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Wednesday November 14 2001 Secret Mergers and Acquisitions Weapon How Web Services can help you Integrate your next Acquisition Anyone who's been through a merger knows that integration is everything. If the new company is able to integrate its systems and processes, then there is a chance of success. If not, there generally isn't. As the M&A climate heats up, corporate decision-makers - both business and IT strategists - should look to Web Services as a way of smoothing out the inherently messy business of bringing disparate entities together. Indeed, a major inhibitor to M&A success is incompatible information and operational technology. An executive corporate concern often stated is that system change-over or integration could take longer than expected - years in some cases - and senior decision makers may be exposed to the risk of unreliable and untimely decision critical information. This risk may place the combined entity at a competitive disadvantage over the short-term. Conversely, where integration is compatible or relatively easy, this is often cited as one the key advantages in doing the deal. Web Services may play an increasingly significant role in easing the concern over incompatible systems, and making a corporation more suitable for integration. Plug in, turn on, watch out! Mergers fail for many reasons: poor due diligence, lack of commitment (or incentive to be committed), management disagreement, culture clashes, bad timing, etc. While systems integration itself can't hope to solve strategic or personality differences, operational harmony can go a long way towards creating a perception of success, which in turn paves the way for the real thing. Most corporate electronic infrastructures were not designed with integration in mind. In fact, the ERP boom of the nineties, with its "one company, one system" mantra, hasn't made life easier for companies on the acquisition trail. Acquisitive companies are quickly learning they need to adopt an M&A integration strategy that is built on open messaging and communications standards. By "black-boxing" critical business functions via Web Services, the stage is set for newly acquired companies to plug themselves into the parent company and achieve synergies faster than ever before. Indeed, it could be possible to use Web Services to make a company a more attractive target for future acquisition. Furthermore, since the acquired company can start to use the parent's capabilities earlier in the process, longer-term integration planning can be done more rationally. This allows management to focus on integrating functions that benefit the combined organization rather than smashing together the ways of the past - in other words, focus on the value proposition that drove the acquisition in the first place. Low Hanging Fruit and ROI While many believe the only way to enjoy the benefits of an acquisition is through full integration, in reality, many useful synergies can be generated via the integration of a much smaller subset of operational functions. Companies with coherent acquisition strategies are keenly aware of the kinds of opportunities they seek and should design their electronic systems infrastructure accordingly - specifically, by isolating and creating service-oriented interfaces to the operational functions that acquired companies will need to use most. Once these interfaces are completed and documented, half the job of integrating important operational functions is complete before the ink on the term sheet dries. By specifying a standard set of integration services applicable to most mergers and limiting the guesswork to the acquired company's side of the equation, you have significantly accelerated the ROI. Why Web Services for M&A? Why are a growing number of companies utilizing Web Services
as a cost effective M&A integration strategy? Let's take a look at
some of the reasons:
Can it all be so Simple? Even though Web Services can make the integration part of M&A a less painful process, they aren't perfect (but then, what is?). Web Services rely heavily on XML, which is known to be slow and wordy; as a consequence, high volume transactions dependent on speed could present a problem. A Services-based Acquisition Integration Strategy Here's a real world example (the company name is withheld since the acquisitions are on-going). A major electronics manufacturer anticipates acquiring five to ten companies over the next 24 months with deals ranging in size from $25-300 million. In the past, full integrations would take upwards of three years to complete, and seven years to pay-back. Needless to say, many things change over the course of seven years, and ascertaining an accurate ROI for these integration projects is difficult. Seeking quicker and more quantifiable returns, the firm is adopting a compartmentalized Web Services-based M&A integration strategy that focuses on tying acquired companies' systems into a smaller subset of functions than a full integration would. The benefit is, this componentized model will deliver greater efficiencies right from the start. In order to adopt this strategy, the firm needed first to identify the core functions it believes could be used by all acquired companies. Initially, these functions included sales forecasting, purchasing, inventory management and certain logistical processes. Since the integration of such functions is often costly and disruptive, these functions would traditionally not get integrated for at least a year or two after the acquisition. Unfortunately, these are the functions that must be integrated in order to attain the cost efficiencies that helped drive the merger in the first place. Once these functions were identified, the firm then created SOAP-based interfaces to the MRP and ERP systems that facilitate these functions. By creating this standards based abstraction layer, the firm is ready to programmatically transact with any acquired company's system that can handle XML transfers (it's still a bit early to hope that an acquired company's system could make direct SOAP requests). Once this link was established, sales projections and pipeline information, item master catalogs, and inventory data started to flow from the acquired company's system into the firm's system. Now information can be aggregated and incorporated into corporate purchasing and logistics planning. Making use of the parent company's capabilities significantly reduces transaction costs for the acquired company. Since the firm has adopted a Web Services based M&A integration strategy, integration time and cost has been cut by two-thirds. Further, these integrations can occur during the honeymoon days of the merger when the levels of momentum and enthusiasm tend to run highest. Consolidating Procurement First Consolidating the procurement function is one the most attractive system integration projects to tackle after an acquisition because the ROI is substantial and often immediate. This assumes the integration is done right. Unfortunately, the company in our example above has not had much luck consolidating procurement and logistics management thus missing out on millions in cost savings. In response to this, the company created an integration XML schema and a set of SOAP-based interfaces to its procurement and logistics systems. This incremental integration achieved the following:
As new companies are acquired, the only interfaces corporate
IT needs to handle are those between the acquired company's systems and
the Web Services abstraction layer. Forecast: Much opportunity for integration During the writing of this article, three large mergers were announced totaling over $30 billion; HP/Compaq, Devon Energy/Anderson Exploration and Santa Fe International/Global Marine. As these companies face the arduous task of integrating operations, now would not be the time to find out that they are not built to integrate. Keep up to date with all the new articles and features on
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