Optimize: Real Deals--And Challenges
As we entered the new year, a new round of merger-and-acquisition activity heated up across a wide spectrum of industries. While many discussions center on the financial aspects of these deals, Optimize invited four M&A veterans to discuss what goes on behind the scenes when IT operations are upended and then reassembled to support a new corporation.
Senior managing editor Paula Klein and editor-in-chief Brian Gillooly held a roundtable discussion with: Sam Rovit, a Bain & Co. partner and leader of the Global M&A practice—Rovit and David Harding recently co-authored the book Mastering the Merger: Four Critical Decisions That Make or Break the Deal (Harvard Business School Press, November 2004); James Kinney, president of Mariner Consulting Inc. and former senior VP and CIO of Kraft Foods; William "Buddy" Gillespie, VP and CIO at Wellspan Health in Pennsylvania; and Robert Best, CIO and executive VP of client services, UnumProvident.
OPTIMIZE: Can you tell us why M&A is heating up now and why business probably should be very nervous about this?
SAM ROVIT: The catalyst for writing the book was the view that most deals fail. That's the conventional wisdom, and yet executives continue to do deals. Deal activity—at least the very big deals—is just starting to come back now. Deal count was up about 10% in 2004.
It's the big deals that get the headlines, and in fact, when we looked at deals over $1 billion in a five- or six-year period, we found that only about 28% actually created significant shareholder value, which we defined as having a share price go up 10% or more within two years of doing the transaction. The fact is, 50% destroyed significant shareholder value. We wanted to understand why this was happening and what can be done to avoid it.
There are three dangers that I'd highlight. One is that the entire team is distracted by the deal; all business functions are focusing only on the integration. Headhunters are going after your people and competitors are going after your customers. You may get the synergies, but you lose the base business. The second thing is that you lose key talent, and this can be in critical areas—for example, legacy systems. And, third, an overly complex process is put in place where you've got hundreds of people running around, and there's no clear prioritization on the few key value drivers.
Those are some of the "watch outs" that I'd flag as we see deal activity starting to ramp up again.
OPTIMIZE: Has this been your experience?
JIM KINNEY: Prior to my retirement from Kraft Foods in 2000, I was CIO during the period when we were attempting to integrate Kraft, General Foods, and Oscar Mayer. I was also there during the early stages of due diligence for the Nabisco acquisition by Kraft, which probably is still under way. The acquirer was actually Philip Morris Co., which had previously purchased General Foods Oscar Mayer. It acted as a holding company, so when it purchased Kraft, it, in effect, declared that the two companies would merge.
There were huge pressures to achieve results that had been suggested by Philip Morris management to Wall Street with regard to synergistic saving. As time went on, there was growing pressure from Kraft's customers, who were becoming increasingly distressed at having to deal with each of the companies as entities when they preferred to deal with a single enterprise. There were about six different sales forces calling on the same customer, and the synergistic savings were taking forever. The thought was that somehow IT would lead the savings by designing and putting in place common business practices and processes that would enable the company to act as an integrated company.
OPTIMIZE: Did that happen?
KINNEY: It took five years. And not until employees returned to work one day to find out that the individual operating-unit headquarters had been disestablished overnight and there was now one Kraft did the actual integration begin. Until that time, IT was stuck trying to create some 14 common systems throughout the enterprise. IT was having incredible difficulty because, in each case, the sponsor of the project was a committee, and any one of the operating units could veto the business process that was being implemented. The only successful part at that point was a common human-resource payroll system and a consolidated IT infrastructure.
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