Chief information officers (CIOs) facing a company acquisition process must approach investment in IT with caution, as a technology previously invested in for competitive advantage might suddenly become a liability.

Two different scenarios are typically found in asset valuations that precede takeovers. Where strong parallels are found and systems are integrated quickly and generate savings, IT can be used as a bonus for the company that is up for sale.

But when IT-related work translates to significant time and investment to obtain post-merger standardisation, technology may discourage potential bidders.

Criteria involved in IT valuations generally involves assessment of the age of the estate ­ which normally gets written off within three years and therefore not represented in the balance sheet ­ and estimated time for possible refreshes.

Supplier agreements and ease of integration with the acquirer’s systems are also a relevant part of the evaluation of companies involved in corporate mergers, said Butler Group’s senior analyst Roy Illsley.

“If both companies are IBM customers, for example, then that is a great asset because the consolidated business can use the supplier in the purchasing or replacement of new kit,” he said.

“But if the companies in question use different suppliers for hardware that is less valuable ­ unless they want to push vendors into a bidding war,” said Illsley.

“Compatibility is also a critical point. If you are buying a business running different applications to your own, bidders should consider whether this adds a cost or value.”

Illsley said that during IT assessments, prospective acquirers will decide if the potential target has systems that can be reused.

“Processes and data are more important than hardware or software, because IT works as an enabler. Some cost is involved in transforming the estate, but the process will be the differentiator rather than the technology,” he said.

Even if a firm is undergoing a big systems conversion programme, by the time of its acquisition decisions are made to assess whether any future benefit can outweigh the cost of the contract.

But if companies are unaware that they are about to embark on a merger process, bringing in new software may put off potential acquirers even if a significant investment is made.

“One of the deals I have worked on involved strategic decisions on which systems would be kept and which ones would need to go,” said Illsley.

“At the time, the target company had just started the rollout of an SAP package. That was valuable for the acquirer because it could look at its own systems and what needed to be replaced, so the rollout was extended into their system and ensured that it met the requirements of the consolidated group,” he said.

“But if the two companies were in the middle of rolling out completely separate platforms, then a decision would need to be made, as it would be impractical to run both systems.”

In-house applications are usually identified as perishable assets, and often not represented in the balance sheet of acquisition targets. But there are options, said KPMG corporate finance partner Doug McPhee. They can be divested via a sale, lead to the creation of a separate operating company or the creation of a specific intellectual property licensing business, he said.

“Bespoke systems can also be used as a competitive advantage and value could be added by integrating such systems to the new organisation, as they may cut the running cost of a business or represent a benefit from a customer relationship perspective,” said McPhee.

Whether or not a firm is on the brink of an acquisition, investments should not be delayed.

“Deferring necessary investments is a dangerous thing to do ­ life goes on in any event, whether a takeover goes ahead or not,” said McPhee.

“Taking a decision to not invest is wrong. Just because a firm may come and buy yours, it doesn’t mean, that you will get penalised.”

Recent acquisitions where IT was cited as a serious issue

Santander and Alliance & Leicester - Spanish bank Santander is aiming for £65m in savings via IT standardisation should its £1.26bn bid for Alliance & Leicester (A&L) go ahead. Santander is preparing an integration strategy similar to that
undertaken at Abbey, the bank it acquired in 2004.

Somerfield and Co-op - The imminent £1.57bn purchase of supermarket chain Somerfield by rival The Co-operative Group (Co-op) may signal a string of challenges related to integration. Co-op is streamlining its back office
operations while Somerfield is moving to SAP.