Mergers & acquisitions have been big news in recent months, with some of the most notable transactions including, Sainsbury’s agreeing a £1.3 billion takeover of Argos owner Home Retail Group, the London Stock Exchange merging with Deutsche Börse for £21 billion and most recently Starwood Hotel & Resorts merger with Marriott International for £9 billion.
When two organisations come together there is a lot to be done to ensure the process is as smooth as possible. However, it doesn’t always go to plan. 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. Integrating the IT operations of two companies often proves to be much more complicated in practice than in theory.
Where does it all 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 no common technology estate there will be fewer common practices.
The technology estate of an organisation is made up of three layers, including: business processes and operations, application portfolio and infrastructure. The middle layer, the application portfolio, plays the most crucial role because it drives the other two layers. This is where the challenge lies, due to the lack of awareness as to code quality of applications. Faults in the application layer impact the quality of the technology at the merged organisation.
One of the main reasons for the failure of M&As is predominantly due to a lack of awareness and understanding of the application portfolio. Analysing the application portfolio allows for “bad patterns” in the software not necessarily bugs, but typically related to bugs, need to be highlighted and fixed before they cause or contribute to a glitch or outage in the merged system.
Analysing the application portfolio
Ideally the application portfolio should be reviewed ahead of the M&A process, to see which IT systems and technologies pose the greatest threats. Carrying out the analysis forms part of a pre-evaluation and post-merger situational analysis that must be done. Failing to prepare is preparing to fail.
One of the more important tasks in application portfolio analysis 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 and benchmarking them.
Carrying out detailed application portfolio analysis allows IT pros to identify the potential risk and cost saving opportunities across distributed application portfolios. By delivering data and insights on the health of the application portfolios, it provides IT leaders with the ability to make more informed business decisions, as to how much ‘technical debt’ each application is carrying. This gives clear guidance on which applications are worth investing in and which should be diverted.
Health factor analysis is carried out by searching for hundreds of known problematic code patterns and bad programming practices which increase risks and costs in the software. Performance, reliability and robustness metrics give the facts about the portfolio that may never have been seen before.
In addition, comparing applications to industry peers helps to determine whether business applications are riskier or more complex than the average. Benchmarking against dimensions such as technology application type or exposure, team skills and turnover ratio, gives an overall objective view of the portfolio and provides the confidence to bid (pre-merger) or integrate (post-merger) appropriately.
Lastly, M&As can happen quickly, so it is important to be able to pull the relevant data fast. The more information these companies have sooner, the better it is going to be in the long run, as they will be able to identify where the risks lie in their systems and applications. When there is no synergy between the business processes, application portfolio and hardware, organisations are at great risk of encountering faults and glitches to their systems. Application portfolio analysis is not just a technical exercise. When it comes to M&A it is just smart business practice.
This article was originally published in TheStack.com
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.