The Definitive Guide to

Mergers & Acquisitions

Mergers & Acquisitions (M&A) is term for a deal in which ownership of a business is transferred or combined. This includes mergers, corporate buyouts, and transfers of business.

Introduction

The volume of mergers and acquisitions has generally remained consistent with about 50,000 global deals per year between 2015 and 2019, but COVID-19 forced a significant downturn in 2020 (see Figure 1). According to a report by Accenture on the pandemic’s impact on the M&A market, the count of deals and divestitures decreased by 12% and 3% respectively, and deal values have diminished by an alarming 47%.

Figure 1. Number of M&A Deals Worldwide

number of Merger acquisition deals worldwide

Source: Institute of Mergers, Acquisitions and Alliances (IMAA)

Regardless, M&A deals are expected to pick up again in 2021 with an optimistic outlook. According to Deloitte’s M&A Trends Survey, 61% of dealmakers expect the M&A activities to return to pre-COVID-19 levels in the next 12 months.

While the number of M&A deals will begin its recovery in 2021, the shift towards scope deals is also expected to rise. These types of deals add business capabilities and modernize operating models to grow revenue streams via technology (see Figure 2).

Figure 2. Percent of Scope Deals Per Year

Percent of Scope Deals Per Year

Source: Technology Report 2020, Bain & Company, October 2020

The goal of a merger or acquisition can vary by company, but with the goal of expanding an organization’s business capabilities, there are general similarities in the drivers behind doing so. These include:

  • Gaining control of a competitor’s assets.
  • Instantly increasing topline revenue through new customer channels.
  • Taking advantage of synergies between companies in the same space.

All businesses depend on software to coordinate transactions, support sales, and maintain operations, so IT is a core consideration during M&As. As more and more companies join forces through mergers and acquisitions, the integration of IT operations and application landscapes will only increase in complexity.

With that, enterprise architects (EAs) and IT leadership have taken center stage as key stakeholders in a successful M&A or carve-out scenario. An EA’s role in this process is to map the business capabilities, assess, rationalize, and merge technology landscapes in the best way possible for the combining businesses. While being closely aligned with both IT and business leadership, the EA team can swiftly and effectively integrate IT landscapes, generating value for the company in a short time. With the architect's focus on transparently recording the technologies in both companies, a basis for decision-making can be defined.

Without IT and EA roles offering their expertise, business leaders would have to control IT synergies, which would lead to confusion and roadblocks. It’s become incumbent upon enterprise architects to play a leading role in delivering a successful post-merger integration.

 

What are Mergers and Acquisitions?

A merger or acquisition is an agreement between two separate businesses that combine into one entity. Even though the terms merger and acquisition are often used as synonyms, they have different legal definitions. A merger is when two companies of similar sizes join together to form one new entity. Acquisitions occur when one business absorbs another and takes control over the acquired company’s stocks and assets. Some great examples of recent acquisitions are Salesforce acquiring Slack for $27.7 billion in December 2020 and SAP entering into an agreement to acquire Signavio in January 2021.

However, combining two businesses means combining potentially conflicting assets, which are often IT-related. Some possible roadblocks that come along with M&As are lack of visibility into new systems and applications, security and compliance failures, and insufficient technical integration compatibility. Other challenges that may not be in the immediate scope of IT hurdles include a lack of clarity in strategic direction as well as need for change management.

 

 

 

What is a Carve-Out?

A carve-out is a divestment a business can make when in the process of an M&A. A company could perform a carve-out when they choose to divest one of their units that is no longer relevant to their business goals or if the payout is more lucrative than keeping the unit itself.

The two types of carve-outs are an equity carve-out and a spin-off. An equity carve-out is the sale of ownership of a unit, allowing the business to receive compensation immediately. A spin-off is when a business unit becomes a single entity with its own stakeholders. An example of this is when Otis Worldwide Corporation (Otis), the world’s leading company for elevator and escalator manufacturing, was spun-off to become its own entity. Read about Otis’ LeanIX Success Story here.

Whether it be for a merger or an acquisition, the two companies must be unified once the deal is signed off. This means the blending of processes, structure, and culture — and ultimately, the integration and optimization of technology landscapes.

 

Types of Mergers & Acquisitions

Not only do the reasons behind a merger or acquisition vary – but there are also different subtypes of deals. All of these come with similar sets of IT challenges. The types of M&A explored below are horizontal, vertical, market-extension, product-extension, conglomerate, and concentric (see Figure 3). The most common challenges found in these M&A types are compliance and security levels, having an efficient and clear direction between IT and corporate strategy, and transparency of the IT landscape.

Figure 3. Types of Mergers & Acquisitions

Types of Mergers & Acquisitions

Source: LeanIX

Horizontal M&A

Horizontal M&As bring together similar products and reduce competition in an industry. An example of a horizontal M&A would be the integration of Facebook and Instagram. The social media platforms are not exactly the same, but merging ensures that they will not develop into direct competitors.

Vertical M&A

Vertical M&As occur to increase efficiency, profits, and product offerings. They occur when two separate companies with different services or products share the same supply chain and extend their business capabilities. Vertical M&As do not require a company to acquire its competition. To understand what happens with a vertical merger, one can look at the AT&T and Time Warner deal which was completed in 2018. With AT&T being one of the world’s largest communications companies, merging with Time Warner allowed them to bundle wireless services and new content, making them a convenient choice for consumers.

Market Extension

A market-extension M&A is when two businesses that produce the same products in different markets join together. This type of M&A is to ensure that both companies have access to a larger customer base. One can see what happens in this type of merger by looking at RBC Centura and Eagle Bancshares, Inc. Eagle Bancshares, Inc. is headquartered in Atlanta, Georgia, and is the holding company for Tucker Federal Bank. Tucker Federal Bank is one of the largest banks in the Atlanta region. This merger allowed RBC Centura to grow its operations in North America, expanding its customer base.

Product Extension

A product-extension M&A is when two businesses that create related products in the same industry merge to sell their products together and gain access to more customers, ultimately increasing profits. An example of this is when Broadcom, a Bluetooth manufacturing company, acquired Mobilink Telecom Inc., a chip and mobile design supplier. As a result, the alliance brought together two products that support each other.

Conglomerate M&A

A conglomerate M&A is when two businesses that are in totally unrelated markets join together. This type of M&A creates a possibility to decrease cost while increasing efficiency. There is no effect on competition since the two merging businesses are in different industries, but it reduces the chance of more competition in the future. An example of this type of M&A activity is Amazon acquiring Whole Foods in 2017.

Concentric M&A

A concentric M&A, also known as a congeneric merger, is when two companies in the same industry combine to offer a more extensive range of services and products. These organizations commonly share similar distribution, technology, and marketing channels. An example of this type of M&A is when Kraft, a producer of condiments and lunch meats, and Heinz, a producer of sauces and frozen foods, combined to sell their products together rather than competing.

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LeanIX M&A Survey 2021

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The Role of Enterprise Architects in M&A

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IT Challenges in M&A

With every type of M&A comes a shared characteristic: IT challenges. Of course, there will be cultural obstacles, but having a stable IT landscape is the only way to guarantee a successful M&A.

Among some of the top IT challenges that businesses need to look out for during an M&A are:

IT integration strategy

An effective IT Integration strategy should be the dominant topic in the early stages of an M&A once the deal has gone through. However, discussions about technical compatibility should be part of the conversation during the due diligence phase as many organizations struggle to harmonize their IT systems, applications, and databases which are tied to their commercial and operational processes. It’s best when both companies’ IT teams are clear on a unified agenda to decide what to keep and migrate, as well as align on best practices as they move forward.

IT transparency

Enabling IT transparency is a must when attempting to integrate two or more separate organizations.

There could be duplicate or obsolete applications in the newly combined IT landscape, resulting in unnecessary spending and increased IT risks. Another example is if one organization uses a modern EA tool with real-time data, while the other has information scattered across various platforms like Excel or Visio. Collaboration between IT teams is vital when sharing the most current and relevant information, thus gaining clear visibility over the newly combined IT landscape.

The key to ensuring visibility across both organizations’ landscape are business capabilities. Best practices show that establishing the common language in any post-merger integration process will provide the right level of abstraction for mapping applications. Once full transparency for all applications per business capability is achieved, decisions can be made about what to keep or sunset.

Compliance and security

The chances are that two merging organizations do not have the same levels of compliance within their processes, posing a technology risk for the business, especially if it's an international M&A. IT will encounter a variety of challenges with data management such as support for different cybersecurity standards. For instance, if a company is global, there may regional regulations such as General Data Protection Regulation (GDPR) that impact one business but not another based on their location.

Ensuring that all information is safe and secure is a critical task for any business, but especially during an M&A. If one company is more secure than the other, confidential information shared in one place can become susceptible to hackers and other unwanted audiences.

A more rigid business may need to quickly get the other merging business up to their code for documentation procedures and policy norms. Neglecting this step can result in fines and damage to the company’s brand stemming from a potential data breach.

Enterprise Architecture in Mergers and Acquisitions

From a technology perspective, mergers and acquisitions are a daunting task. Every system and process used by both companies must be accounted for, analyzed, and harmonized. This process is known as post-merger integration, or PMI for short.

In the graphic below (see Figure 4), LeanIX surveyed its global customer base to determine enterprise architects’ role in M&A activities. While it is clear that enterprise architecture plays a significant role in M&As, where the enterprise architect has the most impact is in PMI (89%).

Figure 4. M&A Process: Stages of EA Involvement

M&A Process- Stages of EA Involvement

Source: LeanIX Mergers & Acquisitions Survey, January 2021

These results are no surprise given that enterprise architects sit at the intersection of business and IT. It underscores the reality that an effective enterprise architecture strategy requires EAs to be heavily involved to harmonize disparate IT landscapes and help drive the technology decisions a new, unified organization will adopt.

 

The Benefits of Enterprise Architecture in Post-Merger Integration

It is crucial that businesses have a stable plan to follow during post-merger integration (PMI) and be flexible when changes to the plan are made. A successful EA strategy can bring both stability and flexibility to inorganic growth by enabling the merging businesses to collaborate and assess, rationalize, and blend technology landscapes in a best-fit manner for the combined enterprise’s future.

The key benefits of using a modern enterprise architecture tool in post-merger integration are:

  • Providing a single source of truth that all stakeholders can understand.
  • Assisting with documenting the entire PMI process.
  • Reducing IT risk by providing transparency into the IT landscape.
  • Accelerating synergies in the immediate aftermath of a significant capital investment.
  • Modeling future-state architectures to ensure the delivery of objectives.

LeanIX’s customer survey data also revealed how EA use cases would be especially relevant during PMI (see Figure 5).

Figure 5. M&A Process: Assessment of Relevant EA Use Cases

M&A Process- Assessment of Relevant EA Use Cases

Source: LeanIX M&A Survey, January 2021, use cases (from top to bottom): n=106, n=105, n=106, n=106, n=99, n=104)

Enterprise architecture provides a transparent, single source of truth for the business capabilities and technology assets of both entities. This enables teams to establish a common language, and a set of guidelines and process standards that everyone involved should follow.

Using a modern EA tool such as LeanIX for full documentation of the steps taken during PMI would help the enterprise architect complete the process. For example, developing a joint business capability map at the start allows for teams to lay a crucial foundation for subsequent PMI activities. If an obstacle arises, IT and business leaders can look into the tool and identify what actions may have caused the roadblock.

Enterprise architecture helps reduce IT complexity and risk by providing visibility throughout the entire PMI process. This enables IT leaders to identify and address legacy and unsupported technologies as well as data interdependencies that could prove to be problematic.

Comprehensive EA helps businesses save costs through the identification and decommissioning of application redundancies. This allows EAs to set a baseline for what applications will be retained, eliminated, or inherited. These activities accelerate synergies and reduce costs in the immediate aftermath of a significant capital investment.

While LeanIX EA Suite offers enterprise architects the ability to successfully conduct PMI activities, the new LeanIX Business Transformation Management (BTM) module provides an additional layer of analysis. Enterprise architects can plan and model changes similar to the GitHub model, but for enterprise architecture. As made possible through interactive timeline reports, architectural data can be visualized from future points in time to predict how IT and business environments will form at any stage during a transformation initiative.

Watch the on-demand webinar hosted by The Open Group, where LeanIX shares all the insights from the LeanIX M&A Survey and why EAs play a significant role in M&A.

 

Lessons Learned from Successful Mergers & Acquisitions

E.ON

LeanIX has had the privilege of working with E. ON, one of Europe’s largest utility companies, during its IT harmonization journey. A prime example of a successful M&A story is E.ON’s acquisition of innogy SE, the former renewable energy division of RWE. A challenging factor in this acquisition was that E.ON and innogy’s sizes were almost equal, with hundreds of legal entities each.

During the process of uncovering synergies and the rationalization potential from E.ON’s new 6,000+ application landscape, the EA team had to plan integrations to support a cloud migration, adopting SaaS solutions, delivering new capabilities to the enterprise with software, and a business-wide digital transformation.

E.ON used LeanIX across its entire global operation as a central repository for every IT asset. Some of E.ON’s achievements through this journey are:

  • The implementation of EA governance
  • Validating 80% of synergies
  • Achieved service level cost transparency
  • Started main modernization projects

 

Main Drivers for M&As in 2021 and Beyond

There are and will continue to be many new deal drivers for M&As in 2021 and years to come. According to research from J.P. Morgan, deals will be driven by changes brought to the economy during the pandemic and a decreasing amount of political uncertainty, with globally influential elections completed and a hopeful outlook on the end of COVID-19. Key drivers for M&As in 2021 are domestic consolidation, cross-regional acquisitions, and more pan-European champions.

In the technology industry, M&As have been substantially increasing, with the number of deals more than tripling over the last decade from 6% to 23%, according to J.P. Morgan. As a result, organizations will need to increase their investments in technology to stay digitally competitive.

In the future, factors changing the way deals are planned and completed are the new ways of “being” (working from home, social distancing, etc.), new opportunities in innovation, shifting industry paths (i.e., Disney shifting focus to their streaming platform Disney+ rather than theme parks), and the future of capital investment. With all these drivers affecting the process of M&As, EA support is more critical than ever. Now that stakeholders and IT professionals have to plan and complete deals and projects remotely, having a way to document the entire M&A process, reduce IT risks, accelerate synergies, and provide a single source of truth is the way to ensure success.

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Answers to frequently asked questions on M&As

What are Mergers and Acquisitions?

A merger is the process of combining, or merging, two separate companies into one. An acquisition is the process of one company buying another to fold it into its operations.

What are the advantages of M&As?

Benefits of a successful M&A are gaining new technology, receiving complementary products, gaining new clients and customers, and increasing revenue. 

What are the types of mergers and acquisitions?

There are six types of Mergers & Acquisitions:

  1. Horizontal M&A - Brings together similar products and reduce competition in an industry.
  2. Vertical M&A - Two separate companies with different services or products share the same supply chain and extend their business capabilities.
  3. Market Extension - Two businesses that produce the same products in different markets join together.
  4. Product Extension - Two businesses that create related products in the same industry merge to sell their products together and gain access to more customers, ultimately increasing profits.
  5. Conglomerate M&A - Two businesses that are in totally unrelated markets join together.
  6. Concentric M&A - Two companies in the same industry combine to offer a more extensive range of services and products.

What is a Carve-Out?

A carve-out is a divestment a business can make when in the process of an M&A. A company could perform a carve-out when they choose to divest one of their units that is no longer relevant to their business goals or if the payout is more lucrative than keeping the unit itself.

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