The hidden cost of mergers and acquisitions – and how you can avoid it

Separation of processes and systems is almost always complex and subject to regulatory, technical and third-party IP constraints.

Time and again at DB Results, we see transition programs enduring the impacts of merger and acquisition (M&A) transactions where the inherent constraints of the separation haven’t been fully considered. All too often, the deal-making process and the resulting transaction relies on a risky and or an unachievable separation/transition window in order to satisfy the stakeholders’ expectations of time-to-benefit realisation, ROI, and a myriad of other factors. Separation of processes and systems, which are often very dated, is almost always complex and subject to a range of regulatory, technical and third-party IP constraints.

Experience has shown us that ignoring these factors leads to bigger problems down the line for one or both parties: financial overruns, increased regulatory scrutiny, operational challenges or reputational damage are common. The approach to separating a business and transitioning it to the acquirer should be based on the inherent limitations of the underlying systems. Based on DB Results’ extensive experience in these complex transition programs, here are some of our key considerations.

Are assets shared or are they standalone?

Shared assets may lend themselves to a “mirror and split” arrangement, where a copy of the asset is commissioned in the purchaser’s datacentre with the seller’s data deleted. Often, however, “shared” data is subject to complex and differing interpretation of personally identifiable information (PII) rules, leading to protracted negotiations on data ownership – this is a frequent issue for separations of wealth and life insurance businesses, where a policy holder might have policies with both branches. There can also be significant complexity in deploying aged assets in a new environment with differing security postures.

Standalone assets (physical or virtual) can sometimes be “lifted and shifted” from one physical or virtual location to another, but again, there are significant risks to consider. Does the purchaser have the infrastructure to “catch” the separated systems and processes? If not, how long will that infrastructure take to deploy?

Often, aging assets are not able to be safely moved and need to be ported/migrated and or upgraded to remain serviceable. Once moved, these assets are often subject to onerous consents and novation conditions from incumbent system providers, which immediately impact the financials of the underlying deal.

Who retains the IP from the asset teams post-transaction?

Separating aging systems and processes relies on people far more than system documentation. Show me a well-documented 20–30-year-old system that can be run from the knowledge base and it’ll be a first!

It’s essential that the teams responsible for the systems to be separated are partly or entirely acquired, for at least the term of the transitional service agreement (TSA). If this is not possible, splitting or lifting and shifting is also unlikely to be possible, due to the underlying IP required to recommission and integrate the assets in the acquirer’s environment.

Is the sale of customers/accounts/policies and not physical assets?

Transactions often involve the purchase of the data only, rather than the underlying systems and processes. The key consideration here is whether the acquirer’s systems are able to ingest the volume of new business, and whether the platform is strategic enough to justify the additional costs of ownership (licence, processor, infrastructure etc.). Where the answer is no, an alternative is required, potentially driving the need to select, acquire and implement an appropriate system/ecosystem to house the acquired business. Allowing for a systems implementation in a TSA timeframe will likely drive a prohibitive TSA cost and/or unsustainable transformation for the acquirer’s business.

Once an approach and timeframe has been agreed on, how will it be delivered?

Many organisations are now agile-centric, but large transitions don’t generally lend themselves to a methodology that’s based on a minimum viable product. To exit a TSA, you need to take carriage of all scope, which means all services are operational: that’s the MVP. A backlog of undelivered scope won’t allow a clean TSA exit and a sustainable business afterwards!

Getting a team that has done it before is critical.  Separations are generally complex programs with fixed end dates, and significant penalties where those dates aren’t met. Separations are not transformations, where targeting low-hanging fruit can deliver quick wins to impatient sponsors. Separations require careful planning, application of proven patterns and acknowledgement of lessons learned in similarly constrained programs. These points outline some of the challenges M&A teams and sponsoring executives need to consider to ensure predictable separations and realisation of the deal fundamentals.

DB Results are experts at ensuring that complex transition programs run smoothly. To find out how we can help your organisation, get in touch.

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