IT MANAGEMENT ISSUES OF CORPORATE MERGERS

Transcription

1 OF Presentation to the British Computer Society - Business Information Systems Specialist Group 08 May 2002 Lynn Lawton and Gaurav Mathur

2 M&A activity is driven by multiple macroeconomic and industry drivers CHANGE IN INDUSTRY STRUCTURE World M&A CHANGE IN CAPITAL MARKET OPPORTUNITIES UK M&A 1, billion 1, billion REGULATORY AND POLITICAL PRESSURE 0 H1 H2 H1 H2 H1 H2 H1 H2 H1 H H1 H2 H1 H2 H1 H2 H1 H2 H1 H UNDER PERFORMANCE World Half-Year Total Telecoms specific UK Cross Border UK Domestic Note: Includes all cross border and domestic deals completed 1st Jan December Excludes MBOs & Privatisations. Source: Datalogic: Thomson Financial, KPMG analysis DESIRE FOR FOCUS AND SIMPLICITY GROWTH OPPORTUNITIES Deals are an essential element of corporate strategy in a changing environment

3 Realising value from deals, however, is increasingly difficult GREATER COMPLEXITY VALUE FOCUS % of deals 100% 80% 60% 40% 20% 0% Deals destroyed value Deals produced no difference Deals added value Source: KPMG surveys Deals that do not add value Deals adding value REPUTATIONAL RISK JUDGING RESULTS These success rates would not be acceptable in any other area of corporate activity!

4 The challenge to create value CIOs need to be an integral part and increase the value in major corporate transactions! Align the IT Strategy with the deal rationale and evaluate its commercial implications Evaluate the impact of IT synergies, issues and risks Establish the most appropriate strategy and plans for IT integration/ separation Make IT happen The role of IT during a deal is becoming vital as an active creator/ protector of shareholder value Critical to support the future business strategy Realise synergies having significant cost and revenue implications Only half the survey respondents were consulted about technology fit when assessing a potential merger or acquisition. When, however, IT is assessed, 1 in 5 mergers are abandoned or subject to delays as a result, suggesting that IT Due Diligence is, or should be, a critical piece of the acquisition agenda. Severely impede the timescale for achieving the full benefits of a merger or acquisition Provide a unique opportunity for solving the IS problems of one or both parties Source: Microsoft survey May 2001

5 When is IT more important? Usually depends on the deal rationale Motive Implication IT importance Economies of scale, achieve critical size Access to key products/brands Access to key technologies/ process methods Access to key markets/ geographic coverage Access to new sales channels Supply chain/vertical integration A good or potentially good investment Implies integration of activities and systems May mean increase of business volumes through existing systems May mean change in business processes May mean changes in customer facing systems New channel may have different system requirements Requires system integration or interfacing to get full benefits Management and other skills are needed to maximise investment Very high Medium Medium High High Very High Low This is a general guide and each situation needs assessing individually

6 Are we there? Corporate strategy Transaction strategy Realisation Completion Implementation Measurement Strategy/ deal origination Deal execution and assessment Implementation Outcome IT Strategy and its commercial implications IT strategy and architecture alignment with the business growth strategy acquisition or organic. IT Strategy alignment with deal rationale Pre-bid assessment of IT value creation potential Risk identification and assessment IT Due diligence and synergy evaluation Assessment of Post deal integration and separation considerations Negotiation Planning and assurance over the post deal IT implementation plans Implementation of post deal plans and synergies, on time and budget Benefits realisation and performance reviews Business continuity Continuous improvement / second/ third wave integration/ separation

7 Managing IT in an acquisition transaction Focus your due diligence efforts on the key drivers of value creation and on the critical issues that may prevent you from achieving that value. PRE-DEAL DUE DILIGENCE INITIAL VALUE IT STRATEGY ASSESSMENT - IT vision in line with the deal rationale and business strategy AND PRELIMINARY IT SYNERGIES INVESTIGATION - Where, how and when can they be created DETAILED INVESTIGATION POST DEAL IMPLEMENTATION - IT separation and integration issues PLAN FOR DETAILED DUE DILIGENCE -Hypothesis of value creation potential, issues and risks -Plan for due diligence and data room review EVALUATING PRE DEAL CONSIDERATIONS -SWOT analysis of target s IT strategy, infrastructure, costs and management -Pre-deal tactics and negotiations PLAN FOR POST TRANSACTION SEPARATION AND INTEGRATION -IT architecture selection and planning and business cases -MAKING IT HAPPEN AND REALISING THE BENEFITS ON TIME AND BUDGET!

8 Managing IT in a disposal transaction De-merger activity has been a rising trend FTSE 100 companies engaging in significant* demergers/ disposals Every CIOs challenge is to help maximise the value generated from the sale without causing disruption to on-going operations Year Provide the potential purchasers with a clear understanding of the value IT currently delivers to the business and its future potential. Assist to deliver a credible, discrete stand-alone entity on Day 1, with value preserved and business continuity ensured. Understand the potential separation options including costs and benefits Assistance in IT separation strategy and post transaction IT strategy. SOURCE: KPMG RESEARCH

9 Attaching numbers to IT Projected costs and benefits. IT has a beautiful mind! Scope of Business Plan Particulars Total A Capex B P&L cash costs C Total cash spend D EBIT benefits E Net cash flow (D-C) F Total P&L costs G Net P&L Impact (D-F) Key investment hurdles evaluated Dynamic Payback Period (DPP) : (x th Year) and Internal rate of Return ( IRR) : xx%. Return on Capital Invested ( ROCI): xx%. Net Present Value: xx million.

10 Attaching numbers to IT OVERALL CONCLUSION: Robust business case for Option 1 however projected EBIT improvements of xxx million in years xx to xx in the business forecast are not realistic and may never be realised. Impact on Valuation and hence DEAL PRICE xxx. COST/ BENEFIT VALUE TREE Business Benefits Overhead Cost reduction COGS Cost reduction IT operating expenses Other Operating expenses Inbound and outbound logistics Manufacturing and operations Costs Asset Reduction One time On going Stocks Fixed facilities Hardware Software External and Internal resources Other implementation and roll out costs Redundancies and severance Upgrades and developments Maintenance Support

11 Sensitising the numbers Business case sensitivity analysis of the post deal IT Strategy 5 Reduction in the key benefit element mil Increase in the cost element mil Implementation Delays in months S SENSITIVITY TOLERANCE ZONE The sensitivity tolerance zone in the graph above demonstrates that a minimum reduction in benefits by 3 mil and a maximum delay in implementation by 12 months and increase in costs by 2 mil can be tolerated to comply with the investment hurdles.

12 Post Deal Implementation Making IT happen Get moving just before the closing of the deal and get ready for integration! Set integration strategy Set up/ mobilise Develop Integration Planning Structure Validate initial synergy benefits Stabilise the business Conduct culture surveys/ interviews Develop 100 Day Integration Plans Employee and customer communication plans Source: KPMG Consulting

13 Post Deal Implementation Making IT happen No IT integration No business integration. KPMG finds a strong degree of correlation between IT integration and deal value creation CIO led and participation on integration board to secure business buy-in The show must go on! On-going operations should not suffer Manage the change. Its more about people than systems Prepare a solution for Day 1 MIS requirements Prioritise and focus on integrating the high value adding elements Web-based technologies could be deployed to support the effective management of the integration programme. Each level of the organisation, from CEO to project level, can have a dynamic, customised dashboard of deliverables, milestones and metrics Count the beans and measure them against plans!

14 Post Deal Implementation Making IT happen The key to a successful implementation lies in an effective programme management methodology Mobilisation events and processes Workstream monitoring and communication processes across project Flash weekly status reporting As Is and To Be templates, questionnaires, audits etc Inter-dependency assessments and monitoring Programme Management Benefits tracking templates and processes Executive strategy Workshops Knowledge Management Gantt charts, project planning techniques e-tools Source: KPMG Consulting

15 Benefits Better chances of shareholder value creation/ protection on time and budget IT Strategy alignment with the business strategy and deal rationale IT implications quantified and factored into the transaction consideration Post deal benefits realisation Enhanced profile of the IT Department in the organisation

16 Contacts Lynn Lawton +44 (0) Gaurav Mathur +44 (0) Carlos Mendes +44 (0) Copyright 2002 KPMG the UK member firm of KPMG International, a Swiss association. All rights reserved.