The time is ripe for mergers
Company acquisitions can be a strain on resources, but it is crucial to have business systems in place to accurately and effectively integrate the acquired company’s data into your business.
Considering a merger or acquisition? Or already suffering through one? In a market of steeply-declined prices, deals made in the last couple of years are almost certainly underwater.
Companies with weak balance sheets may struggle to keep those assets or even stay afloat in this environment. This presents some unique M&A opportunities in a Darwinian sense, and it’s likely we’ll see a fair amount of activity if prices continue at current levels for much longer. The question then is: what lessons learned can be applied to these impending deals?
In the upstream sector many acquisitions are for properties rather than companies. While property acquisitions are simpler, they are by no means easy. But the company acquisitions and subsequent systems integration affect not only the CIOs, but also CFOs and CEOs through the bottom line.
There are a number of practical solutions that company leadership can follow to offset some of these challenges, and while initial investment may seem unrealistic at the time of acquisition, there is a bit of learning to be garnered through previous examples.
Company acquisitions are difficult for a hundred reasons. Consolidating offices, moving, letting people go, obtaining an accurate picture of the balance sheet as of the day of close, and maintaining operational effectiveness are all part of the equation. These hurdles present challenges to the acquiring organization, many of which will be felt for months or even years.
For CFOs and CEOs the immediate task at hand is to ensure the operational and financial sides of the business continue as smoothly as possible. The CIO is often left with the task of understanding and integrating the disparate systems and data between the two companies. But is this the right approach?
Let’s consider a situation. In 2008, a large independent E&P company announced a $4 billion acquisition that included proved natural gas reserves of over 1 tcfe. This acquisition presented enormous opportunities as well as considerable challenges, not the least of which was assimilating the data of the purchased company into the acquiree’s systems. According to a senior manager involved in the transition, data issues ranged from determining accurate balances for suspense to loading lease data from the acquired company’s system into the land system the purchaser used.
Eight months later it is still not possible to obtain an accurate accounting of the suspense held within more than a few million dollars. And the land data remains incomplete and possibly inaccurate. The bottom line problem: the task of accurately and effectively accounting for the new business and integrating the data into the acquiree’s systems proved a much larger task than originally envisioned. And with no clear budget for these problems, the question is not just when will these problems be cleaned up, but will they be cleaned up at all?
Did something go wrong? Not really. The problems this company faced, and still face, are typical for this kind of deal, but it could have been improved. For CEOs and CFOs contemplating the current deals, three key strategic choices should be considered. The first is easy. The second two are difficult, which is why they are so important.
The first choice is the establishment of the short-range team. Some variation of this typically occurs with M&A activity. This group needs to be headed by a senior business or financial representative and a senior IT representative. The group’s job is to ensure that the business is running as smoothly as possible on the day the deal closes and through whatever transition period has been determined. The group’s entire focus is to enable systems to do their jobs – to operate, to process checks to be cut, and to account for the financials at the time required. It’s easy enough. In theory, anyway.
The second choice is creating a long-range team. While many companies don’t want to think about or place funds with a group to conduct long-range planning, it is critical. Executives must realize that getting through the first day or month of close, or the transition period, is at best a patchwork job.
The long-range team has the responsibility to figure out how to change the patchwork solution into a planned consolidation of data and systems that will serve the company efficiently for the foreseeable future. This team’s job is to consider the long-range implications of the systems and data merger. These questions should be asked: Which systems should remain in place? And, whose processes are best? Just because the acquiring company already has a system or process in place doesn’t mean that it is the right system to maintain.
Much money has often been invested by both sides in systems and processes, and the choice about long-term appropriateness should not be made lightly. This is an opportunity to look at best of breed systems and processes. The end result may not be an “ideal state,” but it should be a planned one.
By now this all sounds good on paper, but you’re also thinking it’s costly and impractical. Right? Let’s consider another situation when another client company bought one even larger a few years ago and followed the first step of forming a short-term team. The group was as effective as reasonably possible and attained the goal of merging the data and systems in a very short timeframe. It was, unfortunately, only for the short-term.
During the next few years this company spent more than $35 million on just two of the systems impacted by the merger. And during that timeframe, while they waited for corrected data, they missed revenue and had a difficult time reporting accurate financials. Much of this capital could have been put to other uses within the organization, if a little more attention had been given on the front-end planning side of a long-term team. Another result was that the CFO and two controllers moved on to other jobs during this time.
Finally, the third choice is probably the hardest: budget and timeframe. In a $4 billion deal, an adequate budget has to be set for both the short-term and long-term systems integration. A long-term plan must include the budget and time necessary to reach a reasonable “settled state” for systems and data. How long is that timeframe? What is the budget? Obviously it’s going to vary deal by deal. The larger the deal, the more money and time should be set aside for systems and data for the long-term.
It’s often not what CEOs and CFOs want to hear, but here’s the counter-argument to what might be thought or said. In all probability the money will be spent. The question is more about when, and whether it will be planned as a part of the acquisition cost, or spent later as part of an unplanned budgetary item. Personally, I’d rather have it be a real number in the acquisition budget than try to explain an unexpected cost to the board in a down year when prices have fallen through the floor.
I’ve participated in numerous acquisitions over the past 18 years. None of those deals has fallen apart because of system or data issues. But the real impact of these problems can and does affect CEOs and CFOs long after the closing date, and those problems can become immediate and painful. Proper planning and budgeting for the short-term and long-term for systems and data integration will have far-reaching, positive effects on your next merger.
About the author
Pete Waldroop is part of the management team of Capitalize Consulting and has more than 18 years’ experience in management consulting and in the full system life cycle of software, process design/analysis, and project management. Waldroop has worked extensively in upstream energy, midstream energy, and in the transportation and marketing sectors. Waldroop was previously a founder and executive vice president of Quorum Business Solutions.