Information Technology and
Mergers & Acquisitions (M&A)
Gautam Ray
Management Information Systems
Research Center (MISRC)
Carlson School of Management
University of Minnesota
MISRC Calendar for 2013-2014
Date
Speaker
10/25/13 Prof. Gautam Ray,
University of Minnesota
11/22/13 Prof. Nicholas Berente,
University of Georgia
12/06/13 Prof. Dmitry Zhdanov,
University of Connecticut
3/7/14
Prof. Jeanne Ross, MIT
3/20/14 Karie Willyerd,
SuccessFactors–A SAP Co.
4/4/14
Prof. Youngjin Yoo, Temple
University
Topic/Title
Information Technology and Mergers
and Acquisitions
Change Management: When nonstandardized people meet standardized
enterprise systems
Information Technology Security
IT Project Governance
IT Human Capital Management
Co-sponsored with SIM
Digital Innovation and Design
Agenda
 Why do firms do M&A?
 What is the level of activity?
 Outcomes of M&A.
 Plausible Explanations.
 Role of IT in M&A.
 What can we do?
Why M&A
 Cost-based Synergy/Economy of Scale: Spreading
fixed costs over a higher total volume
 Cost-based Synergy/ Economy of Scope: Spreading
fixed costs of a larger number of products.
Why M&A
 Sharing/Redeploying Complementary Resources.
 Selling existing products to a wider body of
consumers. Product line extensions, geographic
extensions. Redeploy brands.
 Redeploying technology/patents of one firms to
improve the products of the other.
 Combining R&D capabilities of acquirer with the
Marketing capabilities of the target.
Global Deal by Volume and
Value
Source: Zephyr Annual M&A Report, Global, 2012
Target Country by Deal
Volume
Source: Zephyr Annual M&A Report, Global, 2012
Target Country by Deal Value
Source: Zephyr Annual M&A Report, Global, 2012
Target Sector by Volume
Target Sector by Value
Outcomes of M&A
 Ex ante: Market response to the announcement of
the acquisition (Cumulative Abnormal Returns (or
CAR)).
 Ex post: Change (After vs Before acquisition) in
Cost Efficiency, Income (EBITD), Profitability
(ROA, ROS).
Outcomes of M&A
Cumulative Abnormal Returns
Outcomes of M&A
 Average CAR for the acquiring firms is not
different from zero. 50% have negative CAR and
50% have positive CAR (Schoenberg 2006).
 Only at Day 0 are the abnormal returns for
acquiring firms positive.
 Acquiring firms ROA, ROE, ROS performance
have insignificant or negative relationship with
acquisition (Zollo and Singh, 2004).
Outcomes of M&A
 Stockholders of acquired firms make positive
economic returns (Zollo and Singh, 2004).
 The difference between Day 0 abnormal returns
for acquired firm and acquiring firms is
substantial.
 After Days 1 – 5 event window, abnormal
returns for acquiring firms are negative.
Outcomes of M&A
(Scenario 1)
 Market Value of Acquirer1, M(A1) = 15
 Market Value of Acquirer2, M (A2) = 15
 Market Value of Target, M(T) = 10
 Market Value of Acquirer and Target together:
 Say, M(A1 +T) = 25
 Say, M(A2 +T) = 25
 Acquisition price/value of the Target
 M (A1/A2 + T) – M(A1/A2) = 25 – 15 = 10
Outcomes of M&A
(Scenario 2)
 Market Value of Acquirer1, M(A1) = 15
 Market Value of Acquirer2, M (A2) = 15
 Market Value of Target, M(T) = 10
 Market Value of Acquirer and Target together:
 Say, M(A1 +T) = 30
 Say, M(A2 +T) = 30
 Acquisition price/value of the Target
 M (A1/A2 + T) – M(A1/A2) = 30 – 15 = 15
Outcomes of M&A
(Scenario 3)




Market Value of Acquirer1, M(A1) = 15
Market Value of Acquirer2, M (A2) = 15
Market Value of Target, M(T) = 10
Market Value of Acquirer and Target together:
 Say, M(A1 +T) = 35
 Say, M(A2 +T) = 30
 Acquisition price/value of the Target
 For A1: M (A1 + T) – M(A1) = 35 – 15 = 20
 For A2: M(A2 + T) – M(A2) = 30 – 15 = 15
Plausible Explanations “Relatedness” of the Acquisition
 Relatedness of the acquisition (King et al, 2004)
 Redeployment of existing resources
 Product market similarity
 Industry familiarity
 Resource redeployment and knowledge transfer
increased performance (Capron, 1999).
Plausible Explanations Experience and Learning
 Passive learning from experience does not seem to
improve acquisition performance (Zollo and Singh,
2004).
 Knowledge codification (financial evaluation, due
diligence, conversion of information systems,
human resource integration, sales/product
integration) has a positive impact on acquisition
performance.
Plausible Explanations
Source: “Reconcilable differences: IT and post-merger
integration” By Gary A. Curtis and Ravi Chanmugam
Plausible Explanations
Source: “Reconcilable differences: IT and post-merger
integration” By Gary A. Curtis and Ravi Chanmugam
Role of IT in M&A
(Tanriverdi and Uysal, 2009)
 141 acquisitions by 86 Fortune 1000 firms.
 CAR to M&A announcements have a mean of zero
and high variance.
 IT Integration Capability:
 Integration of IT infrastructures
 Integration of data and applications
 Integration of business processes
Role of IT in M&A
(Tanriverdi and Uysal, 2009)
 IT Integration Capability:
 Integration of IT infrastructures
 Integration of data and applications
 Integration of business processes
 IT Integration capability is positively related with
CAR.
 IT Integration capability is also positively related
with abnormal operating performance.
Role of IT in M&A
(Tafti, 2013)
 118 large M&A in the US Banking industry from
1994-2006.
 Examine how IT Investment moderates the impact
of Integration Scale on Acquisition Performance.
Role of IT in M&A
(Tafti, 2013)
 Dependent Variable: (i) CAR (ii) Change in Cost
Efficiency, and (iii) Change in Net Income.
 Independent Variables:
 Integration Scale (Integration Expense) predicted
using Integration Difficulty
 IT Investment of the Acquirer as a proportion of
Total Assets
Role of IT in M&A
(Tafti, 2013)
 Findings:
 As Integration Scale increases, Acquirer IT
Investment is associated with an increase in
CAR.
 As Integration Scale increases, Acquirer IT
Investment is associated with an increase in cost
efficiency and in net income.
Role of IT in M&A
(Benitez-Amado and Ray, 2013)
 How IT may affect M&A?
 A flexible IT infrastructure may affect M&A in
two key ways.
 A flexible IT infrastructure may enable business
flexibility to sense and seize M&A
opportunities.
 A flexible IT infrastructure may help acquirers
to integrate M&A.
Role of IT in M&A
(Benitez-Amado and Ray, 2013)
Business
flexibility
(H1b) +
M&A
activities
(H1a) +
IT
infrastructure
flexibility
(H2) +
IT
integration
capability
(H3) +
Post-M&A
performance
Role of IT in M&A
(Benitez-Amado and Ray, 2013)
 IT infrastructure flexibility
 IT compatibility and connectivity
 Modularity
 IT personnel skills flexibility
 Business flexibility
 Operational flexibility
 Structural flexibility
 Strategic flexibility
Role of IT in M&A
(Benitez-Amado and Ray, 2013)
 IT integration capability
 IT technical infrastructure integration
 IT personnel integration
 IT and business processes integration
 M&A activities
 # of M&A in a year
 Avg value of M&A
 Post-M&A performance
 Financial performance after M&A
 Marketing performance after M&A
Role of IT in M&A
(Benitez-Amado and Ray, 2013)
 Hypothesis 1a: Positive relationship between IT infra
flexibility and business flexibility.


Search for a collaborate with new partners.
Analyze customer data and identify new products/markets.
 Hypothesis 1b: Positive relationship between business
flexibility and M&A activities.


A firm with a diverse supply chain may discover profitable
opportunities to acquire one of its business partners.
A firm with experience entering and exiting markets will sense
and seize M&A opportunities before its competitors.
Role of IT in M&A
(Benitez-Amado and Ray, 2013)
 Hypothesis 2: Positive relationship between IT infra
flexibility and IT integration capability.


Standards enable IT technical infrastructure integration.
Modularity allow specific IT applications to be moved, enabling
IT and business processes integration.
 Hypothesis 3: Positive relationship between IT integration
capability and post-M&A performance.


Consolidating the IT technical infrastructure reduces the overall
IT costs of the merged firm.
Redeploying business resources in new markets and realize
economies of scope.
Role of IT in M&A
(Benitez-Amado and Ray, 2013)
 100 mid-size public and private Spanish firms that
had completed at least one M&A deal during 200408 (list from the Zephyr database)
 Matched-pair survey: 2 key informants:
 Business executive: Business flexibility, postM&A performance.
 IT executive: IT infrastructure flexibility, IT
integration capability.
 Zephyr database: M&A activities.
Role of IT in M&A
(Benitez-Amado and Ray, 2013)
 Test of hypotheses: PLS estimation
Business
flexibility
(R2 =
0.378)
0.257**
M&A
activities
(R2 =
0.096)
0.615***
IT
infrastructure
flexibility
0.668***
IT integration
capability (R2
= 0.539)
0.276*
Post-M&A
performance
(R2 = 0.428)
Role of IT in M&A
(Benitez-Amado and Ray, 2013)
 Post-hoc mediation analyses:


Mediation Analysis 1: IT infrastructure flexibility →
Business flexibility → M&A activities.
Mediation Analysis 2: IT infrastructure flexibility → IT
integration capability → Post-M&A performance.
Role of IT in M&A
(Cao, Ray, Subramani, and Gupta, 2013)
Upstream
Supplier
Focal Firm
ERP system
Downstream
Customer
CRM system
Role of IT in M&A
(Cao, Ray, Subramani, and Gupta, 2013)
 We examine the impact of ERP and CRM Systems on the
likelihood of engaging in M&A.
 Firms can use ERP/CRM systems to integrate upstream
and downstream acquisitions.
 Ownership-based Coordination
 Firms can use ERP/CRM systems to coordinate with
upstream and downstream business partners.
 Information-based Coordination
Role of IT in M&A
(Cao, Ray, Subramani, and Gupta, 2013)
 Data: 853 Fortune 1000 firms from 2006-2009
that made 2273 M&A deals.
 Dependent Variable: The Number of M&A.
 Independent Variable:
 Existence of ERP/CRM.
 Industry Concentration from Compustat.
Role of IT in M&A
(Cao, Ray, Subramani, and Gupta, 2013)
 Focal industry concentration is positively associated
with M&A.
 On average, ERP/CRM systems are positively
associated with M&A. Support for ownership-based
coordination.
 In concentrated focal industries, ERP/CRM systems
are negatively associated M&A. Support for
Information-based coordination.
Summary of Results
What Can We Do with these Findings
 On average, acquisitions don’t pay-off for acquirers.
 However, firms with IT Integration Capability do
significantly better. Ex ante as well as ex post.
 A Flexible IT Infrastructure is a great enabler of
Business Flexibility (to identify and make
acquisitions) and IT Integration Capability.
Summary of Results
What Can We Do with these Findings
 Invest in building a Flexible IT Infrastructure.
 Get involved in acquisitions early.
 Integrate acquisitions and demonstrate value
from IT.