M&A as a route to new products and technology; implications for Technology Leaders
“We see such deals as the beginning of a new M&A era in building products that will be less about short-term synergies and more about acquirers securing the technology and tools that will define their future business.”
Whilst not a new way to grow, the changing emphasis flagged in the Bain & Co. report gives reason for Technology Leaders to pause and potentially reconsider their role in the overall M&A process.
Historically, much M&A has been driven by an ambition to grow via increased market share [of the same services] combined with synergy consolidation driving down unit costs for service [of larger volumes of the same services]. This holds true whether manufacturing physical products or providing business services. Outside pure technology plays, too often the acquisition of a technology, whether an off-the-shelf platform or a proprietary product, is a sideline to the main deal and its associated value. To many Technology Leaders’ frustration, the risks and costs of acquiring technology is underestimated by the deal-time that often limits the input from Tech Leadership, and this can have a negative impact on overall deal success, often only recognised several years after close. That, however, is changing.
The fact that Bain identifies this as a change in emphasis, is a sign that investors are now looking to alternative and potentially faster routes to growth. Whilst the need to drive cost efficiencies post-acquisition remains an important way to add value, it is simply not enough in today’s constrained market. Bain comments that “Cross-regional synergies are minimal and usually come from shared infrastructure, such as IT or operations, rather than commercial gains…” suggesting that investors are looking to grow businesses by using newly acquired services or saleable product lines as commercial add-ons. Acquiring technology now lies at the heart of this ‘add-on’ strategy.
Bain & Co infer that there is a growing focus for acquirers to look for technology products in target businesses that can then be expanded quickly across the acquirer’s existing client base, or existing services can be migrated on to the acquired technology platforms with legacy ‘parent’ systems decommissioned more efficiently and effectively than traditional synergy consolidations. The net is growth through new sales routes and/or faster and increased reductions in total cost of operation.
This proactive search for the value from technology, rather than as an after-thought is a change Technology Leaders should be excited about; and must prepare for.
Implications for Tech Leadership
First, the value of technology is finally being recognised! This invites Technology Leaders to take a greater role in the M&A process. Their voice is moving passed a comment on IT operating costs at worst, and security resilience risk at best. Their voice is becoming material to the deal value and shape, since short- and longer-term goals for the combined business are more tightly aligned to technology success.
To be effective in this changing deal environment, the Technology Leader has to be able to play in this new conversation and so we explore a number of implications the Technology Leader needs to be ready for.
1. What does this mean for the CIO/Tech Leader when undertaking M&A Due Diligence, deal negotiat, warranty definition and PMI?
The Technology Leader needs to be fully embedded in the deal team; and do this without putting ongoing operations and change at risk. M&A activities, especially when done at scale, can be all-consuming for weeks and sometimes months. This requires him/her to have an excellent team that can run projects and day-to-day service delivery.
Whilst ‘winning the lottery’ is often cited as a reason for developing a succession plan, what better justification than to allow the CIO to step up and out of the day-to-day and to focus on strategic growth of the business? How good is your succession plan? How well can your team actually do the job of running technology in your absence? How well are you, as CIO, able to monitor project delivery and operational performance without being on the ground?
With the CIO positioned within the M&A value creation team, and without being diverted back to the day-to-day, what skills does the CIO need? Well, certainly an eye on contract law, an appreciation of Warranties and insurance. The ability to define realistic Transition Service Agreements with the seller will be key. These are largely outside the usual supplier contracting experience many CIOs bring. It is only a step away; however the negotiation is not based on a recognised Tender process, List pricing and discounting. It requires a wider view, tied to the overall integration plan that will involve all functional heads, whether bringing in people, facilities, inventory and, of course, a swathe of customer-facing services. And, each of these is net new to the acquiring CIO!
Being prepared, which may include having a trusted legal and commercial partner, as well as being able to create the time becomes crucial for success.
2. What does this mean for the CIO/Tech Leader who unwittingly receives a new product to own for future revenue targeting?
With the new-found attention to the value of the technology that has been acquired, any interruption to its availability will have an overly large impact on company performance. That will naturally lead to increased focus by those Executives who sponsored the deal. Whilst the technology aspect of every post-merger integration (PMI) strategy and plan should be good, it becomes even more important and must be given sufficient priority.
The CIO needs to understand quickly what development and operational capabilities come with the acquisition; or the CIO needs to create the ability to learn fast how the new technologies should be maintained and then enhanced. This capability may come through an acquired team, or through a third party.
Where it is an acquired team, these need to be engaged in full, retained, and then their skills assessed for uniqueness or alignment with the valuable technology. They may bring additional skills that can be used across the larger organisation into which they are now part, or they become a niche specialist group with its own risks. There may be matching skills in the acquiring business, too, which would enable a transfer of skills and people, providing cover and reducing risk.
The use of a third party creates a different scenario. Building a true partnership will be key. Equally, will be understanding whether the delivery partner is using a pool of resources and skills, or like the in-house model, whether there is a ring-fenced team that delivers only the acquired services. In each case, the CIO can assess the risk and flexibility offered by the new partner and use that to shape a future delivery strategy.
Then there is the third scenario where all knowledge of the platform has been lost or is simply not coming with the acquisition. The only strategy then is to create a dedicated team, at a cost, to dig deep and wide to assure ongoing support and future development is possible. Understanding the situation is the key to developing options to reduce risk and to creating a resilient future strategy for the platform technology.
Some would see this as nothing but added risk. Others see an opportunity provided through unexpected access to people (capacity) and skills (capability) at a time when such skills remain in short supply. If a third party is part of the solution, you might just have met a new partner who can be deployed elsewhere in your operation. If nothing else, and since they are new to you, ask them what they have seen that could be done better. What constraints were they working under pre-acquisition that could be freed-up now? What are your competitors doing that you might not be aware of? What alternative delivery models are available that you had not had access to in the past? What additional value can they add [which may not simply be cost-cutting through volume discounting]?
3. What does this mean for the CIO/Tech Leader’s approach to risk?
Let us assume cautiously that the acquiring CIO has an established set of risk and governance controls as well as measures that communicate how well the team is working to assure resilience across the IT estate. It will be fit for the needs of today. Now there is an added technology platform, deemed of high value to the future of the combined organisation. It needs to be wrapped into this cover, however will it be sufficient?
What is the likelihood of the existing approach to risk and governance being suitable and in the immediate timeframe? How can this be determined especially with new staff joining within IT and outside, each working to their historic company’s ways of working? What additional risk does this add to the wider business? [Editor’s note: How many security incident root causes can be traced back to the inheritance of new technologies and people?]
OK, so the assessment has been run, the necessary changes made to documents, processes, procedures and measurement activities, and the enlarged team is on board. Training has been delivered with recertifications achieved. Now, is the environment ready for scale? The ambition for the deal-team was more than just market share and synergy savings; it was to drive growth through the new technology after all.
Whether measuring growth by revenue, profitability or product volumes, the likelihood is that the technology platforms will be driven to higher loads. Is there sufficient local capacity or access to cloud capacity? Will the security tooling cover a growing operational environment? Will patch management and both hard- and software maintenance activities be able to keep up? Can all third parties grow their services quickly enough? And all at a suitable controllable cost? These are all questions to consider within the area of risk that will tax a CIO with a newly acquired value-targetted technology.
If you look carefully, we have just covered people, process and technology. The three are so hard to separate; or put differently, if they are not treated together, value will only go one way.
Closing Remarks
“‘With great power comes great responsibility’ ”
As technology is seen for its real value during the M&A process, the role of the Technology leader will be seen too. The impact of the CIO’s voice is growing through this, for better and worse. The potential for the CIO’s view to lead to M&A transactions being halted before close, is growing. That has an impact on company growth rates that would have previously ridden roughshod over the CIO. Equally, the added precision the CIO can bring to cost estimation for acquiring technology will narrow M&A teams’ targets before setting expectations with shareholders and investors.
A CIO who builds a reputation for getting this right is going to flourish in the changing world described by Bain. A CIO who continues to show an inability to estimate or to deliver on Post Merger Integrations well, is going to be called to account sooner, with little room to cover shortfalls. Together, we are seeing the skills needed by the CIO/Technology Leader changing in this area. Some CIOs will be motivated by this, however not every CIO needs to be the M&A superhero and so it may be wise to use this emerging trend to adjust future career ambitions. As the role of CFO has developed from operational finance lead to someone focused on the relationship with the shareholder, perhaps the future of the CIO role will become the bridge between strategic use of technology and delivery of real cash value through technology, too? In parallel, the performance-driven Technology leader, recognised for delivering great quality services for the right cost will be just as important, just different.
At CXO Connect, we believe that returning to basics is as important now as ever. Keeping a sharp focus on people, process and technology may seem traditional in a world overtaken by agile processes, AI-driven coding, and agents, however using these basic elements to understand your readiness today; and from that to determine what needs to be done to move forward successfully is just as useful as it always has been.
Call to action
Do you know where you are positioned today?
Do you know where you need to be positioned in the future?
Do you know how to make that step?