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 Topic/Title 10/25/13 Prof. Gautam Ray, University of Minnesota Information Technology and Mergers and Acquisitions 11/22/13 Prof. Nicholas Berente, University of Georgia Change Management: When nonstandardized people meet standardized enterprise systems 12/06/13 Prof. Dmitry Zhdanov, Information Technology Security University of Connecticut 3/7/14 Prof. Jeanne Ross, MIT IT Project Governance 3/20/14 Karie Willyerd, SuccessFactors A SAP Co. 4/4/14 Prof. Youngjin Yoo, Temple University 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
Findings: Role of IT in M&A (Tafti, 2013) 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 2004-08 (list from the Zephyr database) Matched-pair survey: 2 key informants: Business executive: Business flexibility, post- M&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 (R 2 = 0.378) 0.257** M&A activities (R 2 = 0.096) 0.615*** IT infrastructure flexibility 0.668*** IT integration capability (R 2 = 0.539) 0.276* Post-M&A performance (R 2 = 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 Downstream Customer ERP system 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.