Managing acquisition - how to get it right
- 17 February, 2011 12:15
Acquisitions are commonplace in the IT industry. ARN investigates what makes the difference between a successful acquisition or merger, and where things can (and do) go wrong.
Kevin McCoy understands acquisitions. As the founder and principal of Remedy M&A he and his company have built up an impressive resume around consultancy and project management – including the giant 2008 $18.6 billion merger of Westpac and St George banks, right through to the relatively modest kinds of mergers we read about on a regular basis – such as the $8 million project spend to bring Australian Unity and Grand United Corporate together in 2007.
A merger or acquisition is no small project, both in terms of finance and time. M&A consists of two phases, the behind-closed-doors pre-deal phase and the subsequent integration phase, and in that time (for a larger merger or acquisition, that can be years), there’s a great deal of risk that needs to be managed.
It’s the kind of risk that can be handled internally by an organisation. Indeed, the reason Remedy tends to work on the larger deals is one more of efficiency – where a smaller company’s CEO might have more time to devote to an M&A project, a large company derives move benefit from outsourcing.
But large or small, the risk remains the same.
“Generally, there’ll be around 10 generic-type risks that you’ll have to deal with, as well as one or two unique ones to the situation,” McCoy said.
“By generic risks I mean things such as staff morale are always a risk. Doing multiple projects at the same time is a risk. Customer retention is always a risk. And you work through those and make sure each has mitigants for them.”
For example, when two organisations of greatly different sizes merge, or one acquires the other, the staff will immediately look at the structure of senior management and the board, and if one side feels underrepresented, the risk is it can wreak havoc on staff morale.
Given there can only be one staff member in each senior role, in some cases, a significant effort needs to be made by the larger organisation to make sure the balance is kept.
Avnet, when it recently acquired itX, clearly took this into account. Despite being the smaller organisation, itX’s Laurie Sellers was appointed to head the local team. Greg Newham, also from itX, was given a senior management role, as well.
The result of this management structure? So far both Avnet and itX seem very pleased with the process.
“The research I’ve done looking at mergers that haven’t done that well, that’s where it’s all unravelled,” McCoy said.
When done right…
There are plenty of successful examples of successful acquisitions in the IT industry. When APC was acquired by Schneider Electric, it was not an acquisition for synergistic reasons, but rather one to give the electricity industry specialist vendor a kick-start into the IT industry.
As such, there were no redundancies to be made, and indeed, being acquired by a company some 10 times the size of APC, the staff discovered a range of new opportunities for career growth.
“One Australian lady has gone on to a very senior role in strategic planning,” APC Pacific vice-president, Gordon Makryllos, said. “Another person has gone off to manage another country in Asia. So yes it does increase your career opportunities. Schneider is something like 3500 people, APC is 200 people.”
The benefits of the merge still needed to be articulated, however, and an important part of the process was the quality of the information package sent by Schneider to Makryllos and the subsequent road trip he took to all of APC’s local offices.
“I went around the country and did one-on-one presentations with the teams, and took a lot of questions and answers,” Makryllos said.
“I also did a lot of employee roundtables so people understood who Schneider Electric is and why – the really important thing is why – this was a strategic fit, and what it meant to the staff.”
Schneider’s acquisition of APC was relatively rare, in that the teams and systems were intentionally kept separate.
Brennan IT experienced some of the more traditional acquisition pains when it took over the assets, and employed staff from the struggling S Central last year.
Staff at S Central were unpaid, morale was low, and an acquisition by Brennan IT was throwing more uncertainty in the mix. However, Brennan IT managing director, David Stevens, said that he was happy with how the integration of teams went.
“People need to be communicated to really clearly and regularly and honesty, and if there’s going to be layoffs – which we don’t usually do – you need to be honest with them and tell them how many and when. If I am to make lay-offs, I’d want to do all of them at once and get the pain over quick.”
Stevens’ approach to staff communications is grass roots: have an afternoon or evening drink to get to know them better, be candid and make sure you’re around and available to answer questions.
In the end, Brennan became something of a haven for those S Central staff – to the benefit of Brennan which acquired skilled staff at a difficult time for recruitment, and S Central staff, who suddenly found themselves paid again. “The employees were not being well looked after at all,” Stevens said.
“That gave us a great opportunity to get them all together, be open and honest with them, and start paying them. Some people have made the choice to move on, but the majority of people have decided that this is what they wanted to do and stay put, and were grateful for being thrown a lifeline.”
McCoy agrees that communication is vital for a successful acquisition. Provided the rationale is made clear from the outset, and provided managers are open, then anything – including redundancies – can be handled with good grace by the staff.
“Humans are terrible at uncertainty, and if you’re not actually clear in what you say, the grapevine – an unbelievable source of information that swirls around organisations, will be countering things you’re trying to do.”
Effective communication comes from the mundane – making managers available for Q&A, organising staff meetings, and so forth, through to the little psychological truths that allow staff to better manage bad news.
You don’t want to be announcing redundancies on a Friday, for instance, because that will allow the negative emotions to fester over a weekend. Conventional wisdom has Monday as the day to announce redundancies, to allow the organisation to deal with the news internally and get back on track.
“If you don’t plan things properly, the first 30 days cause some real morale issues. The mitigant to that is you should prepare before you make the announcement, and have really clear communications to people to say exactly what will happen to their role, and what they will be going, so they are a bit more comfortable with it,” McCoy said.
When integration fails…
The IT industry has had its fair share of failed acquisitions, too. Commander’s hostile takeover of Volante is perhaps the most famous as it directly led to the eventual collapse of the entire Commander business.
“I don’t think that integration was managed as well as it could have been,” Commander’s former group manager of enterprise, Steve Evans, told ARN in a 2008 interview.
“We adopted their processes, systems and structure… there were a lot of systems issues in the beginning of 2007, which were well reported.”
The cost of a failed migration to Volante’s systems was irrecoverable business damage as orders were unable to be processed and the 2007 financial report hurt confidence in the company badly.
Other resellers picked up business Commander lost, and talented staff jumped a ship that was just starting to sink.
It’s not that an integration program is doomed to fail – these kinds of systems integration can be done, but it requires a great deal of planning, and contingency plans B, C and D at the ready.
“A really good example is a few years ago we were moving data from one system to another,” McCoy said. “We’d planned this for 7-8 weeks, doing dry runs each weekend and working out how long it would take in terms of time so that on Monday 8am it’s all ready to start.
“Then we had a dress run the weekend before. The only window we had was a public holiday because we needed three days.
“When we started, the times were out. I got a call at two in the morning and went to the test centre. The first phase was meant to take an hour, and after an hour and 10 minutes it was halfway through. The reason was when we did those dry runs, the IT team had switched transaction logging off – it’s much quicker to do things because it’s less of a drain on the processor.”
The problem was resolved in no small part because the teams were ready for those 2am calls to jump in a taxi and come to the test centre to solve the problem.
A good 90 per cent of McCoy’s time is spent on the risks, mitigants and contingencies for that 10 per cent of the project that can go wrong. It’s a reasonable trade-off, considering it’s that 10 per cent that can sink an entire business.