Editor's note: This article is from the CIO Dive archives and was originally published in November 2019.

Driven by intense competition, technology companies are racing to identify areas for improvement and take action. If left unchecked, this competitive pressure can evolve into a survival threat.

Take software maker Nintex, for example. The company acquired process management firm Promapp in July 2018 to enhance customers' experience with its automation tools. Promapp was not a direct competitor but complemented Nintex's mission by introducing a simple visual process mapping layer. When the two companies examined system overlaps, duplicate customer relationship management (CRM) systems became an obvious point of inefficiency.

"We encountered many challenges in executing the data migration," Justin Donato, vice president of IT at Nintex, told CIO Dive. "We failed three consecutive times due to technical issues."

Donato noted that the data migration placed additional stress on employees. Teams not only had to repeat the data migration process and corresponding work, but also deal with repeated failures while relying on vendors to complete what should have been a quick process. This all happened amid a series of changes brought on by the merger and acquisition activity.

To improve merger and acquisition success rates, decision-makers should:

  • Ensure a clear understanding of the business rationale for the acquisition and use it to guide decisions.
  • Comprehensively assess the technical challenges and opportunities of the deal, while ensuring employees are aware of potential changes.
  • Determine redundancies in people or technology with a focus on business outcomes.

Without the right strategy, companies may invest resources in merger and acquisition projects that fail to achieve stated goals, leading to stagnation and loss of competitive advantage.

Integration costs

When two companies combine, they plan to leverage each other's employees, market strength, and resources, including technology and IT infrastructure. But before making any technology decisions, such as retiring old systems or undertaking joint modernization, executives need to keep in mind the business significance of the acquisition and set priorities accordingly.

"IT doesn't make the deal, but it can break the deal," James Anderson, senior research director at Gartner, told CIO Dive. "Leaders will factor IT costs into acquisition decisions. The time it takes for the combined business to return to normal operations is also a key factor."

Accurately estimating the time required for migration is difficult. Even with all information available before the deal is finalized, there are still too many unknown variables.

"I think 70% to 80% of the integration must be completed within two years. Otherwise, you leave more 'scar tissue' and the pain that comes with it."

—Glenn O'Donnell, Vice President and Research Director at Forrester

However, Glenn O'Donnell, vice president and research director at Forrester, said in an email to CIO Dive that even for the largest companies, core system integration can typically be completed within a year. What hasn't been integrated within five years may never be integrated.

"There will always be some isolated fragments," O'Donnell said. "You can think of it as the scar tissue of the merger. I think 70% to 80% of the integration needs to be done within two years; otherwise, there's more scar tissue and more pain."

Total integration costs vary widely. A review by EY of 70 mergers and acquisitions between 2010 and 2016 showed integration costs ranging from as little as $4 million to as much as $3.8 billion. The company noted in its report that key drivers of M&A integration costs include severance and employee-related costs, plant/office/real estate closures, and IT system changes.

According to EY, regardless of deal size, M&A integration costs typically account for 1% to 7% of the transaction value. In deals with higher valuations (over $10 billion), integration costs tend to represent a lower percentage of the total transaction.

M&A groundwork

For IT leaders seeking M&A success, identifying the business practices, structures, stakeholders, and challenges within the organization's operations is crucial. Groundwork should begin before any deal is signed and almost always starts at the top of the organizational structure. Transformation plans vary depending on who controls the finances.

"The biggest difficulty is that every merger is inherently different," Anderson said. "Decision-makers must understand what they are acquiring—is it a company, a product, or a service?"

Successful M&A cases often treat major decisions, such as replacing systems or teams, as "day-zero decisions."

—Sharon Rodriguez, Chief Customer Officer at Unqork

M&A is not without risk. The Harvard Business Review estimates that 70% to 90% of acquisitions fail. Clear business objectives help align technology decisions and accelerate the company's integration process. Early in the acquisition, additional obstacles may arise due to difficulty obtaining information before the deal.

Sharon Rodriguez, chief customer officer at Unqork and a former financial industry M&A advisor, told CIO Dive that successful mergers and acquisitions often treat major decisions, such as replacing systems or teams, as "day-zero decisions." Mergers that set priorities early are more likely to succeed.

Rodriguez said that without the right people involved in evaluating operational processes or technology, companies will fail to correctly identify long-term value potential. "I've received acquisition proposals where I asked, 'Are you kidding me?'"

From an IT perspective, Kevin Beasley, CIO of ERP vendor VAI, told CIO Dive that in the early stages of a merger, both parties' existing operations need to be reviewed. Often, middle managers don't learn about the deal until after the contract is signed.

"The acquirer wants to verify that the purchased assets match what's on the books," Beasley said. "The acquired company is also conducting due diligence on the acquirer."

Anderson believes that acquirers should identify as much of the technical debt in the deal as possible.

"In the M&A process, no one says, 'I wish this would take longer.'"

—James Anderson, Senior Research Director at Gartner

The cost of transforming legacy platforms often only becomes apparent after the deal closes, potentially leading to cost overruns or process delays. "In the M&A process, no one says, 'I wish this would take longer,'" Anderson said.

Employee commitment

Overcoming the complex technological changes inherent in corporate restructuring hinges on communicating to employees the reasons and methods for change. Investing resources early to develop a roadmap for success can alleviate transformation anxiety.

For Donato, continuous communication and transparency during the Promapp acquisition and CRM change helped the company succeed on its fourth migration attempt.

Beasley said many mergers take years to complete. Some companies need three to four years after the announcement to integrate point-of-sale (POS) systems or cybersecurity practices. This is because the long process of evaluating different licenses and software features is just beginning. Often, this information is confidential and known only to the highest-level IT leadership.

"The 'in-progress' phase of a merger means a lot of discovery," Beasley said. This phase requires answering key questions, such as the cost of keeping data centers and storage systems running.

"Companies will look at the IT budget from a third perspective to see how these technologies support services," Anderson said. Managers should ask how much it will cost the combined company to provide services like collaboration. Perhaps it makes more sense to move to a single vendor or establish unified internal instant messaging and video conferencing capabilities.

"That's when you see the essence emerge, and redundant parts can be replaced through economies of scale," Anderson said.