Merger & Acquisition (M&A) activity has been relatively stagnant in 2016, with Brexit, the US election and economic uncertainty holding down regular activity. Still, the market has seen some mega deals this year, such as the Bayer-Monsanto merger and Microsoft-LinkedIn acquisition.
Analysts predict a resurgence of M&A activity in 2017, with Ernst & Young reporting that 75% of executive are planning an M&A transaction within the next 12 months. According to EY, this is the highest percentage recorded in the 15 times the survey has been conducted.
However, it’s not all roses and sunshine. A few 2016 deals have drawn plenty of attention to the implications of failing IT systems when companies merged.
HiddenRisks in M&A
According to a recent Harvard Business Review report, the failure rate for M&As is between 70 and 90 percent. This may seem a remarkably high figure, but when you consider the range of business and cultural factors that occur during an M&A, it’s hardly surprising.
When it comes to technology, integrating the IT operations of two companies often proves to be much more complicated in practice than in theory. Before any deal takes place, the buying company should always carry out due diligence. Given the extremities that can take place, there is no way one can be confident enough in IT portfolios before the acquisition.
Pre-acquisition IT application portfolio analysis is supposed to give the buyer the required data to make a more informed decision and judge where potential risks could emerge. But does it really happen?
Where M&As Go Wrong
M&As are typically driven by synergies or competitive advantages through cost-savings, with technology playing a prominent role in the process. If there is evaporation of a synergy, the results could lead to the combined company being unable to reach the anticipated targets in terms of cost-savings and economies of scale.
The technology estate of an organization is made up of three layers:
The middle layer plays the most crucial role because it drives the other two layers. A functional analysis of the two organizations’ application portfolios will provide a theoretical area for synergies – that is, applications with similar functionalities on both sides.
This is where the challenge lies. Which of the applications are worth keeping? An analysis of the code quality of common applications is then required to achieve significant synergies. Applications with high technical debt (future high maintenance costs) or serious underlying risk should be ruled out in the IT rationalization process.
These include applications with the potential to generate severe resiliency, data integrity or security issues from an engineering perspective. It is important pre-M&A due diligence or Post Merger integration activities take these findings into consideration. One of the main reasons M&As teams don’t do this already is because of technology blindness.
They rarely have that visibility into the structural issues of applications. When companies conduct an architectural analysis of the application portfolio layers, only then will they be able to see “bad patterns” in software that can lead to damaging service outages or increased cyber risk.
It is vital that potential failure points are identified. Businesses should also be able to identify assets that impede business agility, as well as finding ‘Super Synergies’. These are synergies that may make the M&A deal more valuable in the long run.
Application Portfolio Analysis
Carrying out an effective application risk management plan allows organizations to address the issue of software quality across every application in the portfolio acquired. One of the most important tasks here is raising the issue of software quality across applications.
Without this analysis, there is no way of seeing clearly which applications pose the greatest risk to interrupting business operations or damaging the customer experience. A detailed application portfolio analysis can also enable organizations to identify the potential risk and cost saving opportunities across distributed application portfolios.
By delivering comprehensive data and insights on the health of the applications, it provides IT leaders with objectivity and clarity to make more informed business decisions, as to how much technical debt each application is carrying. It is imperative to measure technical debt before the close of M&A deal.
Technical debt represents the effort required to fix structural quality issues within live applications. Left unfixed, technical debt can put the business at serious risk, likely leading to severe business disruption. Measuring technical debt before the close of a deal gives leaders clear guidance on which applications are worth investing in and which should be diverted.
Being able to pull the relevant data fast is essential for M&A transactions. The more information available sooner, even if it’s after the merger itself, the quicker faults and risks in systems and applications can be identified. This all plays an important part in enabling financial organizations, such as banks, to operate securely and reliably throughout and after the transaction.
When IT synergy fails, usually because of limited technical due diligence, organizations have a greater risk of encountering faults to their systems. They must be aware of the strategic value IT plays in the M&A process, particularly with acquisitions continuing to play a big part in business growth.
Many M&As fail to live up to the hype due to stumbling blocks when it comes to technology integration. Application portfolio analysis and enhanced software analysis are not just technical exercises; they represent smart business practices, for both the buying and selling firm.
Erik Oltmans, an Associate Partner from EY, Netherlands, spoke at the Software Intelligence Forum on how the consulting behemoth uses Software Intelligence in its Transaction Advisory services.
Erik describes the changing landscape of M & A. Besides the financial and commercial aspects, PE firms now equally value technical assessments, especially for targets with significant software assets. He goes on to detail how CAST Highlight makes these assessments possible with limited access to the targetâ€™s systems, customized quality metrics, and liability implications of open source components - all three that are critical for an M&A due diligence.