It’s Not You, It’s Your Technology

Once an afterthought in M&A, a target's IT systems may be a potential deal-breaker.

Three years ago, when progress Energy put its Progress Rail Services subsidiary up for sale, a potential buyer demanded a concession on price once it discovered, among other things, that the cost of integrating both companies’ technology systems would be prohibitive.

Progress Energy balked at the reduced offer and the deal derailed, but the bidder had a point: at the time, Progress Rail’s IT systems were fragmented, with 60 percent of the company on one transactional system and the remainder using other systems. Stung by that experience, Progress Rail took a hard look at its technology assets. “To get a higher value for the company, we needed to quickly implement a new IT system for our financial consolidations, divisional scorecards, and forecasting and planning,” says David Klementz, senior vice president and CFO of the Albertville, Ala.-based locomotive parts, repair, and services company.

Within months, Progress Rail had consolidated its finance and reporting systems on software from SAS. In March, the company went public and was sold in an initial public bond offering to One Equity Partners LLC for $405 million, more than the original price of the failed acquisition.

Progress Rail learned what many other companies are finding — IT can be a deal-breaker. Once a barely observed line item in a merger valuation, IT is now a top-line consideration in almost every deal. If IT assets don’t line up well from an integration standpoint, deals may be lowered in value or scratched altogether. But valuing IT assets and liabilities is a daunting exercise. “This is not just a question of looking at the IT infrastructures of two companies and saying,’Can we make this work?’” says Gary Curtis, global managing partner of strategic IT effectiveness in the San Francisco office of consulting firm Accenture. “There is always a time frame in which companies can make it work. The question is whether the time, cost, and trouble involved are economically and strategically right for the transaction to take place.”

Cold Feet

When Curtis began dissecting IT systems 20 years ago, few people considered IT integral to a proposed merger or acquisition. “Technology was considered back-office stuff that could easily be merged,” he says. But often many years would go by with no rationalization of those separate infrastructures, and multiple operational problems would bog down those legacy systems. So much for synergy.

But a greater awareness of the critical role that IT plays in a company’s operations, sales, marketing, and customer service has made IT due diligence de rigueur. “There are very few industries in which IT isn’t integral to product delivery, factory operations, and most other facets of the business,” says Curtis. “Most products start and end with IT, and sometimes, as with financial services, the product essentially is IT.”

Not everyone has gotten that message. According to an Accenture survey of 155 U.S. IT and business executives, only 17 percent of business executives rank IT integration as the most critical factor in the success of a merger, compared with 49 percent of IT executives.

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