CEOs and CFOs usually rank IT among the least important of all activities in M&As and divestitures, rarely involving CIOs in the pre-deal negotiations, due diligence or planning.

As CIOs know well, it is very complex, risky and costly to integrate the IT resources of the acquirer and target (in the case of M&A) and to disintegrate the IT of the divested unit (in the case of a spin-off) - an under-appreciated point when the success or failure of IT integration is likely to determine whether the acquisition creates or destroys shareholder value or an IT carve-out preserves or destroys value.

What CIOs need is clear evidence that will raise the awareness among their CEOs and CFOs about the importance of IT in M&A* and divestiture and convince them that IT management ought to be closely involved in all key deal phases.

M&A value creation

Executives often justify M&A by touting the potential synergies that will make the combined value of the acquirer and target greater than the sum of their standalone values. However, the majority of acquirers fail to convert the promised synergies into operational performance gains.

Since IT investments account for more than 50% of a large firm's capital investments, integrating the IT resources of the two firms could generate significant savings. In addition, the timely and successful integration of IT can support knowledge management (KM) capabilities, enabling the transfer of core product, sales and marketing, business management and other information.

Our recent study of 200 major acquisitions (averaging $1 billion) by large firms (with an average market capitalisation of $33bn), highlights how the target's synergy potential and the acquirer's IT and KM capabilities directly affect shareholder value at different phases of the deal:

At the time of M&A announcement

The research results confirm that investors rarely view the promised synergies as credible and reliable indicators of the acquirer's ability to create shareholder value with the target. They also indicate that the capital markets react favourably and significantly increase the stock price of the acquirer when it has strong IT and KM capabilities in addition to a potentially synergistic target. Strong IT and KM capabilities increase investors' confidence that the acquirer will be able to exploit the synergy potential of the target and gain operating performance advantages in the post-deal implementation phase.

During merger integration phase

With large-scale acquisitions, there is typically no significant improvement in the operating performance of the combined firm in the first year of merger, and the evidence suggests that is largely due to the IT integration challenges faced.

Regardless of how strong the IT capability of the acquirer is prior to the merger, a large target presents significant IT integration challenges, disrupts the acquirer's pre-existing IT capabilities and negatively affects the combined firm's overall IT capabilities.

In the second year of merger integration, an acquirer that manages to integrate IT resources of the target typically improves its operating performance significantly, in large part due to synergies achieved through the consolidation and integration of the IT resources.

In the long run

In the third and subsequent years - after the completion of IT integration - the acquirer is able to exchange product, customer and managerial knowledge resources with the target, create knowledge-based synergies and achieve significant operating performance gains.

SPIN-OFF VALUE PRESERVATION

When a corporation divests a business unit, disintegrating previously integrated IT resources becomes the challenge. Our research finds that IT disintegration challenges inhibit the seller's ability to preserve value during divestitures. Sellers struggle in their efforts to comply with regulations - most notably the Sarbanes-Oxley Act (SOX) in the US - and incur higher costs of compliance.

In a study of 235 firms that had been audited for SOX compliance between 2004 and 2008, we found: IT disintegration challenges of divestitures had disrupted the majority of sellers' automated business process controls and controls over IT systems, and led to material weaknesses in internal controls over financial reporting. The result was that many firms fell out of compliance with SOX.

Material weaknesses in controls increase sellers' cost of compliance with SOX by increasing audit and consulting fees and the internal resources that were dedicated to the remediation efforts.

GOALS FOR CIOs

1. CIOs should seek to participate in all the key phases of M&As and divestitures, highlighting the value of IT resources involved in the transaction and identifying and managing post-deal IT implementation risks.

2. CIOs need to convince business executives that business process integration can only be achieved after the merging firms' IT has been integrated. Similarly, IT disintegration is a precursor to the disintegration of business processes in divestitures.

3. Firms that frequently undertake M&A and divestitures face trade-offs between IT integration and IT disintegration. Tight IT integration creates synergies, but it makes the divestiture of business units more challenging. IT can be structured to ease any future separation of business units, but that forgoes potential synergies. CIOs should seek a balance that is suitable for their own firms.

Dr Hüseyin Tanriverdi is an associate professor of information, risk and operations management at the University of Texas at Austin's McCombs School of Business.

For more on this subject, see Mastering M&A.

*Tanriverdi, H. and Uysal, V. "Cross-business information technology integration and acquirer value creation in corporate mergers and acquisitions", Information Systems Research (forthcoming)