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CHAPTER 2 LITERATURE REVIEW
2.1 Post-merger IT Integration
The process of integrating IT involves complex issues such as deciding whether to merge the IT or not or to merge parts of it. IT is perceived here as a broad term that incorporates (1) information system (databases and processing functionalities), (2) IT infrastructure (e.g., data networks, operating systems, hardware, and IT skills), and (3) IT policies (procedures for users and IT managers and IT management, IT coordination, education, and support) (Bharadwaj, 2000; Broadbent & Weill, 1997).
IS integration means changes in IS strategy, IS structure, and the systems supporting the combined IS and business units that allow them to function as a whole (Mehta & Hirschheim, 2007). There are three IT integration objectives, which we understand as three different IT integration-ambition levels:
(1) complete integration, (2) partial integration, and (3) marginal integration (co-existence). Certain IT integration objectives will be most appropriate for specific post-merger organizational structures.
In the meantime, IT integration objectives will correspond with merger objectives (Wijnhoven et al., 2006). Finally, there are four methods to realize complete IT integration: (1) abolishing all IT of both merger partners and replacing it with completely new IT (renewal), (2) closing down all of the IT of one of the partners and using the IT of the other as the IT for both firms (takeover), (3) combining the best parts of both ITs as the new standard for the new organization (standardization), and (4) co-existence, which keeps everything as it was, though introducing some (periodic) synchronization of the redundant systems of both merger partners (Harrell & Higgins, 2002; Johnston & Yetton, 1996). The logic behind investing in post-merger IS integration is, according to these types of IT investments, as follows: investment in transactional IT aimed at cutting costs and investment in strategic IT to gain a competitive advantage. IS integration, particularly in the areas of inventory control, order processing, and other data processing including financial systems, is usually pursued to increase synergy and thus reduce both fixed and variable costs of the merger firm (Weber & Pliskin, 1996).
As with all business initiatives, it is essential that a company identify its M&A strategy first and then align it’s IS integration strategy to support its M&A activities (Harrell & Higgins, 2002). IT governance is concerned with the strategic alignment of IT to the business. An effective exchange of ideas and a shared understanding of business and IT objectives allow the organizational strategies to
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adapt harmoniously (A. M. Johnson & Lederer, 2005 ; Luftman, Papp, & Brier, 1999). Accenture has long maintained that this alignment of the business and information technology functions within a company is critical to the effectiveness of any strategic initiative. Given the fact that IT enables 60%
of post-merger transactions, this alignment is particularly crucial in the realm of M&A (Curtis &
Chanmugam, 2005). However, IT governance requires significant input from stakeholders on both strategic business needs and technological capabilities so that organizations can build a clear and comprehensive picture of the connection between business and IT (Zee, 2002) and devise IT solutions that transcend functional boundaries (Peterson, O'Callaghan, & Ribbers, 2000).
The high failure rates have a variety of causes as M&A projects are considered highly complex in terms of the number of deliverables and the amount of communication among a wide range of stakeholders (Meckl, 2004; Shrivastava, 1986). Explicit analysis of the interests and impacts of intervention on different stakeholders (including the poor and less powerful) can help ensure that costs are borne and benefits realized for those intended (Grimble & Wellard, 1997). In complex decision-making situations with conflicting interests, the problem may be addressed from the perspective of different stakeholders using a multiple-stakeholder approach. The goal of this variation is not to find a single, best solution (as, say, in linear programming), nor to find an equilibrium (as in game theory), but to clarify the values and opinions of the stakeholders, to pinpoint the sources of disagreement, and to develop compromise solutions (von Winterfeldt, 1992).
In practice, there are nearly as many measures as there are studies. IS success has often been defined as a favorable result or outcome. However, early definition of how this outcome should be characterized, or for whom the result should be favorable, is ambiguous (Alaranta, 2005). Evaluation studies may take many forms and have different functions but commonly assume consensus on evaluation criteria. Reasoning from a theory of value pluralism, it is more likely that stakeholders will have different, and sometimes conflicting, views on an evaluated program (Abma, 2000). In order to acknowledge this plurality, Guba and Lincoln (1989) proposed taking different stakeholder constructions as a departure point for a negotiation process towards consensus or a heightened personal and mutual understanding. The explicit consideration of potential trade-offs between different policy objectives and conflicts between stakeholders’ interests helps avoid the unexpected, facilitates good design, improves the likelihood of successful implementation, and assists the assessment of outcomes (Grimble & Wellard, 1997). In conclusion, it’s vital to clearly distinguish stakeholders and define the success of IT integration by different stakeholders. Also, a good
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alignment among stakeholders will lead to a successful post-merger IT integration and project management.
2.2 CEOs’ Concerns
Sixty-six percent of CEOs plan to use M&As as part of their global integration strategies. They described M&A as a key way to rapidly expand global reach—integrating new capabilities, realizing synergy, obtaining knowledge and assets, and gaining access to new customers (IBM, 2008). CEOs seek to increase revenue, decrease cost, improve market share and strengthen competitive positioning through M&A activity (Sharma, 2007). Here are some CEOs’ statements toward M&A. Dennis Kozlowski, the former CEO of Tyco, commented that “The key thing I’ve learned is that acquisitions work best when the main rationale is cost reductions. You can nearly always achieve them because you can see up front what they are. You can define, measure, and capture them” (Carey, 2000 ). John Browne, chief executive of BP, explained the logic and vision behind the mergers and acquisitions.
“Our goal is to be a global player—with the capacity and the reach to capture the real economies of scale that exist in this business. We want big fields, and giant fields, that we can develop at low cost”
(Sikora, 2005). Most of the CEOs eager to achieve cost synergies by M&A. Rolf Borjesson, CEO of the U.K. packaging company Rexam, has overseen both scale- and revenue-driven mergers in pursuit of his goal—to transform Rexam into a leading international package player (Gadiesh et al., 2002).
Jan Leschly, the former CEO of SmithKline Beecham, said “We do focus on revenues because our production costs, once we've developed a drug, are minimal. Also, in terms of improving growth, though, I'd have to say that we have been much more successful at acquiring products and technologies than at acquiring companies” (Carey, 2000 ). CEO of Skrill, Siegfried Heimgaertner said "We are very happy to have come to an agreement to acquire Paysafecard. This acquisition will add significant scale to the Skrill Group in terms of payment volume, customers and merchants and will increase our overall market share" (Skrill, 2012). David Bohnett, the former CEO of Merrill Lynch, said “M&A is certainly the fastest way to expand and solidify our businesses. It was a fast way to build competitive mass and expand our user base” (Carey, 2000 ). Besides, acquiring new technologies is the CEOs’ measurement as well. Roche’s CEO, Severin Schwan, outlined Roche's acquisition strategy, highlighting an appetite for new drugs and diagnostic technologies. Roche is a global leader in the field and an active buyer of new technologies (Gale & Flinn, 2012). Hyoung Won-joon, CEO of SAP Korea, indicated “SAP’s acquisitions are not for the purpose of increasing its global market share, but mainly in line with efforts to seek untapped technologies to provide
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better solutions to its worldwide clients” (Hyong-ki, 2012). Based on the above survey and the CEOs’
opinions, we propose the following indicators: (1) achieve cost synergies, (2) achieve revenue synergies, (3) increase market share, and (4) acquire new technology.
2.3 CIOs’ Concerns
In the post-merger scenario, The CIO must ensure that the establishment of connectivity and consolidation of key infrastructural aspects are given the utmost priority (S. Agrawal, 2010). This involves all activities that have to be completed immediately after the deal is closed, as well as all critical infrastructure-related activities such as common network setup, e-mail, the Internet, and help desk setup. (S. Agrawal, 2010). Many IT executives define “post-merger integration success” in terms of “IT integration,” using, for example, connectivity or operational-continuity metrics: “Did we get the help desk up and running quickly?” or “How quickly was e-mail consolidated?” (Curtis &
Chanmugam, 2005). Similarly, Manansingh (2010) proposed two key points of view for CIOs to be successful when integrating an acquired firm into the business. The first task is to drive technology consolidation, such as consolidating data centers, rationalizing vendor contracts, and renegotiating software licenses. These are quick wins that will provide immediate cost savings. Cost savings also need to be balanced against risks and the impact on operational stability. Second, processes are the key to acting like a single organization. Processes such as a service desk, procurement, security policies, and software development must be stabilized and standardized to achieve organizational stability. Process consistency is a major element of the firm’s perception of IT. A service gap is neither acceptable for in-house functional departments nor for external customers (Albayrak &
Gadatsch, 2009). In short, IT executives focus on two things: (1) achieving cost reductions in the IT organization by eliminating redundant processes and systems, and (2) integrating the remaining systems to streamline the processes of the combined company (Zelinger, 2011). One of the biggest determinants of successful IT integration is how quickly you can get the systems working together, so there's a lot of pressure for IT managers to be overly optimistic about the cost and speed of the project (Shearer, 2004). As a result, most of CIOs are requested to achieve M&A integration within the desired costs (Agrawal 2010; Alvarez et al. 2007; Harrell et al. 2002; Honore et al. 2003; Pratt 2011; Zelinger 2011) and a time frame (Agrawal 2010; Honore et al. 2003; Pratt 2011). Thus, here we indicate that the CIOs’ measurements toward IT integration in post-merger integration are as follows: (1) achieve technology consolidation, (2) achieve operational continuity, (3) achieve cost savings, and (4) integrate IT within a desired time frame.
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2.4 Business Managers’ Concerns
Many authors have argued that a key element in truly achieving the expected benefits from the integration of two organizations lies in the successful delivery of the post-merger integration phase, where synergies and economies of scale are key objectives of top management (Epstein, 2005) in a successful M&A deal (Fubini, Price, & Zollo, 2007; King, Dalton, Daily, & Covin, 2004; Marks &
Mirvis, 2000; Picot, 2002; Quah & Young, 2005; Shrivastava, 1986). As individual managers weigh the uncertainty of due-diligence estimates against their own performance risk, they often translate synergy estimates into even more conservative and easily achievable － cost and revenue targets (A.
Agrawal, Ferrer, & West, 2011). However, Only half of the senior executives polled in a 2006 Accenture/Economist Intelligence Unit survey believed that their companies had achieved the revenue synergies they had expected from their M&A activities, and just 45% affirmed that expected cost synergies had been captured (Kristin, Tom, & Bill, 2007). Also, executives from the companies with prominent competitive exposure were significantly more bullish on the value-creation potential of acquisitions and somewhat less focused on cost efficiencies as the primary driver (Hendrickson, 2003). Business executives define post-merger integration success in terms of the business integration and synergies that IT has enabled, such as technical support of a merged sales forces and an integrated view of the customer (Curtis & Chanmugam, 2005). Based on the literature regarding what benefits business executives expect in M&A and IT integration, we propose two indicators: (1) achieve cost synergies, and (2) achieve revenue synergies.
2.5 Customers’ Concerns
Companies naturally expect M&A deals to result in significant benefits, from the growth of market share to new economies of scale. But these companies run the risk of falling short in their efforts if they fail to keep a close eye on a key factor—the customer (Mangan, 2006). In fact, customers wish to obtain “sweetheart deals” from suppliers and avoid adjustment costs associated with changes in merger-firm operations (Chang, Curtis, & Jenk, 2002; Fee & Thomas, 2004) while they also worry about potential disruption in service (Gadiesh et al., 2002) or providing less service (Bekier &
Shelton, 2002). As customer often become nervous when the announcement of the merger/acquisition hits the news. They need to be reassured that their needs will continue to be met (Thach & Nyman, 2001). In an eye-opening 50% of the deals, consumers give the company lower marks either in company’s prices, quality, or ability to meet expectations. Customers thought they get better service or prices from only 29% of mergers (Thornton, Arndt, & Weber, 2004). Besides, an Accenture survey indicated that 51% of respondents fingered mergers as a cause of higher prices and
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38% blamed them for declining customer service (Sikora, 2005). Indeed, a 2004 Business Week study found that 50% of consumers reported they were less satisfied with the company service, even two years after the merger (Mangan, 2006). Thus, staying on top of customers’ needs and satisfaction can safeguard market performance during the merger process. It is vital that the newly merged company communicates and responds to customer concerns in a timely manner (Homburg & Bucerius, 2005).
Based on the perspective of the customer, we propose the following indicators: (1) service continuity, and (2) obtain better deals.
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The research objective is to offer a measurement of a multi-stakeholder perspective to assess
post-merger IT integration. Based on the literature review, we summarize success indicators for each stakeholder (shown in Table 1).
Table 1 Stakeholders’ Measurements about Post-Merger IT Integration
Stakeholder Measurement Indicative references
CEO Achieve cost synergies (Carey, 2000 ; Gadiesh et al., 2002; Gale
& Flinn, 2012; IBM, 2008; Sharma, 2007; Sikora, 2005)
Achieve revenue synergies
(Carey, 2000 ; Gadiesh et al., 2002; Gale
& Flinn, 2012; IBM, 2008; Sharma, 2007)
Increase market share (Carey, 2000 ; Sharma, 2007; Skrill, 2012)
Acquire new technology (Carey, 2000 ; Gale & Flinn, 2012;
Hyong-ki, 2012)
CIO Achieve technology
consolidation
(S. Agrawal, 2010; Curtis &
Chanmugam, 2005; Harrell & Higgins, 2002; Manansingh, 2010)
Achieve operational continuity
(S. Agrawal, 2010; Albayrak &
Gadatsch, 2009; Curtis & Chanmugam, 2005; Honore & Maheia, 2003;
Manansingh, 2010; Zelinger, 2011) Achieve cost savings (S. Agrawal, 2010; Alvarez, Dawson, &
Sen, 2007; Harrell & Higgins, 2002;
Honore & Maheia, 2003; Pratt, 2011;
Shearer, 2004; Zelinger, 2011) Integrate IT within a
desired time frame
(S. Agrawal, 2010; Honore & Maheia, 2003; Pratt, 2011; Shearer, 2004) Business manager Achieve cost synergies (S. Agrawal, 2010; Curtis &
Chanmugam, 2005; Epstein, 2005;