INTERACTIVE SESSION: MANAGEMENT

INTERACTIVE SESSION: MANAGEMENT free pdf ebook was written by Eleni Michailidou on November 02, 2009 consist of 2 page(s). The pdf file is provided by staff.fit.ac.cy and available on pdfpedia since April 19, 2012.

576 part four building and managing systems interactive session: management managing it in..is understandable that sizing up the target company’s it infrastructure is last..systems. one important reason logicalis, an it integration and consulting company, backed...

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INTERACTIVE SESSION: MANAGEMENT pdf




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INTERACTIVE SESSION: MANAGEMENT - page 1
576 Part Four Building and Managing Systems INTERACTIVE SESSION: MANAGEMENT MANAGING IT IN THE MERGER AND ACQUISITION GAME In 2005, there were 7,736 mergers and acquisitions in the United States, and the average value of M&As has risen to a record $385.6 million in the first half of 2006. “Due diligence” is the concept used to describe what acquirers should perform before they make an acquisition. Technically, for public firms, due dili- gence is a legal requirement of senior management to ensure the financial and business statements of firms they are acquiring are accurate and complete. In the past, acquiring firms have lost a great deal of money by ignoring a very important element of the acquired firm’s business, namely, its information systems. Because M&As are typically entered into for financial reasons (greater market share, elimination of competitors, greater efficiency and profitability), and are led by financial managers, it is understandable that sizing up the target company’s IT infrastructure is last on the list of due diligence activities. But there is a price to pay for ignoring the IT/IS element in mergers. When Wells Fargo purchased its rival First Interstate, it created an IT nightmare. Wells Fargo closed down the First Interstate branches and ATMs, costing the bank over $100 million as 20 percent of First Interstate customers closed their accounts. There are a number of systems-related risks in M&As. The target company may have stopped spending on maintenance years ago to decrease costs and increase profits. It may have fallen behind competitors in new applications. Its software licenses may not be transferable to the new company without significant new fees. The infrastructure may be outdated. The target company’s systems may be totally incompatible with the acquirer’s systems. One important reason Logicalis, an IT integration and consulting company, backed off acquiring a value-added reseller was that the company’s CRM system was incompatible with its own. So how do companies perform due diligence in the information systems area? What are some management tactics for dealing with the merger of two or more very different IT infrastructures? The first step is to classify the assets your firm is about to acquire, create an inventory of these assets, and establish the value of these systems to the newly merged firm. For instance, you could divide the target firm’s IT assets into four categories: transactional systems that perform the basic transactions of the firm; informational systems that inform management about the state of operations; strategic systems that differentiate the firm in the marketplace; and basic infrastructure that includes both the hardware and software installed, as well as the services provided by the IS group to the business. Once you have created an inventory of the target firm’s IT assets, you will need to value their potential contribution to the new firm. There are four options: keep the target company systems if they are better than your own; keep your own systems and retire the target company systems if yours are better; choose the best of both companies’ systems; or use the M&A to build an entirely new infrastructure. In general, firms rarely decided to build a new infrastructure completely. Most commonly, the acquiring firms shut down systems of the acquired company and extend the reach of their own systems. Target firms are usually smaller and less capitalized than acquiring firms and have systems that lag behind those of the acquiring firm. Moreover, the financial rationale for many mergers is scale economies. The argument is that the existing IT/IS infrastructure of the acquiring firm can be expanded with minimal cost, while the merged companies’ rev- enues will increase many fold. The same fixed costs in infrastructure will be able to support a much larger and more profitable business. But the evidence that managers at acquiring firms really understand the risks of mergers and acquisitions is not encouraging. Studies of M&A activity over the past 75 years show that about 60 percent actually destroy shareholder value and result in falling stock prices for the acquiring com- pany. The reasons are that the acquiring firm over- values the assets of the target firm and systemati- cally underestimate the risks of the acquisition, especially the costs of merging the operational activities and information system infrastructures of two firms. Sources: Eric Chabrow, “IT Plays Linchpin Role in High-Stakes M&As,” Information Week, June 26, 2006; Spencer Mcllmurray, “M&A Survival Kit: Relearning Enterprise Addition and Subtraction,” CIO Magazine, October 24, 2006; Nick Moore, “The New Role of the CIO in M&A Due Diligence,” Software Mag.com, July, 2006.
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INTERACTIVE SESSION: MANAGEMENT - page 2
Chapter 14 Project Management: Establishing the Business Value of Systems and Managing Change 577 CASE STUDY QUESTIONS 1. What are some of the risks involved when one firm acquires another firm’s IT infrastructure? 2. Why do firms often fail to take the target firm’s information systems and IT infrastructure into account when purchasing other firms? 3. How would you go about assessing the value of another firm’s IT infrastructure and operational capabilities? What questions would you ask? MIS IN ACTION 1. Bain and Company is one of the premiere business consulting firms specializing in advice about mergers and acquisitions. Visit www.Bain.com and explore the advice on how to conduct a successful merger by clicking on the “Consulting Expertise” tab, and then selecting “Mergers & Acquisitions.” Read this page, then click on “Deals Done Right.” Why does Bain advise managers to stay close to their “core business?” Why might this advice ease the change in information systems infrastructure when mergers take place? What does Bain recommend about “integration” of the business and how would this affect IS/IT decisions? 2. On the Web, explore the IT/IS integration issues raised by one of these mega mergers of the past few years: Proctor & Gamble/Gillette; UJF/Mitsubishi Tokyo Financial, HEXAL/Novartis, or Kellog/Keebler. You can explore these mergers using Google searches such as “Kellogg Keebler merger.” This project team of professionals is using computing tools to enhance communication, analysis, and decision making.
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