October 1 2002 by Erik Sherman
UnumProvident, a Chattanooga, Tenn.-based income replacement insurance firm formed by the merger of three insurance companies, was counting on technology to make its business model work. The plan was to have advanced computer and telecommunication systems enable product line and industry specialty groups to operate nationally, thereby eliminating duplicate personnel and offices.
Unfortunately, technology proved to be problem as well as promise. “On Day 1 of a merger, you want your people to communicate and collaborate and get to know each other,” says Chairman, President and CEO J. Harold Chandler. Reconciling email, internal communications and phone systems didn’t happen quickly enough. “It created, at a minimum, frustration, but more specifically lost productivity, and it sometimes slowed response to customers who expected enhanced services” following the merger, he says.
Like many companies, UnumProvident found that failure to line up disparate technology efforts can undermine a merger. Traditionally, CEOs have shown lukewarm interest in technology’s role in mergers and acquisitions. When a deal is valued in billions of dollars, IT expenses, even at tens of millions, become a drop in the bucket.
But the costs can add up, and integration mismanagement can have drastically negative consequences. Problems with automated systems, for example, require human intervention, taking attention away from normal business activities. “It’s the domino effect,” says John Bogush, business integration partner of New York accounting firm KPMG LLP. “You add up the thousand someones and today’s issues are being ignored because of yesterday’s mistakes. It’s something that you have to be very cognizant of because of the impact of your ability to operate in a direct fashion on Day 1.”
The potential complications quickly compound. “It’s very difficult to realize just what’s in the box when you buy a company,” says Jean Francois Phelizon, CEO of Valley Forge, Pa.-based manufacturing firm Saint-Gobain, which has averaged four acquisitions per year over the past decade. Sometimes existing technology needs upgrading or even discarding, in which case it’s a liability. Other times, a newly purchased company is an asset, offering something previously unavailable. For every acquisition it undertakes, Saint-Gobain performs an extensive survey of the target company’s technology holdings.
Fiserv, a Brookfield, Wis.-based provider of computer services to banks, carefully approaches acquisitions with an eye on technology issues. “Over the years we’ve looked at more than 2,000 companies to buy, but we’ve bought only 108,” says President and CEO Les Muma. “As every company gets more automated, IT plays a more pivotal part. You either have to replace it or you have to make sure the two systems can integrate together.”
Lack of curiosity can kill the merger
But CEOs like Phelizon and Muma may be in the minority. Based on the deals he’s seen, James Watson, chairman and CEO of industry analyst and consulting firm Doculabs in Chicago, estimates that companies perform due diligence only 20 percent of the time. And the lack of proper investigation isn’t merely the province of small, unsophisticated companies; large corporations can have a harder time understanding technology’s impact because of business complexity. “During about 80 percent of the M&As, executives are surprised by something they thought they had looked into and/or knew the answers to,” says Watson.
The result is expensive. Depending on the industry, companies spend anywhere from 2 to 15 percent of their revenue on computer systems, according to Watson. “It’s too big a cost to say it’s not going to affect the deal,” he argues. “You discount for management and variability in revenue and income, but you don’t say, €˜These guys overbought for five years and we’re going to have to flush half of it down the toilet.’”
Another common mistake is to underestimate the capabilities and needs of the purchased company, particularly the smaller ones. “I’ve seen that cause problems in big acquisitions time after time,” says Muma. “They get in there and find that the little company is pretty damn sophisticated.” As a result, the acquired company takes a step back in capabilities, losing customer base and revenue and damaging the value that originally made the deal attractive.
Even after a realistic assessment of the acquired company’s technological capabilities, CEOs can misstep by pushing too quickly for the consummation of a deal, eager to begin reaping the expected financial rewards. If integration of the IT systems goes awry, the combined company won’t achieve cost-effective operations. Technology should be an integral and highly detailed part of the acquisition plan. “You need to know what the integration plan is, and your model for running the business has to anticipate these things,” says Jim Orr, chairman, president and CEO of $2.3 billion Convergys, a customer contact and billing technology and outsourcing firm in Cincinnati. “You have to have a realistic view of, €˜What is the end game, what will my systems look like, and when will I get there?’ In many instances, people have unrealistic expectations.” Convergys created a road map for its technology, which helps referee technical conflicts in acquisitions. “Do I have to run dual platforms forever?” asks Orr. “If I do, one of the benefits of synergy is taken away. On the other hand, if the technology you’re acquiring doesn’t overlap, it may be totally additive.”
Technology also complicates issues of corporate culture. Employees may suddenly find it difficult to perform even basic tasks that are fundamental to their jobs. “We’ve often seen simple things that are incompatible in technology-how do you file a time report for your work, how do you get paid, how do benefits work-impact the culture and morale of people,” Orr notes.
Technology can actually create its own set of cultural issues in the software development process. “The two organizations, in the simplest environment, may use identical tools and have different development approaches,” says Bob Davis, vice chairman of Terra Lycos and partner at Highland Capital Partners in Lexington, Mass. Or one group of employees may need extensive training on unfamiliar tools. Davis addressed the problems by having the technical groups devise their own solutions. “Ultimately, it’s a sense of ownership in what you’re trying to get done and the groups’ playing a significant role in its own integration process,” he says. Davis achieved employee buy-in by having the technology groups devise their own integration solutions. “If they’re making the decision, they own it,” he says.
To manage all the technology issues during its mergers, UnumProvident created a three-tier solution: a steering committee with the most senior tech people making strategic decisions; business transition committees managing customer needs; and work groups focusing on specific technology and infrastructure issues. Decisions may have taken time and attention, but the investment was necessary. “If they go wrong, it can be quite costly,” says Chandler. Call it merger insurance.