Merger and acquisition expenditures exceeded $2.7 trillion worldwide in 2005 and are expected to grow through 2009. However, according to McKinsey and Company, the big global strategy consultancy, "Half or more of the big mergers fail to create significant shareholder value....

The sad conclusion is that an average corporate control transaction...delivers little or no value in the return." The fact that such astronomical levels of cash and equity are sunk into M&A activity when it can put shareholders at risk is far from comforting.

Service Oriented Architecture (SOA) has become a common IT approach to bridge the barriers of collaboration between business partners, customers, suppliers, and different organizations in one company. The adoption of SOA to connect dynamic business processes and disparate IT systems is initially a daunting task beset on all sides by potential complications and setbacks.

Adding M&A activity to the mix compounds the obstacles and complexity of committing to an SOA. When public companies leverage mergers and acquisitions as business strategies to achieve growth and increase shareholder value, another set of complications arise.

M&A Doesn't Always Pay - The Acquisition Death Spiral
Business acquisitions are on the rise, showing no sign of slowing. A recent Morgan Stanley survey found that the chief financial officers at Fortune 1000 companies consider M&A their top priority. The survey says that CFOs ranked M&A as the seventh most important use of capital. Because M&A is top of mind for CFOs, IT management must be prepared to accommodate - and in some cases steer - M&A strategies.

Although M&A is wildly popular, that doesn't necessarily mean that it's in the best interest of shareholders. Mergers and acquisitions can hinder service responsiveness and quality due to reduced, fractured, or even eliminated service and support. Post acquisitions, companies can struggle to grow revenue and become too cost-focused. As a result, the focus on shareholder value, derived from top-line growth at reasonable margins, can be lost.

As discussed in the Harvard Business Review in September 2006, "Companies typically create most of their value through day-to-day operations, but a major acquisition can create or destroy value faster than any other corporate activity." An unhealthy death spiral can start when cost-cutting reduces growth and customer loyalty, leading to lower revenue. Lower revenue leads to increased pressure to cut costs beyond the acquisition business case. And, the downward spiral begins...

Acquisition Value = Growth at Acceptable Margins
Executives need to think differently. According to McKinsey and Company, "Revenue deserves more attention in mergers, indeed, a failure to focus on [revenue] may explain why so many mergers don't pay off." In its study, only 12% of companies analyzed succeeded in accelerating revenue.

Instead of focusing on cost reductions, executives of merging companies can pounce on short-term opportunities and accelerate long-term growth by pressing three core levers:

1. Cross-selling and up-selling in a multi-channel world
2. Channel acceleration
3. Maintaining or enhancing service levels in a post-acquisition environment

Cross-Selling and Up-Selling in a Multi-Channel World
Acquisitions add new products to sell through existing channels that must gain accelerated sales momentum in order to maintain revenue growth. One way to accelerate sales is through cross-selling and up-selling. But there are barriers to cross-selling and up-selling newly acquired products - not the least of which is gaining visibility into existing customers through the incompatible or unconnected IT systems of an acquired company. Post-acquisition, executives must focus on gaining intelligence about existing customer bases by connecting disparate customer information systems and applications so sales teams can mine for cross-sell and up-sell opportunities. At the same time, the channels by which customers purchase products and services must be visible and manageable from anywhere at any time. Whether the channel is online, by phone, in-store, or through a reseller, the sales force must be given access to customer data that lets them effectively up-sell and cross-sell into the base of the acquired and acquiring companies.

Channel Acceleration
Acquisitions frequently bring new channels that may grow, not rationalize, over time. Partners of one organization may be competitors to another. Economies of scale achieved through a relationship with an acquired company might hamper efficiencies with the acquiring company. Mutually beneficial relationships must be quickly identified and cultivated to accelerate channel sales and lead generation. Again, the interoperability of IT systems and the sharing of information must happen quickly before potentially growth-driving channel partners go elsewhere.

Maintaining or Enhancing Service Levels in a Post-Acquisition Environment
Acquisitions can pollute the brand and hamper maintenance and service revenue if promises aren't kept and service level agreements (SLAs) aren't met. If companies turn inward to tediously rewire systems and processes to match perfectly, the organization can easily become misaligned with customer needs. Post-acquisition, there's rarely anything more important to long-term growth than first maintaining then improving customer service levels.

Interoperability versus Standardization
When seeking the optimal combination of these growth levers post-acquisition, fractured processes, data, and systems must be connected. For example, catalog, pricing, and configuration systems must be updated to reflect new offerings and new combinations. Order processing and billing systems need to present a single interface to the customer.

The natural inclination is to standardize everything. That inclination unfortunately delays revenue acceleration and adds to the death spiral. CIO Magazine, in its March 2007 issue states that the average TCO of ERP solutions is $15 million with the range going as high as $300 million. No wonder nearly 40% of the companies that McKinsey surveyed were able to hit cost-reduction targets after acquisition. Standardizing ERP is expensive...and risky.
It's usually better to allow newly joined companies to operate in tandem with a focus on growth at acceptable margins than it is to attempt cost-cutting through standardization of core transaction platforms. (Figure 1)