Integrating Management Information Systems Following Organizational Mergers or Acquisitions
Work in process
Fred Niederman, Saint Louis University
Elizabeth Baker, Virginia Military Institute
Abstract
Mergers and acquisitions have become a normal business occurrence for companies large and small. Integration of entities following mergers and acquisitions are often more painful and less successful than they could be. The integration of information technology functions plays a vital role in the ultimate results of such a merger by actualizing product and customer synergies, establishing best practices drawing from the best of each organization, and providing smooth transition to integrated reporting and decision systems. This study proposes to investigate best practice for information technology leaders for both large scale mergers and more routine smaller acquisitions considering technology portfolios, intellectual property, data assets, personnel, culture, and other key issues in such integration. Deliverables will include development of grounded theory suggesting patterns of activities that lead to more successful merger and acquisition outcomes. From a practitioner perspective, such theory will be presented in the format of a taxonomy of critical success factors forming a comprehensive "checklist" of issues for CIO consideration in approaching future integrations.
The authors are grateful for the funding provided by the Lattanze Center @ Loyola College in support of this research.
Please do not quote or reference without explicit permission from the authors.
“Studies and experiences have shown that a major reason why many mergers and acquisitions fail is because of problems that occur during the implementation stage of the transaction. Information technology (IT) has emerged as one of the most critical aspects of integration and successful implementation.” (Popovich, 2001)
“When dealmakers are trying to knit together a transaction, managing all the details can seem like death by a thousand cuts. But experts insist that deal principals must look beyond financial and other models when evaluating deals and include information technology (IT) on their short list of concerns.” (Shearer, 2004)
Introduction
Merger and acquisition activity is extensively found and of extraordinary consequence in the business world. Based on statistics published in IDD Magazine derived from the consulting group 451 which maintains a database regarding merger and acquisition events, some 4000 mergers and acquisitions were reported in the technology and telecom space in just the year 2006 (Miller, 2007). However, on average, when adjusted for market effects, the value of both the acquired and the acquiring companies tend to fall rather than increase as a result of merger and acquisition. They frequently result in a loss of value sometimes ending in divestiture. McKiernan and Merali (1995) report that estimates of the proportion of such divestitures range between 33% and 60%. They reference Violano (1990) claiming that 80% of merger deals ended up, “destroying the value of the organization for the acquiring company.” This is of importance in the MIS world because a major reason for poor results from mergers and acquisitions is the difficulty and complexity of integration of the entities (Srivastava, 1986) and, as noted in the quotations at the top of this paper, information technology and the MIS functions play a crucial role in effective integration.
The management of mergers and acquisitions at the operational level should be of great interest to CIOs and senior MIS managers. It should be no surprise to be called upon multiple times in an active career to evaluate an acquisition or merger opportunity prior to one taking effect. Even more likely the CIO will be called upon to lead the integration of MIS departments following a merger or acquisition. Although other factors, such as the negotiated price of the transaction and merging of cultures and business processes are also important in the outcome of a merger or acquisition event; the integration of MIS assets are also important influences on outcomes from the transaction. This is so for several reasons not least of which are: (1) the newly merged entity may take advantage of increased bargaining power to renegotiate with vendors and other suppliers in a way that significantly reduces cost or increases services (or may miss such an opportunity: (2) the MIS function provides critical support for business processes whether they be in operations, marketing, research and development, or elsewhere the integration of which relies on smooth uniting of MIS infrastructure and technical support; (3) the MIS function provides the continued supply of accurate, timely, and relevant operational data formatted, aggregated, cleansed, and presented for on-going business decision making; and (4) the MIS personnel in an organization represent a substantial knowledge asset for maintaining existing technology, providing innovation, and moving to a stronger platform in the emerging new business entity formed of acquired and acquiring firms.
From an idealistic point of view, the goals of MIS professionals in a merger and acquisition will include preserving and expanding value to the organization and, ultimately, society. From a pragmatic perspective, mechanisms for achieving these goals are not necessarily clear. A scarcity of research on the role of MIS in merger and acquisition events provides little guidance in this area for practitioners. This study proposes to examine in detail issues involved in the phases of merger and acquisition from pre-event discussions to finalizing consolidations; to identify critical factors, actions, and policies, and to map patterns of relationships between factors, actions, policies, and the outcomes of merger and acquisition events.
Background on Mergers and Acquisitions
Two extensive research literatures have developed regarding mergers and acquisitions. In broad terms, the first is financially-oriented looking for structural factors that correlated with rising or falling value as measured by stock prices. Such investigation will consider, for example, the degree of similarity in product lines, marketing skills, or other factors and correlate such measures with stock prices at various points in the future. Alexandridis, Antoniou, and Petmesas (2007) show that an optimistic view in approaching mergers and acquisitions is largely unsupported by observation of prior financial results when reviewed from a variety of methodological and conceptual perspectives. Pautler (2002) takes an economic approach from the perspective of investigating whether or not mergers and acquisition create dangerous anti-competitive trust activity. This study considers only the net impact of mergers and acquisitions on the overall economy and is not much concerned with issues that would increase or decrease the probability of any particular merger being successful.
A second literature attempts to investigate in more detail the dynamics by which some mergers prove more successful than others. The underlying premise is that quality of management of the merger process influences the outcome. Even where structural factors are extremely favorable, poor management can “blow” the integration of the two firms whereas even where structural factors are unfavorable, excellent management might transform the situation into a success. Over a large number of mergers, such management characteristics may prove to simply average out and be viewed as part of a natural “error” term in regression equations. However, from the perspective of any given merger, management quality and effectiveness of integration may account for significant variation in outcome. Moreover, if standard approaches to effective management of such change are discovered and diffused to become norms the percentage of successful mergers may be increased.
The overall nature of a merger can be described as two sets of competencies and assets moving through a series of transitions from pre-deal assessment through being legally combined into a single new entity and through a set of additional transitions that restructure an emergent new entity from two separate components. In an abstract sense, this can be viewed as a series of moves through a problem space from a “current state” characterized by the un-integrated set of assets brought by each of the new partners to a “future state” characterized by a new set of assets representing a single combined entity. Clearly some of the original assets may remain unchanged, others may disappear, and still others will be recombined in various ways into new asset packages. While this describes the general pattern of mergers and acquisitions, much variance can be found in the original goals motivating the merger and in the amount of integration to be found in the new emergent entity.
Differences on this dimension of integration can be viewed as a continuum from low to high levels of intended integration. At one extreme, the acquired entity is left very much as a stand alone and independent component. This alternative can be described by an ownership holding company with little interaction among components. At the other end of the continuum, mergers may seek to fully integrate business processes, product lines, staffing assets, and physical plants into a single new combination. Naturally, in practice, particular mergers may take intermediate positions representing integration of some but not all business components. For example, IT systems and information may be combined but marketing or manufacturing may be left distinct.
Where lower integration is sought, the firm is likely to be minimizing short term integration costs. It may be able to reinvest profits from one organization into the capital needed for investment and expansion in another product. Over time, however, with enough acquisitions, some costs may appear. For example, a firm with many acquired parts may find itself with many duplicative personnel, supply acquisition, warehouse, and other assets. It may, in fact, be more costly to integrate such replicated assets at a later date when the initial unfreezing phase of the change cycle associated with the merger announcement has passed. On the other hand, with a goal of higher levels of integration, the new entity has many challenges involved in the integration. Such challenges involve the quantity and timing of changes. Issues tend to be interrelated and involve personnel (retaining key personnel, making sure that the needed skills are allocated to the right tasks), culture (moving toward common decision making and conflict resolution approaches), and communication (conveying transitional messages quickly but also accurately). Greater efforts to substantially integrate at operating levelswill, in the short run, engender more cost and more risk, but will also afford the potential for positioning for significant long-term benefit through creating synergies and reducing duplications.
In general firms are faced with the M&A management paradox. Paruchuri, Merkar, and Hambrick (2006) describe this as “one of the central dilemmas in managing acquisitions.…” Because firm experiences costs and risks in aggressively pursuing integration immediately, there is a temptation to allow the merging organizations substantial independence to mitigate these costs and risks. However, in providing such independence, the opportunity to create synergies, which is often at least part of the rationale for merging, may be reduced or lost. In the short run, extending the time period for managing change may allow for targeted use of limited resources, but over time the accumulation of redundant business processes may be more difficult to integrate as the organizational “unfreezing” caused by the M&A will have refrozen into patterns less easily modified.
The mechanics of higher levels of integration would seem to require (somewhat in this order) (1) an inventory of assets brought to the new entity by the acquiring and target companies; (2) a strategy for their restructuring; (3) reallocation or combining of redundant resources; (4) coordination of related but different resources, and (5) creation of resources for “gap-filling” and exploitation of new opportunities.
This view is consistent with a phased perspective where activities in each phase of integration are potentially important. At least five distinct time periods have been recognized. First, there is a pre-merger period where each firm consists of a distinct set of competencies and assets. Second is a negotiating period where terms for merger are considered, where at least one side investigates the assets of the other and estimates the potential for increased value through integration. McKiernan and Merali (1995) suggest that as a result of various pressures, line managers eventually to be responsible for implementation are generally not included in these first phases. They suggest that this results in the failure to discover poor organizational fit at an operational level. Third is the period of announcement and approval seeking from stakeholders including shareholders and government regulators. Fourth is the early implementation including planning and building relationships. Fifth is the longer term implementation where new arrangements are to be exploited. These phases are referred to directly and indirectly in the literature but without analysis of the unique dynamics that differentiate each stage.
A subset of the literature focuses on staffing. Much of this literature is about the attitudes of employees after a merger and techniques for improving the probability of achieving desired results regarding employee attitudes. For example, appropriate levels of helpful communication as well as high quality human resource practices are advocated to bolster morale (Nikandrou, Papalexandris, and Bourantas, 2000). This literature doesn’t appear to address a number of related issues including how different sets of job levels might be recombine; how differently organized sets of job descriptions might be reorganized; how future staffing needs are determined and how existing staff are evaluated for fit with future positions. There does not appear to be any literature on how to look for complementary skills for new team building or expanding implicit human knowledge capabilities. All of these issues would be relevant to a discussion of the merger of IT capabilities within the overall process of both human resource and technology integration.
Another subset of the literature deals with the influence of variations in culture between the initial organizations. In principle, companies with cultures that are more alike should be easier to integrate, but complementary cultures may provide more opportunity to extend the range and power of the initial entities into a stronger emergent entity. Teerikangas and Very (2006) review literature showing mixed outcomes based on similar or different initial entity cultures. They consider both organizational and national culture and conclude that difficulties in grasping the multi-level nature of culture, the complex dynamics of the merger and acquisition process, and measurement issues contribute to the diverse results. Their conclusion calls for close examination of the underlying complex dynamics of mergers and acquisitions in the field as a base for observing stable relationships and presenting emergent theory in this area. In essence, they point out the difficulties of predicting outcomes from an initial set of variables without considering the mediating effects of managerial actions and the “micro results” and feedback loops that derive from these.
Although some inferences can be made from overviews of integration in merger and effects of merger on staff attitudes, no similar subset of literature focuses on the role of MIS in the integration of organizations following merger nor on the effects of merger on the MIS function. This is in spite of an acknowledgement of the potentially critical role played by management of technology (James, 2002, p. 301).
The Role of Information Systems
There are two distinct facets of the role of the MIS function in the merger. These roles pertain first to MIS as a service provider to other organizational functions and second to the structure and assets of the MIS function as a division or department. Increasingly organizations are integrating MIS capabilities with business processes. The sequencing of activities, the use of information to support these, and the technology enabling them are becoming increasingly intertwined. Prior to the integration of merged or acquired firms, many high level business processes, with integrated information and technology elements, are loosely duplicated between the independent entities. For example, both entities are likely to have marketing, accounting, human resource, and production functions. It is equally likely that under the surface the business processes enacted by each entity differ from one another. In some cases these differences may be marginal, in other cases substantial. Within the same merger activity, the various business processes may range in their similarity or difference between organizations. As noted earlier, some organizations may allow the continuation of separate business processes while others may aim to integrate these rapidly into single new ones. It is likely that organizations will aim to integrate some rapidly and others more slowly within the overall portfolio.
Strategies for such integration at the level of individual business processes may take a number of forms. Such forms include: (1) eliminating one approach and expanding the other for use by both former entities; (2) picking and choosing stronger elements from each approach (e.g. using the prospect approach from one marketing organization and the sales approach from another); or (3) defining a more optimal future approach and evolving both individual entities processes toward that new system (e.g. replacing different sales systems with a new more comprehensive CRM). Note that in the spirit of fractals which replicate at various systems levels such an approach can be mirrored at the business process level and at the overall departmental level.