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Leadership / Strategy

Shock! M&As With Technical Due Diligence Are Better

Mergers and acquisitions (M&As) are a significant undertaking for businesses. Companies spend $2trillion every year on M&As, yet multiple studies show the failure rate falls somewhere between 70% to 90%, writes Lev Lesokhin, EVP of strategy and analytics at CAST.

Lev Lesokhin
Lev Lesokhin

M&As fail for many reasons. Cultural integration issues, as well as leadership and management change all present significant challenges. However, Accenture’s Merger Integration Study found the main reason for failures is IT integration, contributing to 40% of unsuccessful mergers. So, after driving so much resource into mergers, how can organizations achieve successful M&As from a technology point of view?

Software Intelligence, a deep analysis of the software architecture, can provide IT leaders with key technology insights prior to a merger, an important step to a prosperous M&A. Accenture’s research found five of the top six factors of a successful M&A are directly related to IT activities, including IT systems compatibility. A prime example of when IT integration was not considered pre-close is when Banco Sabadell bought TSB from Lloyds in 2015.

Banco Sabadell intended to move all of TSB’s customers, and their 1.3 billion records, to its Proteo core banking system. The migration took three years to complete, and when it finally went live, online banking users reported major issues including being able to see other customers’ accounts. The failed IT integration resulted in an extra £176.4 million in costs, which later rose to £330m by the end of 2018.

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A lack of understanding and intelligence on what technology will be acquired and adopted during an M&A and how it will be integrated, leads to expensive and potentially devastating problems for all parties involved – especially when IT systems are thrown together. IT leaders need a clear insight into both parties’ technology before the merger takes place, Software Intelligence can provide this.

Intelligent M&A Due Diligence

Software Intelligence can help organizations with M&A due diligence by scanning IT systems and providing insight into previously undetected risks within the software, including technical debt, vulnerabilities, IP/licensing risks and poorly documented code. These could cause outages, security breaches & compliance problems during integration or later down the line.

In 2012, Santander had to postpone its acquisition of Williams & Glyn’s branch network as its existing technology was too complex to understand. M&A due diligence isn’t limited to detecting software failures, integration risk and security bugs, it can also drill down into key focus areas, including data and analytics capabilities, compliance and technology operations, helping IT leaders understand the software acquired.

Although prior to a merger it may be the best technology for the job, if you can’t understand it well enough to use it, it’s useless. A comprehensive review of both potential software issues, as well as compliance and operations, is crucial and has broader implications for any business transaction.

Unpicking Hidden Costs

IT failures during M&As can also bring unplanned and budget-breaking costs. Costs including fixing post-integration IT issues, application downtime and/or the adoption of unpaid or deferred software licenses – especially Open Source Software (OSS) licenses – can quickly grow past the initial merger price.

Inherited OSS licenses can bring hidden legal and compliance risks, if IT leaders are unaware of these risks it can lead to organisations having to spend time reengineering the OSS software or even remove it altogether. It is most likely these costs will not have been considered when discussing the initial M&A.

Earlier this year, Marriott faced a $123 million fine following a data breach caused by a compromised database acquired during the merger with Starwood Hotels. Although the database had been infected by bad actors two years prior to the merger, the fault laid with Marriott. Had those responsible for technology audits applied Software Intelligence to analyze the quality and risks of IT systems being acquired, they may have been made aware of this breach before the final agreement was signed.

Business leaders need to use Software Intelligence to understand where these IT issues may arise, giving them the opportunity to negotiate or plan for any additional budget.

Identify New Opportunities

By incorporating Software Intelligence technology to gain insights into complex software structure in the M&A process, buyers can not only find and prioritise business risks but also identify new opportunities. Due diligence provides ways to keep up or even stay ahead of the competition, IT lea ders need to use Software Intelligence to identify potential operational improvements and areas to save costs.

However, a word of warning: Banco Sabadell predicted the integration with TSB would eventually save £160 million a year, no one can predict all the issues they will face based on current and future technology needs. Wouldn’t you rather know as much as you can beforehand using Software Intelligence?

M&As need careful planning and as much intel as possible, especially when it comes to IT integration. IT leaders need to make sure they don’t rush blindly into the unknown without the knowledge needed. Knowing the bad news first can prevent unwanted surprises down the line. Building Software Intelligence into M&A due diligence can help drive the overall journey, enabling better business planning, decision making and bring new opportunities to the forefront.

See Also: UK Ransomware Attacks Soar 195% – Malware Cocktails Proliferate


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CBR Staff Writer

CBR Online legacy content.