Banking

Measuring the results of an acquisition

In the final part of his due diligence series, Mike Sisco explains how to best measure the results of an acquisition or merger success. He also offers a simple chart template that you can use to provide data results to corporate leaders.


The only real way to determine whether you’re successful in any project is to measure the results of your initiative. Acquiring another company is a strategic initiative to gain something—whether it’s to gain market share, acquire a new technology to help the company, or consolidate an industry. In the initial articles of my due diligence series, I discussed how important it is to determine, early on, the specific objectives your company has when conducting an acquisition or merger. In this final series article, I’ll explain best practices in measuring the effort’s results.

What should you measure?
The first thing to realize is that your senior managers (CEO and CFO specifically) will want a macro view of your due diligence progress. Corporate leaders are predominately interested in revenues and expenses and what IT is doing to improve them.

A measurement is integral in helping them understand the financial progress of your efforts. For example, earnings-per-share is a key measurement of any public company and the board of directors is vitally interested in improving earnings-per-share and in seeing the company grow. Acquiring another company can help your enterprise grow its revenues, but it’s also important for investors to see that you can improve earnings by absorbing the new company into the parent and continuing to operate effectively.

An acquisition has four primary areas of leverage as it relates to the IT organization and your CIO responsibilities:
  1. IT organization expense (staff)
  2. Monthly technology operating expenses
  3. Technology leverage initiatives
  4. Company department initiatives that require IT support

In the due diligence phase of an acquisition, you should have identified specific objectives that you want to achieve after the merger is complete and that support the company’s overall goals in acquiring the new company. List each of these projects in one of the four categories listed above, and include the potential savings goal and the estimated target date for completion.

Typical items to measure include:
  • IT organization expense (I break this down into groups of staff such as infrastructure, business applications, data center, and management.)
  • Telecommunications expense
  • IT organization office rent or space allocation
  • Hardware and software maintenance, and software licenses
  • Data center (computer operations) expenses
  • Network and infrastructure expenses
  • Key projects identified in due diligence that generate leverage after buying the other company. These may be technology initiatives but are more likely company or external department initiatives that depend on IT support to accomplish them.

An example of this last item might be to measure the staff cost of another department of the company and the progress that is made when the IT organization automates certain functions following the merger. For example, in a health care billing company, a fully automated billing department can operate with roughly half the staff of a similar operation that is all clerical and paper-driven.

As I mentioned, the CEO is interested in how you’re improving earnings-per-share or what’s taking place with IT expense as a percent of revenue. Measuring the specific items will help you explain what is causing the change.

A simple measurement approach
My professional CIO experience and heavy acquisition activity prompted me to develop tools and a process that I use to help me assess a new IT situation quickly and to transition the IT organization into its new company.

First, you need to establish a baseline of every measurement you want to monitor. You need to do this for both the parent company and separately for the acquired company prior to the merger. Until you truly have the two IT organizations and technology capabilities merged and operating as one, you need to monitor independent entities. Otherwise, you risk distorting the facts of your efforts and that can lead to misinterpreting real progress. You should track only the items that have significance in your overall IT organization’s expense or that have a material effect in another department reaching key goals in its assimilation/leverage initiatives.

The second step is establishing targeted objectives for each initiative. It’s hard to know if you’re successful when you don’t set the height of the bar you plan to leap over. Be aggressive to make the target worthwhile but conservative enough to make it achievable. You should work with other department managers to define the priority of how you use your IT resources to support their initiatives.

I’ve always monitored progress at six, 12, and 18 months. Most of the key opportunities identified in due diligence should be taken care of within 18 months. Beyond that timeframe, organizations tend to become much less defined entities unless they are left alone and asked to operate just as they did prior to the acquisition.

An easy tool to use
The true measure of growing the company is whether the company can continue to sell and grow the revenue base from these merged operations and whether it can do so cost-effectively. When you can create a vision of where you want to be as a CIO, have the ability to establish a starting baseline, and can present the progress in a meaningful way, you have increased your net worth to your company.

A good approach is to use the sample scorecard model provided below (see Figure A).

I maintain a scorecard for each company entity, both the parent company and each acquired company. When reporting the progress of key initiatives, I compile the scorecard information into a summary.

This approach allows me to present the progress at a high level for senior management as well as to monitor the individual progress of each acquired company.
Figure A
Acquisition measurements (Acquired company #1) IT department
 
Baseline
6
months
12
months
18
months
Target
goal
Target
date
IT % of revenue 5.5%       2.5% 7/1/2003
Total IT staff 28       15
Monthly staff expense $140,000       $75,000
Monthly telecom expense $38,000       $28,000
Monthly rent allocation $3,500       $2,200
Billing dept. staff 12       80
WAN connection          
Data center consolidation          

That wraps up the series
This seven-part series has taken us through the full cycle of an acquisition and the implications it has for an IT organization. One thing I’ve discovered from the 40 IT due diligence and assimilation projects I’ve been involved in is that every acquisition presents its own set of challenges and opportunities. Likewise, all acquisitions have similarities and can be approached with a similar plan.

The trick is to know when to “zig” vs. “zag” when you’re in the midst of either the due diligence phase or the assimilation phase. Experience is the real teacher of zigging and zagging, but these due diligence articles and tools can provide a solid foundation to work from. Having the right tools and a process will improve your productivity and help you conduct a thorough assessment of any technology environment.

Missed a part of our due diligence series?
Read the first six articles:

Mike Sisco is the CEO of MDE Enterprises, an IT management training and consulting company. For more of Mike’s management insight, take a look at his IT Manager Development Series.

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