Yet mergers, acquisitions and carveouts are a fact of life, and business technology leaders need to understand the challenges they produce and strategies needed to overcome them. If anyone wants evidence that such expertise is a necessary part of your skill set, look at the technology sector. It is dominated by mergers, acquisitions and carveouts – from niche tech start-ups to powerful enterprise giants.
Hewlett Packard Enterprise, sponsors of the Business Value Exchange, for example, is the product of HP’s decision to split its business in 2015 between its personal systems-focused HP Inc. and Hewlett Packard Enterprise, which contains the company’s enterprise technology infrastructure, software and services businesses. In May, HPE announced it too would split in a “spin-merger” with CSC to create a $26 billion per year services company.
Similarly, Dell announced a takeover of EMC last year and in June 2016 sold its software division to Francisco Partners, a firm that specialises in divisional carveouts from technology companies.
It is not just tech, though. The scale of M&A and divestment activity is immense. The UK’s Office of National Statistics looked at data on UK-centred deals worth more than £1 million for the first quarter of 2016 and found:
“There were a total of 114 successful domestic and cross-border M&A involving UK companies in Quarter 1 (Jan to Mar) 2016, valued at approximately £68 billion. This total includes 57 domestic acquisitions valued at £11.6 billion; 29 inward acquisitions valued at £49.4 billion; 22 outward acquisitions valued at £6.1 billion and 6 outward disposals valued at £0.7 billion.”
Among the largest deals was Royal Dutch Shell’s acquisition of BG Group. Also completed in Q1 of 2016, and worth £100 million or more, was the purchase of Betfair Group by Ireland’s Paddy Power, Japan’s Mitsui Sumitomo Insurance Company snapping up of Amlin, while Australia’s Wesfarmers bought Homebase, the carved out business of the UK’s Home Retail Group. In Q2, Sainsbury’s announced a £1.4 billion takeover of the remainder of Home Retail Group, which includes the Argos chain of shops. Elsewhere in retail, the Co-op announced plans in July to sell 298 smaller stores to McColl’s for £117 million.
Image Resource: Office of National Statistics
The market’s appetite for this sort of activity is insatiable, and the expectations around deals are high. According to audit and professional services firm Deloitte: “Companies are committing to deliver annualised cost synergies that represent, on average, 3-4% of the transaction value.”
Often a carveout is not a distress sale but the divestment of a thriving business that is no longer central to an enterprise. Nevertheless, success is not guaranteed. In a carveout, just as in other M&A activity, speed is of the essence. Value erodes the longer it takes to complete the process, and with regulators often holding up deals, pressure is on the CIO and their tech team to move swiftly once the deal gets the green light.
There are other pressures, too. The CIO is required to keep carveout-related costs to a minimum, while trying to minimise the loss of existing synergies for the organisation’s existing infrastructure and applications. This is no easy challenge, particularly in a well-optimised organisation that may run two or three global data centres, and no more than one or two instances of its core ERP or CRM systems, for example.
Innovate or stagnate?
Faced with this, the CIO has a strategic choice to make, which could profoundly influence the future success of both the carveout and the remaining organisation: go with tradition or innovate.
The mainstream maxim for a divestment is ‘no betterment’. The carved-out organisation should have an IT infrastructure that is no better than that of the existing organisation. However, Christian Valerius, Strategist, Advisory and Consulting Services at Hewlett Packard Enterprise, argues “no betterment is a 20th century idea” that may no longer be appropriate. “The rapid progress in IT,” he says, means “it might be more cost-efficient to optimise the IT landscape instead of merely splitting up the existing one and replicating it on a smaller scale.”
As Software as a Service and Infrastructure as a Service platforms boom, innovation could often be cheaper than replicating existing IT, but any CIO choosing this route has to be prepared to fight for an innovation-driven approach.
Such an approach will certainly ease relations with the IT leadership of the organisation being carved out. It can, however, also lead to the CFO complaining about costs and staff at the parent organisation, frustrated that the spin-off may have better technology than those remaining behind.
It is a difficult path to tread, but if the CIO can position a carveout project as a way of “initiating important steps towards a digital transformation the subsidiary, or even the parent company,” there is a good chance of success, according to Valerius. He goes on to argue that the CIO will need help from IT consultants who have experience and proven successes with both carveouts and digital transformation projects, if they are to succeed.
One of the most impressive merger, acquisition and carveout operations in recent years was Kraft Foods’ decision to spin off its North American grocery business as Kraft Foods Group, Inc. and became Mondel?z International. It did this just two years after its $19 billion takeover of Cadbury, the UK food and chocolate giant. In less than nine months Kraft’s IT services partner, HP Enterprise:
- Set up over 1,000 servers and 300 terabytes of storage
- Installed five SAP landscapes, moved 350 applications
- Created two dedicated private clouds
- Built security infrastructures and the foundation for data centre disaster recovery services
- Created two new Microsoft Lync collaboration infrastructures, two Active Directory domains and two software distribution infrastructures
- Created 40,000 Mondel?z International email accounts and moved Kraft Foods Group email accounts into a new cloud
This was achieved without any major issues: on time and on budget.
Even in a world of mega-mergers, few carveout projects will be on this scale. Nevertheless, the basic principles and the technologies used by HPE in the Kraft/Mondel?z split apply. In a world where technology is making and breaking markets and companies, maintaining the status quo is a recipe for stagnation and, possibly, rapid failure.
The CIO may feel frustrated at being left out of the loop when the board discuss merger, acquisition and carveout proposals, but they should already have a digital transformation agenda of their own in place and underway. That way, divestment activity can become an opportunity for innovation. A carveout can either speed an organisation’s digital transformation or at least be the opportunity to rationalise the technology estate and put in place the infrastructure and practices that can best support the organisation’s digital transformation going forward.
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