Integrating the IS functions after mergers and acquisitions: Analyzing business-IT alignment

Highlights

• We examine 22 mergers and acquisitions to examine business-IS strategies employed.

• M&A outcomes are successful when strategies are aligned and not aligned.

• M&A often uses emergent strategy formation, not normative strategy formation.

Abstract

This exploratory positivist case study uses multiple case design to examine the impacts of strategic alignment during the mergers and acquisitions (M&A) process and the implications for strategic formulation of successful M&A outcomes. According to alignment theory, for a firm to achieve M&A integration success, the business-IS strategies should be aligned during the M&A execution. However, our results indicate that successful, non-aligned M&A integrations can also occur, strongly supporting the emergent perspective of strategy formation in M&A integration as a valuable addition to the a priori formal planning view of strategy formation.

Introduction

Mergers and acquisitions (M&A) constitutes a risky, frequent, and high stakes business activity. M&A is a massive contributor to the global political economy. Ernst and Young recognized some 1000 M&A with a combined market value of more than $110 billion USD (Dharmapalan, 2011) from the global technology and telecom sector alone. Despite the large and increasing volume of mergers and acquisitions, however, the value of both acquired and acquiring companies tends to fall as a result of M&A (Pautler, 2003). A number of studies (Chatterjee et al., 1992, Gao and Iyer, 2006) suggest that this decline is a result of structural precursors such as the cultural distance between integrating firms. Further, McKiernan and Merali (1995) estimate that between 33% and 60% of M&A activities ultimately result in divestiture; similarly, Violano (1990) finds that 80% of merger deals destroyed the value of the organization for the acquiring company.

One potential source of added cost and failure to achieve positive goals from M&A activity derives from the difficulty in operationalizing integration. Following Christensen et al. (2011) this may be due to a poor matching of firm level integration strategy with the purpose of obtaining the firm. Such poorly selected firm level integration strategy will result in poorly chosen tactics for the integration (e.g. piling up investments, when the purpose is to streamline; or failing to invest sufficiently when the purpose is to expand product range or quality). We would further argue that successful M&A integration requires effective recombination of functional areas (e.g. marketing, accounting) from existing and acquired sources. Difficulties integrating existing and acquired firm assets can be a major contributor to the failure to realize financial benefits from M&A.

IS can be viewed as one of the critical functional areas that benefits from effective integration for the overall success of the M&A effort. Origitano (2006) argues persuasively that the integration of MIS assets can be an important influence on M&A outcomes. The IS function should play a critical role in the success of organizational integration for three main reasons: (1) Since business processes are closely tied to supporting information systems, information systems need also be accounted for when building a unified firm; (2) Because management decision making is largely based on complete, accurate, and timely information, effective integration of IS can provide the data needed for such decision making; and (3) Since the assets of IS functions can be substantial, integration of both computing and human assets may achieve either cost savings or capability extension. McKiernan and Merali (1995) and Shearer (2004) suggest that a major reason why merger and acquisition integration fails is poor management of information systems in the integration process (Shrivastava, 1986). Issues that complicate integration include, “definition of the new corporate information systems (IS), infrastructure requirements, the high cost of integration and development of information technology (IT) systems, and a reluctance to define both IS and IT in the ex-ante stage” (McKiernan and Merali, 1995, p.55).

One approach toward improving the probability of successful IS integration focuses on alignment of firm and IS level integration strategies. Following Venkatraman et al. (1993), higher degrees of alignment between the IS and firm-level business strategies will result in more successful enterprises. Thus, we expect acquiring firms that more closely align IS with firm-level business strategy should be more effective in actualizing IS integration. Although Venkatraman et al. (1993) did not specifically address post M&A integration, Mehta and Hirschheim (2007) follow this line of argument in their study of IS integration of three energy industry mergers. While rich in detail, longitudinal in nature, and highly informative, their data is limited to three cases in a single industry and their findings show significant ambiguity in: (1) the relationship between alignment and outcomes; and (2) the degree to which alignment is a mandated strategic approach or a by-product of local and ad hoc decision making. Given the financial impact of M&A, the potential influence of integration of IS on overall M&A success, and the lack of clear understanding in this area, the continued investigation of this topic represents an opportunity to address an important gap in existing research.

This study aims to contribute to our understanding of the relationship between strategy and integration of the IS function following M&A in three ways. First, we aim to examine the applicability of alignment theory to the specific instance of post implementation integration of the IS function from acquired and acquiring firm. We observe the tendency in particular cases to align IS integration strategy to the firm-level strategy. We also investigate the relationship between successful outcomes in the integration and occurrences of alignment. Second, for each of the particular forms of alignment and any other observed non-aligned approaches, we identify characteristic issues critical for success in that particular strategic alignment. Third, we examine whether instances of alignment (or non-alignment) derive from a “classic” approach where selected strategy drives subsequent decisions and actions or from an “emergent” approach where the solving of various elemental problems can be viewed retrospectively as a particular strategy. In the former case, we would have to consider why organizations would purposely choose a “non-aligned strategy”; in the latter case, we would have to consider that alignment is a logical by-product of replicated goals and approaches at firm and IS function level rather than an organized objective.

In the sections that follow, we discuss in more detail the foundations of alignment theory as well as several alternative perspectives on strategy. We follow that by presenting details regarding the positivist case study method that we employ in examining this topic. Next we present the results of our investigation followed by a discussion of the implications for research and practice. We conclude with a summary of our contribution and acknowledgments of limitations as well as potential directions for future research.