The Role of IT in the Success of Mergers and Acquisitions

1. The Role of ITin the Success of Mergers and Acquisitions Carol V. Brown, Ph.D. Distinguished Professor Howe School of Technology Management Stevens Institute of Technology carol.brown@stevens.edu HSATM – November 19, 2008

2. Personal Research Interests • IT Strategy and Management issues… that keep CIOs awake at night • Field-based research: case studies & surveys “Best practices” and new IT management capabilities • Publications: academic readers and practitioner readers • Editorships: MIS Quarterly Executive (editor-in-chief eff. Jan. 2009) Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

3. Agenda: the IT Role in M&A • The Motivation • CIO “awake at night” Topic • Knowledge Gaps in Prior IS Research • Case Study Research • Merger-of-Equals (n=3) • Smaller Acquisitions (n=6) • Some Concluding Thoughts Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

4. The Motivation: CIO perspective • Today’s Business environments (dynamic, global)  more frequent Business restructuring events Mergers and Acquisitions (M&A) Divestitures Joint ventures & other strategic alliances • What IT Capabilities are needed to effectively support these Business restructuring events? Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

5. The Motivation: Gaps in IS Research • M&A events have different characteristics (intent, size): What characteristics of the M&A event influence the IT role? • Mergers-of-Equals involve large-scale, complex IT projects: • IT Application rationalization (App Rat) • Other Technology rationalization (data centers, networks) • IT Talent selection: retaining and downsizing What are some “best practices”? • Multiple IT Merger strategies exist: Support IT of Firm B(leave as is) Replace IT of Firm B (with IT of Firm A) Adopt IT of acquired Firm B Synthesize or “Greenfield” IT project (to replace IT of Firm A and Firm B) Is the same IT merger strategy used for all acquired systems? Why or why not? Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

6. Case Study Research • Descriptive Case Studies: 3 Merger-of-Equals • Compaq buys Digital (with J.Ross, MIT) • Sallie Mae buys USA Group (with IT leaders) • Sprint buys Nextel (with IT leaders & B.Wixom, UVA) • Grounded Theory Studies: • Smaller Acquisitions (with B.Reinicke, UNC-W) 2 events in 3 companies, no merger-of-equals • Merger-of-Equals (with B.Wixom & E.Goren, SIT) 2-year longitudinal study, early access (two locations) Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

7. $14 billion public firm based in Reston, Virginia $50 billion student loan portfolio Public firm with employee stock option program Largest guarantor of student loans based in Indianapolis $16 billion student loan portfolio Not-for-profit with growing fee-based businesses Deal Closes: July 31, 2000 New Sallie Mae Old Sallie Mae USA Group # 1 Funds Source # 1 Servicer # 1 Guarantor Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

8. Only 12% of mergers led to significant growth during 3 years after acquisition; 42% actually lost ground. Bekier, Bogardus, and Oldham. McKinsey Quarterly, 2001 (No.4) Key employees typically receive external job inquiries within 5 days of a merger announcement. Kay and Shelton. McKinsey Quarterly, 2000 (No.4) Business Metrics: Increased market share Public goals met for cost reduction: headcount by 25%, other costs by 40% IT Metrics: No major service interruptions during first peak season (less than 30 days after data center relocation completed) Key IT talent retained as needed for 12+ months, despite “hot market” conditions Success Metrics Industry M&A Record Record Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

9. 4 Success Factors Identified • Credible IT Leadership (supports Linder 1996) • Announce IT leaders as soon as possible • Leverage prior relationships (IT business, IT project teams) • Common Direction & Compelling Deadlines (supports Linder 1996) • Set direction, remove roadblocks, and empower others to act • Make customer-facing applications a priority • Intensive Collaborative Planning • Firm A + Firm B pairs to rationalize technologies • Retention of Key IT Talent (supports Watson Wyatt 1999 survey) • Generous severance packages • Incentives to ensure knowledge transfer These Practices are NOT characteristics of Compaq-Digital case study Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

10. 100-year-old company, 60K workers based in Kansas Local, long-distance, wireless Systematic consensus management, but IT credibility problems with business 15-year-old company, 20K workers based in DC corridor Wireless; innovative push-to-talk product Entrepreneurial management, with strong IT track record with business Deal Announced: Dec. 2004 Sprint Nextel Sprint Old Sprint Old Nextel “Merger-of-equals” with Adopt-and-Go approach Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

11. $400 Million Cost Savings over 3 years $424 Million Cost Savings within 2 years Reduced operational expenditures and avoided new capital IT expenditures for: IT Applications IT Operations Sprint Success Metrics IT Synergy Target IT Synergy Achieved Includes integration of other business restructurings: - spinoff of major business unit (required for government approval) - acquisition of former alliances (Nextel Partners, Sprint affiliates) Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

12. Sprint Success Factors for IT Role • Credible IT Leadership • Early “wins” (Day 0, Day 1) • Constant, consistent communications 2. Common Direction & Compelling Deadlines • “Adopt-and-Go” approach embraced by IT • Integration Management Office to keep IT focus on synergy targets 3. Intensive Collaborative Planning • “Rational” process for application “domains”: Pairs of leaders, clear criteria & use of multi-criteria decision-making tool to selected “winners” 4. Retention of Key IT Talent • In-source and reallocate people across IT units • Early voluntary separation package 4 Factors identified for Sallie Mae also found in Sprint case Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

13. Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

14. Case Study Research • Descriptive Case Studies: 3 Merger-of-Equals • Compaq buys Digital (with J.Ross, MIT) • Sallie Mae buys USA Group (with IT leaders) • Sprint buys Nextel (with IT leaders & Barb Wixom, UVA) • Grounded Theory Studies: • Smaller Acquisitions (with B.Reinicke, UNC-W) 2 events in 3 companies, no merger-of-equals • Merger-of-Equals (with B.Wixom & E.Goren, SIT) 2-year longitudinal study, early access (two locations) Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

15. Preliminary Findings: Smaller Acquisitions Factors that influence system-level Strategies IT factors IT standards Security issue Business factors Regulatory issue Financial issue (of acquired) Unique business function/process Corporate governance/culture IT Role: Success Factors Repeatable processes Dedicated team IT Merger Strategies Replace IT of Acquired* Goal: Minimum cost & • Maximum speed • Support IT of Acquired • Goal: Alignment for • short-term...or long-term • Adopt or Synthesize IT • Goal: Increase IT Assets * Includes Replace with IT Standard …and these may change over time Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

16. Some Concluding Thoughts • IT and Business factors influence the IT Merger Strategy selected; different strategies for the same M&A event are typical, and the Year #1 strategy may differ from Year #2 - Replace, Support, Adopt, Synthesize/Greenfield • “Best practices” for merger-of-equals events include: • Credible IT leaders, dedicated project office and compelling deadlines, collaborative “rational” planning processes, and retention of key IT talent • Characteristics of the M&A event influence the IT role: Combination Potential – not just Size, but “merger-of-equals” mindset Competitive Environment – not just hyper-competitiveness, but also if Public Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

17. Some Concluding Thoughts • IT Role Success is Necessary, but not Sufficient, for M&A Success • IT Role Metrics: not just IT Cost Savings, but also Business Revenues • Today’s dynamic Business environments require a new type of IT Capability: “Reconfiguring IT Resources” Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

18. M&A Articles & Teaching Cases Published Articles Clancy, G., C.V. Brown, and R. Scholer. “A Post-Merger IT Integration Success Story: Sallie Mae.” MIS Quarterly Executive, 2:1 (March 2003), pp. 15-27. - SIM Best Paper Award, 2002 LeFave, R., W. Branch, C.V. Brown, and B. Wixom. “Sprint Nextel IT Leadership: Reconfiguring IT Resources for Results.” Forthcoming in MIS Quarterly Executive, 7:4 (Dec. 2008). - SIM Best Paper Award, 2008 Teaching Cases Brown, C.V. and J.Ross. “Merging Information Technology and Cultures at Compaq- Digital.” Managing Information Technology, 5th ed. (Prentice Hall, 2005). Part A: Meeting Day One Objectives Part B: Becoming a Single Firm Brown, C.V. with R. Scholer. “FastTrack IT Integration for the Sallie Mae Merger.” Managing Information Technology, 6th ed. (Prentice Hall, 2009). Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008

19. The Role of IT in the Success of Mergers and Acquisitions Q&A Presentation prepared by Carol V. Brown, HSATM, Nov. 19, 2008