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Narayan Krishnaswamy on Challenges in Post-Merger Integration and How to Overcome Them: A Finance and IT Lens

Mergers are typically characterized by a symbiotic relationship, where none of the players are dominant in the newly-formed ‘partnership’ and are expected to be mutually supportive. Towards this, the seminal contribution of Haspeslagh & Jennison in 1991 warrants a mention. They structured a 2*2 matrix plotting two parameters and highlighting their significance as well - the need for strategic interdependence vis-à-vis autonomy. When both parameters are high, as in the case of mergers, they chose to call it Symbiosis. In the case of Acquisition, there’s always a dominant player.

A PwC study has identified certain criteria for successful deal-making: achieving overall synergy and completing the integration within an ambitious time frame, while managing culture & change, and ensuring strong governance during implementation. Of course, this is putting it rather simplistically. When you take into account that 60 – 70% of M&As don’t fetch the desired results then we need to dig deeper and find out why.

Here, I have restricted myself to Finance & IT – the lenses through which I want you to look at M&A

Finance

Two disparate finance departments will now be required to work as one. That’s why, post-merger, a substantial amount of work is required to get the accounts stabilized. One should be prepared for a significant amount of clean-up, especially, if things have not been too consistent (accounting standpoint and adherence to GAAP) for instance. It may also add to the complexities if, at the time of the merger there is a major change in IT adoption, For instance, if Cloud migration is on simultaneously. It’s good to have ambitious timelines but it has to be realistic too. Towards this, an early categorization is essential – what are the must-haves and good to have. Mergers usually take place because of a need for growth (inorganic) and the finance function is tasked with ensuring maximum business value through cost efficiencies, to create synergies

All processes aren’t absorbed/blended equally. The CFO of the new entity will need to decide the future-state operating model with due weightage given to the org structure, processes, including reporting structure. Equally, It’s crucial to get the governance piece right. One, it will enable quicker decision making, and two, a fear-mongering atmosphere can be avoided.

People do become unsure and insecure about their own roles at the time of change. It is very difficult to do away with this feeling and to be fair, people lose their jobs during mergers. It leads to a sense of despondency and lax behaviour. A simple example could be - an unbanked cheque lying stuffed in a drawer that someone forgot leading us to the question as to who will take ownership? It may be worthwhile for a Steering Committee to ensure compliance and that things are implemented, as intended. A collective buy-in can also be sought through this approach.

Post Merger Integration (PMI) is an opportunity to re-negotiate with common vendors and strike better deals. It should not end up in a situation where one entity simply dumps contracts on the other and expects better negotiations to happen right away. It requires due diligence and prioritizing suppliers. Mergers are aimed at optimizing operating leverage, financial leverage, and tax efficiencies. Therefore it’s imperative that these angles are adequately thought through and covered.

Technology

A successful merger is one when the merged entity is stronger and more valuable than the sum of its parts. A lot like teamwork. Of course, we can engage in a lively debate on what constitutes value and for who – the shareholders, employees or the customer? Foremost, IT & Finance have to work cohesively and in its purest form. This may sound idealistic but leaders need to realize that the dilution of this philosophy only makes things that much harder. Any gaps however inconsequential run a serious risk of amplification at a later point in time and completely going out of whack.

The integration will have to consider all the employees (as per the new order), and accordingly, IT processes have to be mapped with access controls re-defined. This calls for a detailed inventory assessment to determine the exact nature of IT assets. We have seen that in a networked world (at our fingertips), there’s a tendency to avoid physical inspection. “Send me pictures on WA”, is a common enough refrain that is best avoided. Site surveys are crucial for network assessment. Equally, it’s very important to extensively communicate with IT vendors to truly comprehend the realms of possibility including the stretch. How far can they go (both technically & commercially) to ensure a smooth transition? Datacentres and apps are to IT what accounting and compliance is to Finance.

Data security assessment is yet another crucial consideration. Companies must always be cognizant of the fact that whatever advanced tools and techniques are available are also available in the Dark Web. During the course of integration and thereafter, there may be a possibility of increased cyber-attacks. Specifically to address this issue one needs to assess vulnerability and engage with specialists.

Data migration tools need to address tasks such as application migration, maintenance & upgrade, replacement of assets (servers, etc.), data centres management and website consolidation. There has to be synergy in all of this and that’s why the IT team must have complete visibility of the new entity – besides technology, the org structure as well.

Mergers provide a whole new opportunity to have a re-look at technology. The IT leader needs to weigh various options available in the market. Are they being adequately leveraged – AI & Advanced Analytics, for instance? Secondly, the Microsofts and Amazons of the world have made huge investments in Cloud to address concerns on security. Increasingly, the CIOs have started to believe that a Cloud environment may actually be more secure than an on-premise environment. Thirdly, the CIO’s role has changed significantly. He/She is not only a techie any longer. He/She is an integral part of strategy-making and a facilitator. The CIO’s ability to work alongside other functional heads to ensure a smooth transition is the secret sauce.

The Final Word

The part which I have not dwelt upon extensively here is the one about culture. Arguably, it supersedes everything else. A project of this magnitude can only be successful through transparency and well-defined accountability. Granted. checks and balances can be put in place to safeguard compliance but ultimately, it’s about people – how committed and motivated they are at the time of massive change. It’s able leadership that recongnizes this attribute and ensures that the inevitable overhang of uncertainty is removed at the earliet.