Executive Summary of the MISRC Seminar on 10/25/2013
Information Technology and Mergers and Acquisitions (M&A)
Prof. Gautam Ray, University of Minnesota
Mergers and Acquisitions (M&A) are a key strategy to realize cost savings and growth opportunities. The value-generating potential of M&A explains the number and size of M&A deals. In 2012 65,060 M&A deals were completed around the world with a total deal value of 3,144 billion U.S. Dollars (Bureau van Dijk 2013). However, a large body of empirical evidence suggests that there is significant variance in the returns generated from M&A. King et al. (2004), for example, find that M&A have a positive impact on acquirers' performance in the very short term (i.e., the day of M&A announcement), no effect in the medium term (i.e., one to three years) and a negative impact in the long term. Prior research has focused on the identification of variables that may explain the variance in post-M&A performance. The key antecedents analyzed includes relatedness of the acquisitions i.e., did the acquirer make acquisitions where the acquirer and the target shared related resources that can be leveraged by the acquirer post-acquisition; and knowledge transfer practices i.e., did the acquirer learn about how to select and integrate acquisitions from its prior acquisitions.
Though, on average, M&A don't create value, information technology (IT) can be the difference in a firm's ability to realize the economic benefits from M&A. Tanriverdi and Uysal (2011) show that IT integration capability (defined as the ability to integrate the IT platform, data, applications and business processes of the acquirer and the target) is associated with post-M&A performance in the short as well as long run. In this regard, a flexible IT infrastructure (defined as IT infrastructure that follows standards for platform and data, and modularity for applications) affects M&A in two key ways. First, a flexible IT infrastructure facilitates the development of business flexibility to sense M&A opportunities and select acquisition targets. Second, a flexible IT infrastructure enables firms to develop the IT Integration capability to integrate acquisitions and improve their post-M&A performance.
Though M&A generally don't create value for acquirers, firms with superior IT Integration capability achieve significantly better post-acquisition performance. In this regard, a flexible IT infrastructure is an enabler of business flexibility to identify acquisition targets where synergies exist, and a flexible IT infrastructure also facilitates the development of IT Integration capability to integrate acquisition and improve post-M&A performance. Thus, IT organizations should invest in building a flexible IT infrastructure and get involved in due diligence early so as to be able to indentify appropriate targets, and integrate the targets once they are acquired. In essence, the research on the impact of IT on M&A suggests that IT organizations have a great opportunity to demonstrate value by participating in decisions about what targets to acquire and how to integrate acquisitions.