Poor Integration Still Destroying Shareholder Value in Too Many M&As – Global Kinetic

By Sergio Barbosa, CIO of enterprise software development house, Global Kinetic, and CEO of its open banking platform, FutureBank.

Mergers and acquisitions (M&A) are some of the most complex business processes. Ensuring great system integration after the deal is done can help companies avoid the very real risk of failure, and can also help maximise future success. However, too many business leaders allow a territorial, inside-out approach to dominate the integration discussions, leading to substandard results and even failure.

Historically there are fewer M&As in downturn economies, but with more capital available, PwC has suggested that this time might be different. A recent analysis from the company also suggested that companies that made deals during a downturn economy saw better returns. This is good news for companies that are looking to acquire technology and expertise in order to maximise growth when the economy turns.

Many companies grow through acquisitions, snapping up the technology and experience they are looking for rather than developing it organically over time. While this has worked for many, the problem is that deals are negotiated on paper and when it comes to actually merging the entities, the cracks quickly start to show. We frequently see siloed tech teams trying to integrate disparate tech stacks into a cohesive unit. There is also often a disconnect between what the acquiring company wants to achieve and what the in-house team believes should be done.

Failed or poor integration attempts can have a serious and material impact. While there are chances for value erosion at every stage of a merger or acquisition, research from KPMG suggests that 70% of the value erosion for deals that fail, occur during the final integration phase, costing companies billions of dollars each year.

Innovation is often the collateral damage of M&As

The tech disconnect becomes particularly dangerous when it comes to innovation.

Innovation relies on your ability to test and iterate. Successful companies have a fail fast approach to innovation and when there is a difference in values and culture between teams it puts a huge amount of pressure on leaders. The default position will always be in favour of the company that is least able to adopt a fail fast approach, forcing the new entity to innovate at their slower pace. This will, in turn, impact delivery and shareholder value and will place a good deal of pressure on the success of the merger.

An inside-out approach sees companies innovating to simply match competitors

When firms merge many business leaders fall into a myopic approach, focussed only on taking what they have and building products that they think they need – an inside-out approach when it comes to tech innovation. Rather than using the combined strengths of the new organisation and designing around customers needs, leaders get caught up with simply delivering what their nearest competitor has.

When you have a culture of acquiring you are not used to creating new things. Rather than focussing on leveraging the new tech they have acquired for new and exciting offerings, business leaders become obsessed with delivering the same product their competitors have. They can’t see the wood for the trees and miss out on tapping into the real innovation opportunities. The merger or acquisition may not fail with this approach, but it will never achieve its true potential.

The power of another set of eyes

One of the best times to really explore innovative opportunities is during the discovery phase of integrations. It’s at this point that having an experienced and neutral third party development partner can make all the difference.

When technology and business leaders are in the thick of an integration they are often obsessed with getting core features to work, rather than taking a moment to reflect about what their customers actually want and need. Integration discovery phases after M&As give organisations the perfect opportunity to take their product offering in a new direction. Working with a partner that can bring an outside-in perspective can unlock new innovation and, ultimately, meaningful shareholder value.

Being prepared to take bold steps that may take both merged entities out of their comfort zone to really deliver on innovation goals depends on shared values and a steady, unbiased guide.

Success in any new relationship depends on all parties sharing a common set of values and compatible cultures. The path of all M&As is paved with tough decisions and compromise and can be really difficult for leaders who have sunk entire careers into their company’s system design. Many M&As will include external consultants to help guide the process. But it also helps to have a software development partner that has experience in getting the most out of existing systems, and who is also proficient in designing and delivering products that are best suited to what customers really want. This may even mean tossing out a big chunk of the existing systems, but when all parties have a common goal and are prepared to be guided by partners who have travelled the road before, the chances of success are infinitely greater.