this, a visit can be set up to acquaint the AT team with acquirer's systems. Another option is to install some workstations at the AT site to demonstrate the systems in parallel.
Since the time for on-site due diligence is typically limited to a week or less, the AT should be asked to gather essential information prior to the team's arrival. This may include information about the AT's: IT strategy and business strategy IS organizational structure (including areas handled by external service providers) Key IT operations processes Disaster recovery capability Service providers Asset inventory Licenses, contracts and agreements Skills management process and structure, and competency centers IT human-resource policies IT governance process and structure Application portfolio and packages Active projects and their status Backlogged projects All IT infrastructure (leased, owned or outsourced) All IT infrastructure on order, and delivery commitments Information on all product licenses and service contracts, including cost, duration, renewal options, early-termination penalties, transferability and liabilities Desktop environment description, including standards supported Network infrastructure Remote-access capability Equipment utilization Information architecture (if one exists) Data architecture, including key tables and elements by application
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Data warehouse description Application development methodologies and skills Architecture standards IT metrics used, and the past 12 months of findings
In addition, the AT must be provided with a list of the interviews it will have to set up for the due-diligence team. IT infrastructure interviews are exclusive to the IS organization, but functional interviews should be coordinated with the business function due-diligence teams. Because the IS people needed for the on-site visit are not typically needed for the entire duration of the due-diligence process, they should be scheduled in such a way as to keep the overall process manageable. The due-diligence team leader should stress the importance of professional and courteous conduct during the on-site visit, and should prepare the team with some rules of engagement. For example: Remember that AT personnel are likely to be nervous, so it is important to leave a good impression. Be courteous at all times. Don't discuss due-diligence team business in front of AT personnel. Never make negative or judgmental comments. Never reveal information about your recommendations. Remember that they are evaluating you as well. Do they want to be acquired by you? Any negative impressions of the due-diligence team will be passed by the AT back to due-diligence management, which will act to address them. The wrong attitude can kill a deal. On Site
5.2.2
On arrival, the IS people should locate the due-diligence team room, find the requested data, confirm the team's operations, activities and schedule (including interview schedules), and confirm plans for functional demos in conjunction with functional teams. The following is representative of a typical day's activities for the due-diligence team leader: Prepare data for interviews. Meet with appointments, and coordinate with functional leaders. Push to get demos of processes in operation, and obtain information about process details and people. Develop business process flowcharts for reference by due-diligence team. Cycle through team members several times a day to address any needs or issues, such as problems with data. Keep checking off requested data items as they are received and complete. At the daily debriefing session, meet with the team to refine the financial model and identify areas for further review. Come away with a "to do" list of IT activities.
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Obtain functional members' impressions of application systems, and get a feel for potential integration issues. Debrief the IS team at day's end and plan the next day. In the evening, expand and update the integrated set of process charts, and post them in the duediligence team room.
Information needs will arise during the day, typically in the form of reports. The IT people on the team should act as an intermediary between with the functional teams and the AT technical people gathering the information. Each group within the due-diligence team is assigned to gather specific information that will be used in the acquisition financial model. For the IS organization, these items will include IT infrastructure disposition, IS staff disposition, and application transition cost and timing estimates. The information gathered will fall into one of four categories: acquisition model financial data, functional knowledge, organization knowledge and "deal breakers" i.e., items that, in all likelihood, will terminate acquisition activity (which are rarely found by the IS organization). It can be very important for the team to see how, and whether, the various business processes interface. Simple diagramming tools can be used to build an overall picture for the due-diligence team. These process charts can serve as a "collective memory" for the team to help build an overall understanding of the total business operation. Effective due diligence is all about asking good questions: AT personnel may have things to hide, but they will be obligated to answer questions truthfully. In-depth questioning on functional business processes will lead to planning for how each set of processes will be transitioned, often resulting in modifications to established systems. Gaining concurrence with due-diligence functional team members will be key to understanding the true scope of the eventual acquisition integration. Because most acquisitions require staff reductions, it is important remember that people-related assessments are a key part of the due-diligence process. Organizational change costs will be fed into the financial model. Conversely, the due-diligence team should also be aware that because its enterprise may be competing with other organizations that also want to acquire the target it is be being evaluated, in a sense, by AT people as well. Part of the team's task is to help convince the target that the acquiring enterprise is the strongest candidate to merge with; therefore, they will have to reveal something about themselves and their company. When acquisitions become auctions and the asking price becomes inflated, the quality of the acquirer's organization can, to some extent, justify a lower offering price. 5.2.3 Wrap-up
After the on-site phase is complete, a formal report should be created. This report should summarize the information supporting the early estimates posted to the financial model during the due-diligence visit. Sample sections include: An assessment of each functional area Recommendations for transitioning IT infrastructure An estimate of the IT resources and time required to effect the transition
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6.0 People assessments and recommendations for IS organizational-structure changes Estimates of transition costs Stage 4 Closing the Deal
During this stage, the deal is consummated, documents are signed and funds are transferred. Execution of this stage is usually assigned to corporate staff, although it may involve external staff support. 6.1 Negotiation
Negotiation is the process of defining an initial offering price for the target enterprise, and identifying nonnegotiable items (e.g., an independent sales force). Factors in determining the initial offering price include: Continuous and noncontinuous revenue streams Historical and projected growth rates Profitability Impact on earnings per share (including calculations for foregone interest on the purchase price and amortization of goodwill)
Participants in the negotiation process are typically corporate and business unit business development personnel, with support from corporate financial-planning and business unit management. Negotiation activities include: 6.2 Performing a preliminary price assessment Developing a letter of intent Due Diligence II
Once a letter of intent has been issued to, and signed by, the target enterprise, a second round of duediligence activities commences, known as Due Diligence II. This phase includes a detailed look at terms and conditions, an examination of contracts and leases, and a review of detailed corporate financial statements, customer lists, facilities and personnel. Participants include key business unit personnel, corporate and business unit business development staff, and corporate departments such as IS, finance, human resources, facilities, sales, production and distribution. Areas of Due Diligence II activity include: Final pricing and payment Terms and conditions Payment and holdbacks Management Operations Benefits
Employment letters
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6.3 Transition Planning
Transition planning actually begins during the initial due-diligence phase, and continues in parallel with negotiation and Due Diligence II activities. The objective of transition planning is to develop product, operating management, budget and marketing programs for the integrated target entity. Participants in transition planning include personnel from all corporate departments and business units impacted by the acquisition. Areas of transition-planning activity include: Management and staff issues Senior management Analysts/consultants Human resources Benefits transition Public relations Investor relations
Finance Order entry Payroll Accounting
Operations Production Facilities IS
Product marketing Product plan Product integration Branding Pricing Distribution
Sales Sales force integration Sales management Quota impact

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Tactical guidelines for effective transition planning include: 6.4 Use speed to counter to anxiety and reduced productivity i.e., keep everyone busy. Don't try to understand everything. Instead, focus on the main issues, per the "80/20 rule" (i.e., 80 percent of what is important will be represented in 20 percent of the goals). Decision making is key, so organize to get decisions made quickly. Don't become a democracy there isn't time. Keep everyone informed of what is important. If the deal is a global one, this communication must be sensitive to cross-cultural issues (see Strategic Analysis Report R-15-8953, Section 4). Resolve organizational-structure issues as quickly as possible. Like it or not, people need to feel comfortable with how they fit in, and often see their value to the enterprise in terms this relationship. As noted in the KPMG study (see Section 1.2), strong leadership throughout the M&A process has proven to be one of the most significant determinants of achieving expected results. What IS Can Do
The principal value for IS in this stage is to be the integrator among all the operating and administrative groups involved. The IT systems that support their processes form the framework for the eventual execution of the merger. The more IS can engage all the parties in serious, detailed planning, the higher the probability for eventual operational success. Unfortunately, this stage falls by the wayside in many mergers because senior management views price negotiation as the sole remaining obstacle. IS, along with its business partners, must keep applying pressure to extract as much planning in this stage as possible. The single point of leverage is to talk money, the language of Stage 4. Executing the planning activities outlined in Section 6.3 will lead to a more refined understanding of true transition costs, which in turn can refine the acquisition financial model. Most acquisition activity relies heavily on assumptions, and the more integrated planning and thinking that takes place, the more likely it is that any falsehoods underlying these assumptions will be exposed. Such falsely supported assumptions are the place where most cost "surprise packages" will be hiding. 7.0 Stage 5 Executing the Merger or Acquisition
A common recommendation is to move quickly in executing this stage. Reasons for proceeding as expeditiously as possible include the high cost take-out and consequent uncertainty in the operations ranks that these deals often bring. In addition, speed helps avoid getting caught up in lengthy decision cycles and subsequent inertia regarding what should be done. Moreover, the reaction of competitors which may move quickly to dull the deal's threat can heighten the need to get organized and execute quickly (e.g., via a "100-day plan"). There are cases, however, when a slower, more gradual transition approach can be successful one particularly when the "merger of equals" (i.e., best-of-breed) model is used (see Section 1.3). Such an approach needs powerful vision at the top and strong backing along the way. It requires an acquisition price that doesn't need to be justified with a high cost take-out the lower the number of people facing termination, the more likely it will be that a stable transition can span an extended period and still remain focused on creating a better operation and business model.
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Whether the slow or fast approach is appropriate depends on senior management's objectives for the M&A event. Regardless of which approach is used, the following pointers should be kept in mind: Attack fear. It undermines everything. Watch for inconsistencies with what has already been stated. It is important that management's "story" remains consistent with integration actions. Develop an integration process that responds to the situation, adapting to the uniqueness of each M&A event. The firms most adept at this (e.g., Cisco Systems) view integration as a collection of processes, out of which a unique process set will be applied to the transition based on the nature of the transaction. Speed is relative; it can kill. Some decisions should be made quickly, especially those that set the bounds for integration planning. However, the balance between moving quickly and taking the time to make the right decision is a delicate one, and the group must recognize that some decisions deserve more time not every decision should be boxed into a 24-hour turnaround window. Build in reverse communication. That way, the organization can be monitored to see if it is approaching its capacity for change. Strangely, as capacity is being approached, noise levels and complaints tend to build, but when it is actually reached or exceeded everything often becomes quiet. Pay careful attention to the special requirements of cross-border deals. These include language, culture, tax and socioeconomic factors (see Strategic Analysis Report R-15-8953, Section 4). The Integration Process
7.1
Stage 5 is very complex and encompasses the most time and activity of the six stages. To better understand what is involved, this stage can be divided into four phases, each of which overlaps with the next: Integration Planning: Conduct intensive planning for business and IT projects, and to resolve personnel-related issues. The planning done for Stages 3 and 4 sets the foundation for this phase. Early Projects: Focus on early transformation projects to achieve momentum (e.g., infrastructure, finance and human resources). Operational Business Process Projects: Tackle all the IT components of operational business transformation. This is what everything has been leading up to. Employee Projects: Prepare employees for the new operational environment. Integration Planning
7.1.1
Whatever planning wasn't accomplished in Stages 3 and 4 must now be addressed here. If an integration manager hasn't been appointed by this point, selecting one will be the first order of business. Integration managers practice project management, but not necessarily the traditional variety. People don't report to them, and they have direct access to senior management. They are there to organize and define the process, facilitate integration, work with people and keep everything on schedule. Unlike traditional projects, M&A integration activities often lack detailed plans at the outset many things get worked out in detail as they progress, and simple methods are required to manage the rapidly changing direction. The integration manager's job is mostly about managing people: getting them to understand what needs to be done, and being creative and supportive in helping them execute it.

The effectiveness of project management can be the factor that makes or breaks a merger. Good project management is at the core of avoiding poor execution, while poor project management is one of the major factors seen in merger failures. For a more thorough analysis of project management, see "The Project Office: Teams, Processes and Tools" (R-11-1530). 7.1.1.1 The Core Transition Team A core transition team must be appointed. This team should include representatives from all affected business operation and administrative areas (use the list in Section 6.3 as a guide) as well as the IS organization. It is essential that each of the members of the core team be able to make most decisions on behalf of his or her assigned responsibility. Some of the bigger decisions, however, will get bumped up the management chain, and usually involve more money, affect many people or alter the schedule. If members are chosen too far up the management chain, they often won't have the necessary time available to devote to the core team's efforts. Members chosen too far down the chain, on the other hand, will be too limited in their capacity to make decisions. The core team is responsible for the M&A schedule, and needs the backing of senior management to enable assignment of additional resources to tackle projects along the way. Decision-making time is the single largest contributor to "schedule creep." Some organizations use a guideline that all decisions must be made within a 24-hour period. In any event, one of the key organizing tasks for the transition manager is to structure a decision-making process for his or her core team, and for those assigned in support of the team. Successful M&A execution is all about moving quickly and decisively. 7.1.1.2 Defining the Scope of Work To Be Done The first step in this phase is to verify the work accomplished to date, and to identify that which remains to be done. The key constraint to Stage 5, and therefore the scope of planning, is the targeted completion date. An unfortunate byproduct of earlier stages and pricing is the need to establish a cutoff date that represents when the merger is to be completed. The more complete the planning in earlier stages is, the more realistic the selected date will be. Regardless, a date has almost always been set by this point, and this deadline is what will ultimately determine how much can be done. If no date has been chosen by this point, it is likely that the deal is one that follows the "merger of equals" model in which case, the extent of the transformation will be the deciding factor for project selection. The level of effort required in this initial step of the planning phase is inversely proportional to the effectiveness of earlier due-diligence efforts: Effective Due Diligence: In this case, all the major tasks are evident, along with most of the smaller ones. The planning effort starts with reviewing all that was decided during due diligence and verifying that it is still accurate. The limited availability of information during due diligence may have led to some erroneous assumptions, so it is important to revisit these assumptions once complete access is available. The goal is to arrive at a set of requirements from all of the participating operating and administrative groups affected, which becomes input to project definition. This should only take a few weeks at best. Little or No Due Diligence: Unfortunately, we see far too many of these situations, and considerable catch-up activity will be required if this is the case. Use the planning discussions from Stage 3 and Stage 4 to review all the potential areas where effort or a project may be needed. It is best to simply work at developing what everyone believes must be done. Don't attempt to prioritize at this time, as it
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complicates the picture. To prioritize effectively, the total picture must be seen a point that will be reached only at the end of the gathering stage. Subtle points often become evident only when everything is gathered. In the "ineffective due diligence" scenario, this early step can take several months to complete. Enterprises in this situation often assume that they simply need to catch up on a five-day due-diligence effort, but this doesn't take into account all of the work that should have taken place before and after the on-site due-diligence visit. Considerable information must be absorbed, understood and translated into what has to be done. 7.1.1.3 Schedule Development The merger model (i.e., "absorption," "stand-alone" or "merger of equals"; see Section 1.3) will to a great extent affect what the ultimate schedule will look like as well as the level of effort involved in planning for it (with "stand-alone" deals requiring the least effort, and "merger of equals" deals requiring the most). Schedule planning requires a balance between the end date, the resources available and the work to be done. One method of addressing this need is to first "stack rank" all the requirements in a most- to leastneeded sequence. Invariably, some organizational units will put in their "pet needs," hoping to get unapproved project requests in under the guise of an M&A event. The obviously necessary items automatically make the list. The point is to quickly find a set of lower-level requirements and focus on these using any refinements of value assessment used in the enterprise. Don't put everything through a rigorous value judgement; it isn't worth the effort. With the requirements ranked, the next step is project definition, and assigning requirements to projects. When the available time and resources have been consumed, the remaining requirements will be taken up with senior management to make a case for getting more resources or extending the completion date. The results of this process will be the finalization of the project mix and the generation of an overall schedule. All parties involved should agree that this project mix and schedule represent a "doable" amount of work, even if some degree of "stretch" is involved. 7.1.1.4 Personnel Parallel to the work definition efforts, there must be a quick, efficient process to resolve people issues. The human-resources group within the enterprise typically drives this process. The focus is on which people to keep, which to let go and when. If prior due-diligence efforts were effective, much of this will already be understood. If these efforts were poor, a quick assessment will be needed. The financial model has already laid out the scope of what will be required, based largely on the cost reduction needed to support the eventual price. The final selection of requirements and resulting projects will determine how this all plays out, and again underscores the importance of good due-diligence practices. Time is crucial here, as almost everyone on the acquired side will feel insecure. The longer people are kept in the dark, the more likely it is they will seek a different job. Informing the best people those most needed to effect the merger as soon as possible improves the probability that they will stay through the project. Those people chosen to be retained must to be told quickly how they will fit into the new organization should they choose to stay. Those not selected to be permanent employees comprise two groups: those that can go immediately and those needed to execute the transition. For the latter group, packages must be put together to encourage them to stay (the cost of which should already be factored into the financial model). These packages can contain any of the following: A bonus deliverable upon project completion
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A bonus delivered incrementally as the project advances Higher pay for the duration of the project Retention of PC equipment if working remotely An offer to place the individual elsewhere in the enterprise
7.1.1.5 Communication Prior to Stage 5, determining the communication approach to use is not necessarily an important consideration, as communications will often reflect whatever approach is typical for the enterprise. However, starting in Stage 5, communication becomes critical. From a planning perspective, M&A execution can be viewed as a collection of projects working their way along a timeline, but this view doesn't consider the impact these projects have on the lives of so many individuals. Something new is being created to replace something known, and the uncertainty will be palpable for everyone involved, including employees, customers and suppliers. It is important to communicate early, honestly and consistently. One misstep could mean a loss of credibility. The point of the communication is to inform. A common mistake is to try and gather everything together to present a "total picture." This inevitably lengthens the time between people knowing something is up and finding out what that is. It is more effective to inform people often, even if this entails some repetition. Another common mistake is to churn out a high volume of communication with no apparent organization. It is more helpful to decide at the onset what general categories will be addressed, and then organize the communication campaign accordingly for each group. This will afford the information issuers the opportunity to check with each group and see how a particular communication would affect that group. To be effective, communications must be tailored to the audience. The following is a sample list of audience types and topics: Employees M&A event (e.g., closing and transformation status) Human-resources issues Enterprise culture Employees of acquired organization
Customer M&A event (e.g., key dates and what will change) Effects on them
Suppliers M&A event (e.g., key dates and what will change) Effects on them
Investors
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Media Early Projects
7.1.2
During the planning activity discussed above, a set of projects will emerge that can be executed much sooner than others. These typically involve IT infrastructure and administrative activities in the following areas: Telephone networks Data networks Telephone equipment E-mail systems Document systems Videoconferencing Hardware/software infrastructure sizing Supplier contract renegotiation Financial reporting Human resources
These are typically stand-alone-type projects involving little integration with operational business processes. They also typically represent the lowest-risk projects and therefore have a high likelihood of success, which can help boost the morale of those working on the more complex integration projects. Getting a string of quick projects implemented also helps to get everyone engaged, and to present the merger as an activity that is actually happening within the enterprise. 7.1.3 Operational Business Process Projects
The bulk of many merger efforts lies in the integration of the processes that define the new business. Depending on the M&A model (see Section 1.3), the scope of such projects can be anywhere from negligible (in the "stand-alone" model) to extremely vast (in the best-of-breed approach, which requires a complex set of interface/integration projects). For almost any industry, a set of six or so key business processes will suffice to define the structure of the business operation at the highest level. This set of key processes will serve as a basic sorting mechanism for the effort that will be required. Each of these key areas contains subprocesses recognized by employees as their "working tools" where the actual projects will be defined. The following sections examine the project definition process for each of the three M&A model types defined in Section 1.3. 7.1.3.1 Project Definition: Absorption Model Typically, in this approach, all systems from one of the merging entities will be used and the others will be discarded. Project definition falls into two categories. The first category consists of projects related to the migration of data from the discarded systems to the surviving ones. Data mapping should be the first project kicked off, for it will uncover anything missed

during due diligence while there is time to do something about it. This project starts with a map of all necessary data elements, which is usually an output of the database software or normal system documentation. This must be converted to a vehicle (e.g., a desktop spreadsheet and database) that can capture necessary conversion rules as each retiring data element is reviewed. This review requires the assembly teams of people who are knowledgeable about the data elements in the merging systems, which will be mapped to their corresponding data elements in the retiring systems. These mappings can be one-to-one, many-to-one or one-to-many. The rules for conversion become the programming requirements of a project. The second category involves a review of requirements the retiring systems met that the surviving ones don't, therefore dictating system modifications. These needs may be related to contractual commitments, or may simply reflect better ways of doing business that the capturing entity wants to incorporate into its operation. The resolution of these requirements (most of which, ideally, will have already been identified during due diligence) is performed in conjunction with business process managers. Discipline may be needed at this point to stress to business requesters how much effort will be required to make modifications (bearing in mind that old project requests are likely to be inserted under cover of the merger). The key point is that the time frame for completion of all projects has probably already been set, and all projects selected must compete with that schedule. Striking the right balance in the selection process is probably the single most important factor in determining the ultimate success of any "absorption-type" merger, at least from an IS perspective. To the extent that the effort required to perform the modifications is inadequately defined, more requirements may need to be weeded out later as implementation realities bump up against the schedule deadline. Therefore, at scheduling time, it is important to rank requirements by priority from those that are most critical, to those that the enterprise can afford to drop, if necessary. Unfortunately, such dropped projects tend to erode the credibility and perceived success of the merger integration process. 7.1.3.2 Project Definition: Stand-Alone Model In this model, the definition process tends to be simple because business processes are unlikely to be replaced in the acquired entity. However, administrative processes are almost always modified in the financial arena. Other administrative functions, such as human resources, are less likely to require that any projects be performed at the IS level. The acquired entity must report its financials, and therefore a mechanism must be devised to make that work. This is typically a "rush project" because the need to consolidate numbers is a pressing issue for corporate management, which must continually report financial data. The effort usually involves developing interfaces between financial or feeder systems. It's rare that such a project would entail complete replacement of the acquired financial system such an effort, if necessary, would likely be a follow-up project driven by factors other than a merger. 7.1.3.3 Project Definition: "Merger of Equals" Model Among the three M&A approaches, the "merger of equals" type poses the largest project definition effort. Since best-of-breed business process and applications are what will survive, the project definition effort falls into three categories. The first involves deciding which applications "win." Functional business managers are key to this selection process. A clear understanding of the strategic vision for the new organization will be needed as a framework for making selection decisions. In addition, a methodology will be needed to manage the
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decision process. A possible alternative is to select a whole new approach (e.g., implementing a new ERP II foundation). If an enterprise doesn't already have an established methodology for managing IT selection decisions, one tried-and-true approach to consider is the Analytical Hierarchy Process (AHP), first introduced by Thomas Saaty over 20 years ago. The AHP is a method for decision support based on breaking down the elements of a complex problem into a multileveled structure of objectives, criteria and alternatives. It forces users to structure their problems into hierarchies and to judge the relative importance and impact of the various factors. By making paired comparisons between the factors (thus developing ratios), the AHP enables users to develop ranked alternatives and a formal representation of both intuitive and quantified results. The AHP can be highly complex, and in some selection decisions its use may be overkill. We recommend that organizations learn more about the theory in detail before adopting it for their own use. The second category of projects results from a situation similar to that described under the "Absorption" model (see Section 7.1.3.1) i.e., requests will inevitably be made that extra functions and features be built into whatever applications are selected, and such modifications will define a set of projects in their own right. Such requests must be diligently controlled to manage scope creep. It is critical to define these additions prior to addressing integration projects associated with the next category below. The third category involves knitting together all the selected applications so they can operate as an integrated set of business processes for the new entity. Such integration efforts have challenged IS organizations for the past decade, as enterprise-level decision makers have increasingly demanded seamless business operation. While this is too complex a topic to cover in depth here, one high-level theme is worth raising the importance of enabling middleware. Most enterprises have a blend of multivendor and homegrown application solutions the challenge is to get them to "know of one another's existence." The emergence of middleware tools specifically designed to handle the kinds of tasks encountered in integration have been evolving since the mid-1990s. Vendors first introduced message brokers (now known as integration brokers) as a new form of middleware that supplied transformation and intelligent-routing (e.g., content-based-routing and publish-and-subscribe) functions. They later added off-the-shelf adapters to packaged applications and increasingly productive adapter-building tools. Such integration technology continues to become more sophisticated and complex. To properly do the job, any enterprise committing to a "best of breed" merger approach must also commit to implementing integration middleware if it has not already done so. If an integration architecture doesn't already exist, the need for one may hard sell to senior management because it is such a technical issue. However, since senior management has committed to rebuilding the infrastructure of the business operation it only follows that the IT infrastructure must do the same. It's really a "pay me now or pay me later" decision but if the choice is "later," the price paid will be a much higher one. The sequence of staging the implementation is quite complex and involves the organizations of both merger partners. Any changes will be felt enterprisewide, and the degree of integration will determine how they are executed. Since most organizations would never contemplate turning off all systems one night and turning on new ones the next day, application groups must be defined to set the implementation staging sequence. This inevitably leads to additional work on temporary interfaces, which will not be needed when the implementation sequence is complete. Because of these complexities, this model has the longest integration cycle typically two or three years. The "merger of equals" approach is the most daunting and, therefore, the least often used among the three M&A models.
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7.1.4 Employee Change Projects
These projects involve preparing employees to function in their new environment. This is a separate consideration from the communication issues discussed above (see Section 7.1.1.5). Employee change projects primarily involve training. Training will be divided between administrative functions (e.g., e-mail or office support) and applications. If an ERP implementation is already established, training is typically already in place to manage any changes. In addition, the surviving office applications are also likely to have established training materials and processes. Training projects emerge from a review of the early and business process projects discussed above (see Sections 7.1.2 and 7.1.3). Nothing is unique here these projects simply have to be taken care of to get the new organization operational as quickly as possible. 7.2 Sample Template For Stage 5
Figure 4 is a sample summary template for the M&A integration process. Its purpose is to provide an example of the form that the sequence of integration activities can take.
Process Step Identify integration manager Preliminary integration assessment key issues Identify integration team Develop communication strategy First meeting of integration team Document Document Deliverable Time Frame Signing of letter of intent During due diligence Prior to close Prior to close Participants Integration manager Integration manager and acquisition team Integration manager and M&A management team Integration manager, with line-of-business and and functional management Integration team This is a 30,000 foot view of potential integration issues and an outline of the integration plan. The integration team includes members of acquiring company. This strategy includes both internal and external communications. Introduce integration manager, agree on team objectives, schedule integration plan review meeting and work out team logistics. Include objectives for the first 90 days. Revise plan based on feedback from meeting. Comments
Close
Develop integration plan Integration plan review and approval Execute 90-day plan Integration team reviews Monthly status reviews 90-day review
Document Presentation
Two weeks after close After completion of Integration plan
Integration team M&A management team and other functional management areas
Status reports Status reports Presentation
Weekly Monthly 90 days after close Monthly after 90-day review
Integration team Management M&A management team and other functional management areas Integration team M&A management team and other functional management areas
Identify key obstacles to the completion of integration. Identify key obstacles to the completion of integration. This is an assessment of the integration to date, and of key issues and obstacles to completion.
Integration team reviews Six-month review Presentation
Six months after close
This is the conclusion of the integration teams efforts, providing feedback into the process.
Figure 4. Sample Template for M&A Integration


7.3 What IS Can Do
Stage 5 focuses on project execution, and the most important success factor is to have an effective project management process. Most enterprises that excel at project management have adopted a "project office" competency i.e., they've built up strong, concentrated specialization in project management. The idea of developing an enterprise discipline for project management has been around for years. However, recently Gartner has observed the renewed use of a dedicated organizational structure to fulfill that role. Based on Gartner's routine client contacts and informal surveys, we estimate that more than 40 percent of client organizations have implemented some form of project office to "professionalize" project management for application development, infrastructure change and large-scale system migrations. Their goal is a base-level improvement in project completion within schedule deadlines and budget estimates, while delivering the expected functionality with satisfactory quality. World-class organizations complete nearly 90 percent of their projects within 10 percent of budget and time estimates. Gartner has identified five key roles for a project office:
Standard Methodology: The key to implementation a consistent set of tools and processes for projects provides a basis for measuring performance, and can act as a communication and training vehicle for developing project skills. Resource Evaluation: The initial assessment of resources (i.e., people, money and time) is critical on several fronts. Based on experience and evidence from previous projects, the project office acts to validate business assumptions about project and life cycle costs. It also serves senior management by feeding back information that may alter project priorities, based on resource availability or crossfunctional project conflicts. Project Planning: The project plan is a cooperative effort coordinated by the project office, which as a best practice serves as a competency center and as a library for previous project plans. Project Management: Consistent practices, frequent review and a governing responsibility are the baseline roles for management within the project office. In most initial implementations, project managers are not staffed directly from the project office. However, in some organizations, the project office is also the source for project managers, who are deployed as consultants in effect for the life of the project. Project Review and Analysis: Enterprises need to know if project goals were achieved as designed, on time and within budget. The review and analysis phase is a loop back to the resource evaluation role.
Thus, a project office is a shared competency designed to integrate project management within an enterprise. We recommend that it be used to ensure successful, on-time completion of merger integration efforts. For more information on the project office concept and its operation, see "The Project Office: Teams, Processes and Tools" (R-11-1530). 8.0 Stage 6 Operational Review
This last stage focuses on critically examining what was actually accomplished. Experience shows that future integration efforts are more likely to succeed if early reviews are conducted with the acquired team to ascertain the success of the integration. The goal of this stage is create, or improve, a repeatable M&A process. If the enterprise already has a core M&A integration team, this phase is simply part of its "closing
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out" activity. If such a standing team does not exist, this effort is needed to capture the best practices learned for the benefit of future teams that will be formed to manage new merger activities. The operational review should take no more than two weeks and should address two areas: An early assessment of the merger's value i.e., whether expectations are likely to be met in the time frames originally planned. Lessons learned about the process itself, what can be done better next time.
If concern exists about the potential for bias, one approach to minimizing this is to assign responsibility for conducting the review to an executive who was not involved in the acquisition. 8.1 Determining Whether Acquisition Value Expectations Are Likely To Be Met
At this point, the original assumptions for why the merger was such a good idea are revisited. It is still too early to make a final judgement, but using this review to take a hard look at what was actually achieved can lead to future adjustments that can better ensure the merger's ultimate success. This area is the responsibility of the business, but IS participation will provide more opportunity for better understanding the business values involved, as well as how applications can better serve the business. Unfortunately, this activity coincides with the period when many of the participants will want to "get this all behind them" and may be tempted to do so by "declaring victory," regardless of the facts. If this is a one-time activity for the enterprise, the problems caused by such an approach may not be critical ones. Most companies, however, are on the prowl for additional acquisitions, and they owe it to themselves to ensure that they learn from experience, and that they apply this learning to future M&A activities. The questions used to re-examine the original M&A value expectations are defined by the assumptions that underpinned the acquisition model used. (Ironically, these assumptions often aren't identified at the start, but nevertheless appear as the source for excuses during the review of the actual value achieved.) To provide a broad perspective, the following is a general list of questions organized by the M&A drivers presented in Section 1.1. For each negative response to a question, follow-up questions should be asked (e.g., "Why not?" "What should be done about it?" and "How do we avoid this the next time around?"). Economies of Scale (Market Share) Was the market share expected actually realized? What does the cash flow look like, and does it meet expectations? Have the cost reductions expected due to increased purchasing power been achieved? Were the expected reductions in SG&A expenses achieved? Were any of the expected components within SG&A achieved?
Customer Demand (Market Awareness) How have customers reacted to the change? Have customers been retained as expected? Are the purchased products or services really what they were assumed to be? Have new customers appeared as expected?
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Do cross-selling opportunities still seem possible?
Changing Business Models What has been the effect on suppliers? Has a cogent, easy-to-understand definition of the new organization's strategy emerged? What does the planning and budget model look like for the next annual cycle? Were distribution improvements realized? Did the products or services bought deliver their expected synergy?
Globalization What do the markets really look like from the inside? How much synergy can really be extracted in the short run, and in the long run? Can business processes be brought under one global set? What are the difficulties involved, and what time frames are needed to make it all work? How realistic is it to have global products? Do markets really want them? How difficult is it for product design teams to operate globally? What do the country-by-country legal and financial environments look like now? Are they more complex than expected, and not as well-understood as assumed?
Diversification Does the product or service bought live up to expectations? Will the product or service deliver the revenue stream anticipated? Do the cost structures for the product or service match what was originally understood? Do the skills that were acquired really exist to the extent expected? What does the market purchased look like now that it can be seen from the inside?
Organizational Culture What has been the result of combining organizational cultures? Who have been the winners or losers? What has been the impact of this winning and losing? How has senior management from both organizations settled into the new operation? Is there an unspoken lack of support by those from the acquired enterprise? How realistic was senior management's original vision for this acquisition and its chances of success? What levels of support has senior management devoted to ensuring that the acquisition succeeds?
Scavenging for Value Were head count reduction synergies achieved as expected? If not, why not, and what can be done to address the situation?
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How do the actual integration expenses compare to those used in the financial model that drove the merger price? What were the factors that led to material differences above or below these estimates? What changes should be made to do a better job of estimating in the future? If an overage exists in acquisition expenses, how much must be recovered from current operations, and how? How will this affect goodwill accounting and impairment evaluations? Did undoing contract and lease obligations cost more or less than expected? Did any unforeseen legal problems arise?
Finally, if the acquisition is judged to be unsuccessful after the scrutiny of a value review, the review team should go over the reasons for failure listed in Section 1.2. Some of these reasons may surface as a result of the process review discussed in the next section, but the objective is to get to the root causes for why the acquisition didn't measure up to expectations and do something about it. Clearly, it takes great discipline to own up to management failure, and hopefully punishment will not be the reward. Instead, the result should be a recognition that in the rush to close an acquisition the future is often deeply shrouded, and this review should serve the purpose of piercing that shroud just a little bit more for the next time around. 8.2 Determining How to Improve the Process for the Future
This activity amounts to chronicling what didn't work well. During each stage of the acquisition, the results of activities often cause participants to say, "I wish we had done that differently." The process review starts with gathering information on these situations, staying focused on those that are important. In gathering the list, the group must keep a watchful eye on what it will take to implement the changes. The idea is not to try and fix everything, but rather to filter out the more marginal problems. It is more important to address the critical issues well than to take a stab at everything. Most organizations have only a limited set of resources available, but they can stay committed if they feel they are tackling meaningful problems. Once the list has been generated, the group should discuss and categorize each problem by asking four key questions: Was it based on a faulty assumption? Was it the result of poor execution? Was it a people problem? Can it be corrected now, and is it worth it? Was It Based on a Faulty Assumption?
8.2.1
By the time the deal is signed in Stage 4, all assumptions underlying the decisions that drive planning are firm. Due diligence and the early activities of Stage 5 are the source for gathering all necessary information. That was the time to challenge all the assumptions that inevitably fed the decision process. Most flawed assumptions are not obvious, and how many will be unmasked will depend on how skeptical the due diligence team was. An obvious one pertains to the quality of data, which can have a tremendous impact on conversion timing and effort. From an IS perspective, others surface in the business processes themselves for example, when practices were believed to exist as the acquiree described them, rather than being observed firsthand and examined in depth. The business side is most often surprised by the

quality of assets failing to live up to initial representations, which can spill over into the IS organization's efforts by creating additional work to reconcile the differences. The resolution to this type of problem is to strengthen the due-diligence process. The key to adding strength is to put knowledgeable process people from the business on the team and have them walk transactions through the system, asking as many probing questions as they can think of. Select people for the team who are naturally curious and have deep experience in the process being reviewed. Another valuable concept in executing due diligence is to continually ask the mental question: "What is being assumed here?" Most reviewers automatically view what they are examining in reference to their own process operation knowledge, and naturally fall into the trap of assuming something works as they are used to seeing it work. The best questions are raised when nothing is assumed, and the process is tracked as if it were the first time anyone ever thought of doing this. 8.2.2 Was It the Result of Poor Execution?
Many problem factors can lead to this conclusion, but they can be primarily grouped into two categories: work product and project management. Work product concerns the quality of decision making within each project. Problems can arise in several areas, which include: Gathering the correct information to set up project design. This is especially difficult when operating under the pressure of short time frames typical of most mergers. If everyone did their best, problems will hopefully be the exception rather than the rule. Often, however, they result from the end-user specialists being insufficiently engaged in the definition process. It's not unusual to see IS people making decisions in the vacuum of end-user indifference, which often results in end-user criticism of results for which they are actually accountable. This can be avoided by putting the most committed and knowledgeable process people on the project. They must be accountable throughout, from initial design to signing off on training. This can put strain on the end-user community, with key people doing double duty, but there really isn't any other way to reduce the risk from this problem area. Understanding how the process works. Informal processes are typically where problems arise. They often reflect process exceptions that the original system designers never contemplated. End users simply find work-arounds to get the job done. The more of these work-arounds there are, the more difficult it is to make changes to any single process. This is also a symptom of the assumption problem i.e., no one looked carefully enough at the process to identify all the exceptions. "Surprises" that result from these unidentified exceptions can frustrate the end-user population, and cause them to deem the acquisition to be unsuccessful. Estimating the work effort. This is a perennial problem for many IS organizations, and can be the source of the constant end-user refrain: "They never get anything done on time." Failures of the two types discussed above will naturally lead to late completion dates. Given that the work is understood in its entirety, nothing develops better estimates than a focused effort to learn from each estimate. Successful organizations recognize that not everyone working on a project does so at the same level of competence. Each estimate, therefore, must be built realistically, balancing the range of people's skills against the difficulty of the work. In addition, it never hurts to build in some slack to account for unseen events. The more interfaces any project has with others, the more complex the timing for completion will be. This area touches on the other broad category discussed below: project management.
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Training end users. It isn't unusual to see everyone's attention focused on the integration projects themselves. However, it is still the end user that turns it all into reality. Providing adequate end-user training is complicated in M&A efforts because there are two groups of trainees, with differing needs: People from the acquired organization typically need complete training, while those from the acquiring organization may just need an update to go over the changes that were introduced. Unfortunately, training is an area that often get short shrift in company budgets, and a merger is one place the cost becomes quite evident. Determining whether a problem exists in this area is easy: Simply ask any end user if they have adequate training, both for new hires and changes. Many options for developing and delivering training exist, but the bottom line is that something must be in place to cover both business process and office support training.
Project management encompasses issues related to the management of the entire integration process. Problems in this area can be the result of several causes, which include: Wrong choice for overall project manager. This often happens when the person selected in not viewed as an authority. The biggest responsibility facing any merger project manager is to make a long series of important decisions, often under time pressure. The position must be seen by the enterprise as one that has the authority to speak for the enterprise in most situations (e.g., in quickly adjudicating conflicts among different organizations). Often, this manager must decide in the enterprise's interests over those of an individual business unit or administrative department, which takes power. Absent this power, the entire process can quickly get bogged down in governance issues, and tie up too much senior-management time. The further up the management ladder that decisions must be made, the longer the process will take (a factor that is often the major cause of missed schedule deadlines). Some companies assign the new business leader, if one exists, to driving the change. It's a best practice to get those who will have to live with the result to be in charge of executing the integration. This practice helps balance the opposing forces of "getting it done quickly" and "getting it done right." Inexperienced individual project managers. A natural evolutionary career path is to have IS people become project managers. Nothing is wrong with this as long as they are trained in what project management means (see Section 7.3). Lack of formalized project management will condemn the IS organization to inconsistent work product, and to enterprise dissatisfaction with the service it provides. Was It a People Problem?
8.2.3
The leadership aspect of this question was addressed in the project management discussion above. That leaves two other categories: the people executing the integration projects and the end users. Project Execution Personnel: Within this group, people problems often arise from the following sources. A skills mismatch in IS. This will be affected by how rigorously the IS organization manages its people and their competencies. If this is a recurring problem, it needs to be addressed and involves a good deal of effort on management's part. At the core of resolving this issue is being realistic about the individuals themselves i.e., what do they know, and how much can they grow? Unless a disciplined commitment to managing people's performance exists, there is little hope that the right people can be brought in and retained by the IS organization. Gartner has published considerable research on IT skills management (see "Managing the Dynamic IT Skills Portfolio," R-13-5613). A skills mismatch with an outsourcer. It is common for IS organizations to supplement their skills with outside people, especially during peaks of activity that exceed what can be handled by internal staff. It isn't uncommon for organizations that use outsourced staff to treat them as though they were simply a different form of employee. In a way, bringing in an outsourced individual should reflect the IS
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organization's hiring process. This means that every individual brought in must be vetted to ensure they possess the required skills. All too often, suppliers of outside help will display the best people upfront, but find reasons to deliver less-skilled people later on. In addition, disciplined service-level management will be needed to ensure that the arrangement works as expected (see "A Guide to Successful SLA Development and Management," R-11-3353). End Users: People problems related this group fall into two main categories, based on the following perspectives from which they view the merger. As acquirees. From this perspective, they are likely to be defensive, fearing that their worth could disappear with the demise of their old company. A large part of the people-related effort required in any merger focuses on getting these employees to feel like part of a new team. The success of this effort will figure heavily in the attitude of these employees. The less successful it was, the longer it will take for this group to "get on board" and make the integration a success. Uneven effort across organizational units not only makes the transition difficult, but festers over time, making operations inefficient and costly. Beyond effective communication from senior management, good training will figure heavily in resolving this particular issue, for it provides tangible proof of the concern the acquirer has for the employees' well being. It is natural for many in this group to feel that their way of doing business was better than the "new way." The best way to resolve this is to sell them on the new way through effective, compassionate communication and training. As employees. It is common for problems in this area to result from an imbalance between established and new employees. Established employees may have taken over and forced the new people to lower levels, reinforcing many of the acquirees' fears. This is often indicative of a poor performance management system. Unfortunately, if this has occurred, correcting the situation will require a complex and comprehensive effort to overhaul human-resources practices in general. A less likely scenario is that the acquired personnel took over and pushed the established people into the background. In this case, the same approach to resolving the problem applies. Can the It Be Corrected Now, and Is It Worth It?
8.2.4
Usually problems are corrected along the way, but sometimes there just isn't time in the rush to meet schedules. The sections above focus on how to avoid the sources of problems in the future. Although the main goal of this problem review is to highlight what didn't work well, this doesn't mean that the opportunity to correct something now should be missed if it makes sense to do so. Asking whether each problem discussed can, and should, be corrected now and acting when appropriate sends a powerful signal that the enterprise is willing to own up to its mistakes and take corrective action to resolve them. This touches on an important cultural issue of business in general: People are likely to understand and accept that not everything will work well all the time but they're far less likely to tolerate failure to acknowledge what went wrong and attempt to correct it. 8.3 What IS Can Do
The IS organization will be fully engaged by Stage 5 and, as such, will be focused on the process of integrating the organizational components. Typically, IS can do little about the accuracy of the value proposition of the merger itself, since it is based on assumptions built into the first four stages. Therefore, IS needs to promote and support the Stage 6 process described above. Regardless of whether a value review is performed, IS should always ensure that a process assessment is completed. The better the M&A process is to begin with, the more effectively IS can resources to

support acquisitions. The process is what engages the enterprise, and its effectiveness is a reflection on all that participate. 9.0 Conclusion: M&A Recommendations for Business and IS Management
Business and IS management must be aware that M&A activity has the potential to disrupt the business of both the acquiring and target enterprises. Of particular concern are the following pitfalls: Overestimating the cost savings from IT consolidation Failure to deliver against promised business objectives Missing the window of opportunity to prepare for Internet-driven competition Locking in a higher-than-average cost structure because the merged infrastructure supports duplicate applications (e.g., multiple database management systems and platforms) Prolonged project times and higher costs due to staff malaise, the difficulty of cultural integration and other personnel factors Raising risk levels associated with IT decisions, caused by the high cost of integration in relation to promised business cost savings
Gartner therefore recommends that senior IS and business managers carefully examine the impact of the merger on established projects and infrastructures. The choice of which systems to integrate, and the timing of the integration process, will depend on strategic, cultural and competitive factors. The M&A process can become something of a "forced march" for IS managers. A critical point that should not be lost during the transition, however, is that a new culture will emerge and information sharing will be key to enabling this evolution. Moreover, because IT is a critical component of M&A success, IT issues cannot be allowed to relegated to the position of an afterthought in the merger process. To successfully manage the M&A transition and integration process, Gartner offers the following basic guidelines for effective change: Enlist senior business management on an IT advisory council to guide the development of IT capabilities that are integrated with business goals. Recognize the project costs, including new infrastructure, in the first phase. Map the key business and IT processes to identify organizational interfaces and boundaries. Identify governance issues and assess solutions. Identify how the newly merged enterprise will have similar or different information and technology requirements. Perform a skills assessment and needs analysis to define roles filled internally and externally, and to identify staffing and training gaps. Work with the human-resources and accounting organizations to support integrated and nonstandard organizational structures.
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Appendix A: M&A Screening 20 Questions for the Initial Contact The following is an example of a standard set of questions used to gather initial information on a candidate. An asterisk (*) denotes that the question addresses required, as opposed to optional, information. Screening questionnaires like this one should be completed in as much detail as possible, balancing the candidate's need for confidentiality. * 1. Who is the candidate? Name Headquarters address Phone number Fax number Web address Divisions Geographic locations Date of first contact
* 2. What is the company's revenue? 3. What percentage of its revenue falls into the following categories? (Note: Categories should be added or revised based on the enterprise's market; the following are examples for a research organization.) Continuous services Consulting and other noncontinuous services U.S. Non-U.S. (indicate revenues by country, if possible)
4. Can you provide the following financial statements? Latest balance sheet Income statement Cash flow statement Monthly income/expenses for past two years Revenue and expenses by product or product line
* 5. Can you provide an organization chart, and describe the strength and depth of the management team? In addition, please provide staffing numbers (full-time equivalents) for the following categories: Sales Marketing Product development
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Administration Consulting Research/production
* 6. Please provide capital-structure data: Who owns how much of the company? * 7. What are the company's product lines? 8. How do its products map to our products? 9. Which of our business units will be affected by a potential acquisition? 10. Which of our business units would manage the acquisition? 11. Would the target be split up if acquired? 12. Would its current management continue to run the organization? 13. How would becoming part of our company affect: The target company's revenues? Our revenues? Our profitability?
14. What is the target's budget today? 15. What would its proposed budget be as part of our company? 16. What strategic benefits would this acquisition bring to our company? * 17. Why are we interested (e.g., to gain new products, services, distribution channels, or technologies to augment our business functions)? * 18. What is the company's current relationship with us (e.g., client or partner), and do any of our own associates have knowledge about its associates and products? * 19. Who are the key stakeholders in this deal? (Stakeholders are internal and external parties required to successfully complete the deal, and those affected by its completion. For example, legal talent will be required for contracts, and it may be necessary to involve external legal help if questions go beyond internal legal expertise, or involve foreign legal issues.) * 20. Is this a potential: Acquisition or merger candidate? Joint venture? Minority investment? Development agreement? Distribution agreement? Intellectual-property-sharing agreement?
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Appendix B:
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Due-Diligence Focus Areas This section contains Gartner's suggested list of potential focus areas for M&A due-diligence efforts. The list is not intended to be all-inclusive, but merely to suggest the direction an enterprise can take. Alignment With Stated Business Objectives Understanding the "why" of the merger drives IT planning for the next 24 months. Examples include: Diversification of cash flow or portfolio (cashing in/out) Market expansion or consolidation (customer awareness) Competitive advantage through product acquisition (diversification) Leveraging economies of scale (increased cash flow) Extending geographic domain (globalization) Market creation (changing business models) Skills acquisition (workforce volatility) Understanding why the target company was successful to preserve value
Business Infrastructure Local telecommunications infrastructure Local network infrastructure Local travel services and logistics support
IT Infrastructure All IT infrastructure installed, leased, owned and outsourced All IT infrastructure on order, and delivery commitments Internet Servers Databases Middleware Storage Output management Network and systems management software Desktop computing WAN LAN Security systems
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Data center Distributed computing Outsourced infrastructure Seasonal patterns that indicate an unusually high peak requirement
Business IT Infrastructure Active projects and their status Backlogged projects Data warehouses Customer-facing applications Embedded technology machines Back-office applications (e.g., human resources and finance) End-user applications Workgroup computing Workflow computing Digital signatures Security (applications and facilities) Industry-specific technology (e.g., ATMs or robotics) Commitments for joint-venture or partnership arrangements
Financial Management and Infrastructure All contracts and licenses for products and services: cost, duration, renewal options, early-termination penalties, transferability and liabilities Agreements concerning installment purchases, franchises, employment, suppliers, customers, confidentiality/noncompete and warranties (all of which will remain valid after the acquisition) Equipment leases Real property obligations Energy Maintenance agreements Contracts with external service providers (e.g., consultants, integrators and contractors) Service-and-support contracts and service agreements Contractor relationships Consulting engagements
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Facilities Power availability, obligations Software contracts Capital asset depreciation Expenses Contractual obligations Debt servicing IT capital budget (line of business and corporate) Projects planned and under way (e.g., desktop) Expenses (staff, facilities and power) Taxes (e.g., property taxes) Geographic issues (e.g., foreign financial commitments) Currency issues treasury functions Cost to maintain services (e.g., retain skills during transition) Cost to retrain and retain employees Furniture, fixtures and office equipment
Application Portfolio Review Number of applications Type of applications by classification Back-office Utilities Leading-edge, mission-critical Infrastructure Productivity
Desktop application environment Platform analysis (client/server vs. mainframe vs. Web-based) Middleware requirements Development analysis new development and enhancements Project analysis state of development Critical review of major revisions in progress, if any
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Applications operated globally, tax and financial aspects Support analysis Documentation Supportability End-of-life status Replacement status Application development methodologies and skills
Standards and Architecture IT strategy IT architecture documents Standards process Business architecture (e.g., customers, products, services and competitors) Information architecture (e.g., information standards, creation and security) Data architecture: key tables and elements by application Application architecture (e.g., finance and human resources) Established IT standards Network Database Middleware Platforms Management software Desktop Mobile/portable Non-PC end-user devices Embedded technology Operating systems
Process Analysis and Development Process analysis Capacity planning Contingency planning
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Storage management User management Administration Problem management Service management Application development
IT metrics used and the past 12 months of findings Compatibility Measurement and service-level assumptions Cultural differences and similarities
Intellectual Property Copyrights Patents Service marks Trade secrets Trade names Employee obligations (e.g., can they claim ownership of any intellectual property?)
Staff, Skills and Competencies Human-resource policy Compensation Hiring and retention practices Training strategies Bonuses and indirect benefits
Skills needed for future organization Skills management process and structure; competency centers Skills needed to maintain infrastructure during M&A Project leadership Development support and maintenance Documentation Team leaders and potential synergies
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Core competencies Training issues Technology transfer and learning opportunities
Organizational Change Management Cultural differences Leadership style Management style Time period of change (0 to 36 months) Need for outside help
Organizational Structure IT organization charts Organizational style (e.g., role-based, hierarchical or team-based) Leadership and governance (e.g., CIO and steering committee) Consolidated and distributed structures Size Location Staff competencies Management competencies Operate well as a team Understand business operational details Cooperative or hostile
Geography Cost of facilities Cost of power Local competition for IT resources Local availability of external services Availability of housing, schooling and family infrastructure
Government Restrictive regulations (e.g., encryption algorithms) Benefits (e.g., tax breaks, equipment depreciation and real estate)
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Appendix C:
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Sample Due-Diligence Questionnaire Here's another perspective on due diligence. It is a fairly simple set of questions one company used to determine the state of an acquired environment. The answers presumably would be compared to the current state of the acquiring organization to develop a gap and integration analysis. Technology Management Do you have a documented disaster recovery plan? Are you ISO certified? Do you have any outsourcing relationships? Do you assess your application development capability using the Software Engineering Institute's Capability Maturity Model (CMM)? If so, what CMM level (1-5) has your organization reached?
Acquisition What is your involvement in the order and configuration management process for IT-related equipment? Do you have an asset management system for IT-related equipment? Do you have a disposition process for expired equipment?
Installation What is your method for hardware and software delivery?
Help Desk Do you have a help desk that supports your internal IT users? If not, how are calls from customers handled? If so, what call types are handled? What are the staffing levels? How many locations do they support? What are the call volumes?
Hardware Management Please provide an inventory of hardware items and their associated maintenance schedules and costs, by location and building.
Technical Support Please provide a list of IT employees, and their responsibilities and salaries. Please outline your scope of services and coverage. Do you have service-level agreements with your internal customers, defining support services and priority resolution? If so, please provide.
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Please list all sites supported and their locations.
Software Management Please provide an inventory of software, and its associated maintenance schedules and costs. Do you have a license management system? If so, what is the product?
LAN Management What are your data center locations? What are your hardware standards in the following areas? PCs Servers Hubs/switches
What are your software standards in the following areas? Desktop operating system Network operating system Desktop office packages E-mail, scheduling (groupware) Database management system
WAN Management Please provide a global WAN diagram and include vendors and monthly recurring costs. What are your hardware standards in the following areas? Routers Firewalls DSU/CSU
What are your software standards for network management? Please list your network protocols. (If IP, please list class ownership and scheme.)
Telecommunications Please provide the following information on voice systems, by location: Phone system manufacturer Date of purchase Owned or leased Number of stations
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Number of trunks General ledger by telecom account (This will provide baseline trends.)
Please provide a list of telephone support staff, with their responsibilities and salaries. Please provide the following information on video systems, by location: Manufacturer Date of purchase Owned or leased H.320 or H.323 standard Speed capability (e.g., 128, 256 or 348 Kbps)
Appendix D:
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Acronym Key AHP AT ATM CASE CEO CIO CMM CSU DSU EMU ERP GDS IP IS ISO IT Kbps LAN LDAP LOB M&A PC SEC SG&A SLA WAN Analytical Hierarchy Process Acquisition target Automated teller machine Computer-aided software engineering Chief executive officer Chief information officer Capability Maturity Model Channel service unit Data service unit Economic and monetary union Enterprise resource planning Global Directory Service Internet Protocol Information systems International Standards Organization Information technology Kilobits per second Local-area network Lightweight Directory Access Protocol Line of business Mergers and acquisitions Personal computer Securities and Exchange Commission Selling, general and administrative Service-level agreement Wide-area network
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An Is Perspective of Mergers and Acquisitions

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R-14-6198 R. Mack, M. Gerrard, N.

Strategic Analysis Report

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

R-14-6198 17 April 2002

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

R-14-6198 17 April 2002

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

R-14-6198 17 April 2002

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

R-14-6198 17 April 2002

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

R-14-6198 17 April 2002

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

Percentage of Organizations Capacity for Change

Amount of Change That Can Be Absorbed in a Given Period

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

R-14-6198 17 April 2002

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

R-14-6198 17 April 2002

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

Computer-aided software engineering Economic and monetary union

Global Directory Service Lightweight Directory Access Protocol

Source: Gartner Research

Figure 3. Sample Due-Diligence Checklist 5.2 What IS Can Do

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

Finance Order entry Payroll Accounting

Operations Production Facilities IS

Product marketing Product plan Product integration Branding Pricing Distribution

Sales Sales force integration Sales management Quota impact

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

R-14-6198 17 April 2002

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

Two weeks after close After completion of Integration plan

Status reports Status reports Presentation

Weekly Monthly 90 days after close Monthly after 90-day review

Integration team reviews Six-month review Presentation

Six months after close

Source: Gartner Research

Figure 4. Sample Template for M&A Integration

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook

R-14-6198 17 April 2002

An IS Perspective on Mergers and Acquisitions: A Six-Stage Handbook