The importance of architecture in mergers and acquisitions
Despite the challenges posed by the COVID-19 pandemic, the number of mergers and acquisitions in the Netherlands increased for the eighth consecutive year, making 2021 a record year. However, in the first half of 2022, the mergers and acquisitions market came to a standstill due to significant economic uncertainties[1]. This presents an opportunity to take stock of the situation.
Not All Sunshine and Roses
For many organizations, mergers (and to a lesser extent, acquisitions) are no longer isolated or exceptional events. In many cases, involvement in mergers and acquisitions stems from modern business strategies aimed at achieving growth or cost savings. While this may sound appealing, the underexplored flip side is that mergers and acquisitions are considered among the most challenging undertakings for organizations and their IT.
Research indicates that the overwhelming majority of mergers and acquisitions, estimated to be between 70% and 90% [2] ,[3], end up being failures. These high failure rates indicate that approximately 4 out of 5 mergers or acquisitions do not meet the expectations set before the process. The three most common mistakes made during these ventures are: (1) overestimating the value of the merger or acquisition, (2) overestimating the synergies to be achieved, and (3) underestimating the integration costs.
No Merger or Acquisition Without IT Due Diligence and Prop er Architecture
Given the heavy reliance on IT by many companies today, conducting a thorough IT due diligence is crucial during mergers and acquisitions. IT costs, IT organization, and the ICT landscape are aspects that require close scrutiny to uncover any potential hidden issues. Architecture serves as an invaluable tool to contribute to the overall success of these endeavors. A well-established architecture can provide an accurate inventory of the current system landscape and the possibilities (or limitations) of IT integration with the acquiring organization. Strangely enough, the architecture team is often not involved or included too late in the merger or acquisition process at many organizations, despite various studies showing that mergers and acquisitions are more successful when there is a high level of architectural involvement and maturity [3], [4]. Therefore, architecture plays a critical role in the success of such ventures.
To Integrate or Not to Integrate?
From an architectural perspective, the most important question during merger and acquisition processes is whether the acquired organization will be integrated or not. In the case of mergers, integration is a logical step. However, in acquisitions, integration is not always necessary. If there is no integration, the relationship between the acquiring and acquired parties may be more of an "arm's length" arrangement. In such cases, setting clear long-term goals and a vision is essential. Nonetheless, in many mergers and acquisitions, integration is a common course of action. Reasons for integrating an organization often include cost reduction, achieving synergies, or gaining more control. While integration may be a logical choice in some instances, there are scenarios where it may not be the best approach or even desirable. Making informed decisions in these situations can be challenging, as organizations may not always have access to all the desired information, and sometimes, critical issues emerge after the deal is closed and during due diligence.
Conclusion
In summary, each merger or acquisition is unique and comes with its own set of challenges. These are inherently complex undertakings, which is why the estimated failure rate ranges from 70% to 90%. Overestimation and underestimation are significant contributing factors. Architecture can serve as a powerful tool to contribute to the success of these endeavors.
References:
Daan, an enterprise architecture graduate specializing in mergers and acquisitions (M&A) and IT due diligence, works on various information-related issues for his clients as an architect. If your organization is involved in a (potential) merger or acquisition and you wish to discuss it further, we are more than willing to have a conversation without any obligations. Please reach out to daan.vanhorssen@vka.nl or wilbert.enserink@vka.nl.
[1] fd.nl/bedrijfsleven (only available in dutch)
[3] G. Toppenberg, S. Henningsson, and G. Shanks. How cisco systems used enterprise architecture capability to sustain acquisition-based growth. Copenhagen Business School, 14:151–168, 01 2015.
[4] J. McKendrick. Enterprise architects, the new heroes of mergers and acquisitions, 2021.
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