May 6, 2019

The Strategic Value of IT in M&A Part 1: Due Diligence on Information Assets

James Cotton

Topic:   Data

All businesses strive to grow, and external expansion can play a key role in an organisation’s growth strategy. Mergers and acquisitions can help businesses fill critical gaps in their asset base, service offerings, or client lists. They can be an efficient way to acquire talent and intellectual property, add a proven new business model or brand, or gain adjacent capabilities. There are often cost or revenue synergies to be had, whether through economies of scale, reducing competition, opening up new territories, accessing new markets, or expanding cross-sell opportunities.

However, these rewards are not without their challenges, such as potential culture clashes, brand dilution, marketplace confusion, and the distraction of managing resource-intensive restructuring activities while trying to maintain ‘business as usual’. In fact, more than half of mergers and acquisitions fail to achieve their predicted value. But the main reason might surprise you: these failures are largely due to the challenges around IT integration.

Due diligence is the single most important phase of any M&A, as it involves truly understanding all facets of the target company, including an overview of corporate software, the current IT landscape, and the most valuable asset of all: data.

IT Can Make or Break M&A

Nowadays, every business is a technology business, as IT has gone from being a back-office enabler to a source of revenue generation in itself. A successful M&A initiative calls for effective integration of infrastructure, applications, and data, yet IT often takes a back seat to legal and financial scrutiny, with the CIO relegated to a somewhat reactive, tactical role.

There are three major phases in a typical M&A where the IT function should have a more prominent, strategic influence: due diligence, integration, and optimisation and consolidation. Due diligence is the single most important phase of any M&A, as it involves truly understanding all facets of the target company, including an overview of corporate software, the current IT landscape, and the most valuable asset of all: data.

Doing Your Due Diligence

The primary goals of due diligence are to correctly assess the strategic value on offer, understand what data poses regulatory or privacy risks to the new organisation, and what cost savings can be achieved by combining enterprise systems. That demands considerable work to locate, profile, and interpret the data, and determine how trustworthy, accessible, and usable it is. After all, bad data can’t be put to good use, and there will be a cost attached to future remediation and harmonisation efforts.

Without robust data management practices in place, many businesses still struggle to come up with an accurate count of their own customers. In practice, there will typically be overlaps between the acquirer’s and the target’s data. As a simplistic illustration, if company A has 100 customer records and company B has 100 customer records, the combination of the two databases may not yield 200 unique customers, so only the delta will add incremental value. The reality is more complex. For example, a customer’s name and address has limited worth if there are no attributes associated with it, such as engagement or transaction history, which can be used for behavioural segmentation to inform personalisation or prediction.

The Thorny Issue of Consent

With consent becoming a hot topic since the introduction of GDPR, purchasers must seek a much greater level of comfort around legacy compliance, particularly if data processing is integral to the value of the target. A key pillar of GDPR is purpose limitation, so if an organisation is effectively buying data collected by the target for one purpose, consent will not be automatically conferred to the new entity for data to be used for another purpose after the deal is done.

Calculating the Value of Combined Data

Quantifying combined data opportunities is rarely a straightforward exercise, but it’s crucial to mitigating risk, managing expectations, and defining the synergies that will deliver the intended business outcomes.

We witnessed this firsthand while working with a marketing firm that develops elaborate profiling, as we supported them through the due diligence phase of an acquisition. We initially involved subject matter experts within the acquiring company to define the hallmarks of a profile’s value. However, with the speed at which restructuring activity is expected to unfold, it’s simply not feasible to plough through millions of records by hand. So we then applied advanced data quality algorithms and intelligent automation to help the business establish the true value of its target’s information assets, as well as related opportunities, risks, and liabilities.

This exercise wasn’t simply a case of assigning a dollar value to the data: we were able to identify overlaps in the companies’ respective data sets and classify the value of the target company’s intellectual property based on expected business benefits. Armed with this insight, the marketing firm was able to successfully negotiate the acquisition at a more realistic price, with the confidence the deal would reach its anticipated synergy targets.

IT can make or break a merger or acquisition, so in the next blog in this three-part series, I’ll be looking at the next key phase: the technology challenges of “integration with the lights on.”