CIOIN

You would think that the people charged with conducting due diligence for a potential acquisition would subscribe to the adage, 'Haste makes waste'. Long ago, I was involved in an acquisition in which that saying was ignored, at great expense. It's a situation that's painful to recall but full of valuable lessons.

The target was a technology-based company. Its business involved receiving timely financial data over its own network, using proprietary software to analyze it and then providing the results to subscribers, again over its own network. The company's revenue stream was 100 percent dependent on properly functioning IT.

Despite that, my technology function was not represented on the 'acquisition hit team', as its members referred to it. I argued that my group's assessment could be crucial in such an acquisition, but the hit team's leader, an outside M&A consultant, replied that it wouldn't be necessary because he was comfortable with technical matters. He told me that he didn't have time to keep every internal technical, corporate and administrative function involved in every acquisition decision. I was a newly-appointed CIO, and seeing no support for my position, I didn't press the matter.

Clues One, Two and Three
Very quickly, though, what should have been clear warnings about the dangerous ground we were treading started appearing. To make sure that the acquisition was under the radar of the business community, the hit team gave the target company the code name of Merry Widow. The team decided that the target should have a code name for referring to our company as well, and it thought it would be a sign of goodwill to let people at the target company choose one. Their response? Milk and Honey. Somehow, no one on our team saw the significance in how Merry Widow pictured us.

A couple of weeks into due diligence, Merry Widow's financial and growth indicators looked positive. Its profitability appeared stable and rising, if slowly, and surprisingly, its costs didn't increase with volume growth or with recent additions to what was offered to Merry Widow's clients.

At that point, Merry Widow told the leader of our acquisition hit team that it had been approached by another company interested in acquiring it. Merry Widow's response had been 'not now', but our hit team leader panicked.

He convened an urgent meeting with our president and general management team (which included me). He told us that he and his team were very positive about Merry Widow, and therefore not surprised that another company was sniffing around. Because of the risk that we could lose the chance to acquire Merry Widow to a competitor, he suggested cutting the due diligence period from 90 days to 30 days! A couple of us on the management team wanted to take longer and err on the side of caution. We argued that we needed to fully understand this technology-based company before investing in it. A compromise was reached: that due diligence period was cut to six weeks. Merry Widow quickly agreed. Another clue.

The rush to glory became unstoppable. Due diligence was completed early. Offers were made and exchanged. Merry Widow rejected our 'earn-out periods' for key people; the owners of Merry Widow wanted their equity promptly, not drawn out over several years. Besides, another party was interested in acquiring them. Yet another clue, also ignored.

Finally, after a modest sum was set aside to deal with the cost of Merry Widow's integration, the acquisition was made, with some celebration.

Disaster Strikes
Things unraveled fast from that point. Within a month, the two founders of Merry Widow and its CIO resigned. A senior manager from our company who was familiar with technology was quickly appointed as CEO of Merry Widow, and he soon became cognizant of the extent of Merry Widow client complaints. More Merry Widow staffers resigned.

Shortly after that, operational issues surfaced as some subscribers complained that they were not receiving any services. At that point, our appointed CEO called in the cavalry from the parent company and asked for an emergency assessment of Merry Widow's IT situation.

It was when my team finally arrived on the scene that the ugliness of the situation became clear.

We tried to learn what we could, but technical staffers were practically rushing out the door by this time. Merry Widow's chief systems engineer had taken a leave of absence, and the CIO was long gone. With no one to ask, my staff and I looked at what was left. We found seven months of trouble tickets and changes that had been requested by clients, with no action taken. The network had no redundancy built in, so network failures required all hands on deck. But all that could be done was to apply Band-Aids and wait for the next crisis. The processing capacity was severely underdeveloped and could not be increased without major expense. (At last, we understood why expansion had not resulted in significant cost increases.) For many months, the technical staff had been summoned to work through every weekend. IT staffers, burnt out from dealing with crisis after crisis, were resigning too fast to allow for their effective replacement. And since the people who originally developed Merry Widow's proprietary software were no longer around, there was no one left who knew what it did.

Merry Widow's newly appointed CEO wanted to know what it would take to fix the problem. The simple answer was that there was no overall fix. Some improvements were possible that would allow Merry Widow to maintain operations and customer service for a short time. The real problem was the proprietary software. It was no longer meeting clients' needs, but it could not be changed,  maintained or reverse-engineered.

IT's Role In an M&A

At another emergency session with the executive committee, Merry Widow's CEO summarized things, deferring to me on any questions about the state of the IT environment.

Painful as it was, it was agreed that we had transferred significant financial resources to others based upon an incomplete understanding of what we would receive in return. In the end, it was decided to remedy those short-term things that could be remedied and to disengage Merry Widow's clients (adding no new ones) in the most harmonious way possible. After about a year, Merry Widow no longer existed.

IT's Role In an M&A
It was a hard lesson, but it was one we applied ever afterward. Other acquisitions were explored in the years that followed, and those that were completed were successful. Plenty of times, we found ourselves dealing with forthright, responsible management teams on the target company side, but we were always prepared to find out something else and gave ourselves every chance to discover the worst. One way we did this was to always include the IT function in the acquisition team. There were no more surprises.

Of the many takeaways from this experience for IT leaders, I would emphasize the need to formalize your concerns. If you are an IT leader and you see risk, document it. It may not be in your position's description, but you have a responsibility to protect the stockholders' interests. Speak up and you'd be surprised how such input can focus the discussion and keep it on point.

The truth is rushed acquisitions are not rare. As a matter of fact, over the past 25 years as a consultant and senior IT manager, it's scary how often I've seen such rushed processes. The IT discoveries come too late, and still it happens. I eventually created the term 'integratibility' to help general management understand that it is essential that the targeted company's IT function be carefully considered during due diligence. The best outcome of such an assessment is that the IT environment is found to be reliable, reasonably compatible and well maintained and to have adequate capacity for the near future. Any other outcome needs to be fully addressed before completing the merger or moving on.

I wouldn't wish a Merry Widow on anyone. But even if you should encounter one, you can still deal with it constructively if the assessment is thorough and deliberate and includes IT.

Al Kueblerhas been CIO at AT&T Universal Card, Los Angeles County, Alcatel and McGraw-Hill and director of process engineering at Citicorp. He is now a general management and IT consultant.