How CIOs can modernize tech stacks in divestitures
July 14, 2021
Mergers and Acquisitions (M&A) remain an important avenue for strategic growth. After a year of pandemic-induced turmoil, we are seeing transactions that were “parked” come back to life, with M&A activity jumping in the second half of 2020 and staying at high levels in 2021. And, with interest rates at an all-time low, investors can tap into an enormous cash pool at very low cost.
However, it’s not easy to take over a business’ technology “stack.” A technology stack is the combination of tools, services, software, hardware, coding languages, operating systems and programs used by a company to build an application. For chief information officers (CIOs) on either side of a transaction, it can be a difficult undertaking to bring two disparate technology structures together. This can pose a significant risk to successful integration. Additionally, for chief financial offers (CFOs) it is not only one of the biggest cash-out areas for overall transaction costs, but also among the riskiest.
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As my colleague Donald Dawson pointed out in an earlier blog, companies that place early and significant emphasis on technology as part of their transaction strategy are best positioned to realize value from acquisitions. The CIO usually takes the lead role in making the company’s technology stack buyer friendly. In fact, according to the Accenture Technology Vision 2021, 77 percent of executives state that their technology architecture is becoming very critical or critical to the overall success of their organization.
One of the most exciting concepts we are seeing in the M&A technology environment is what we call “lean greenfield.” For most companies divesting businesses means building (or rebuilding) the technology stack essentially from scratch, including applications, infrastructure, for the business unit to be divested. Then historic and current data from the old stack is migrated to the newly set-up stack. With this, the business gets stood up with existing data but on standardized and automated business processes that do come with the new stack.
In lean greenfield, the stack is “pre-solutioned,” that is, prepared in advance for different applications and infrastructure approaches. The buyer can quickly adapt the technology stack for its own purposes rather than having to undertake an extensive (and expensive) reconfiguration. Additionally, the buyer does not have to have a legacy trained workforce but can set up an organization that deals with the latest technologies.
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Strategic decision: build from scratch, or adapt existing elements
We think there is a strong case to be made for building from scratch rather than adapting the existing infrastructure and application environment. Although the merger process can take from six months to several years to complete, we find it typically takes about a year to make the final strategic decision on divestiture, find a buyer, conduct negotiations, and close the transaction. During that time, the seller can create a new technology stack based on a modern, 100 percent cloud-based architecture, using a standardized platform, modular components, and uniform processes. Cloud helps IT make continuous enhancements through agile, real-time delivery, breaks down barriers to innovation and encourages collaboration and iteration in development.
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77% of executives state that their technology architecture is becoming very critical or critical to the overall success of their organization.
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The lean greenfield approach can offer three advantages:
- Leaner digital operations. While the business unit still belongs to the seller, lean greenfield initiatives can deliver immediate cost savings through standardization and automation. The seller can often reduce the full-time equivalent employees by as much as 20 percent especially in the SG&A costs (selling, general and administrative). Lower operating costs translate into increased earnings before interest, taxes, depreciation, and amortization and then finally into a better enterprise valuation and ultimately a better selling price.
- Lower information technology spending. The use of digital core platforms and readily implemented enterprise resource planning platforms lowers technology spending and optimizes IT functions. This increases enterprise value and improves the seller’s position during negotiations. The business to be divested runs better because it no longer operates on bulky, over-customized legacy systems.
- Greater autonomy for both buyer and seller (minimized or no transitional service agreements). Lean greenfield allows the seller to detach operations from the buyer almost immediately. In a typical divestiture, the seller signs a transitional service agreement, which commits the seller to supporting the technology of the divested unit for a specific period. By creating a simplified, standardized environment, lean greenfield shortens that time and allows the buyer to take over technology operations more or less immediately after transaction closes.
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CFOs and CIOs at companies seeking to divest businesses should look at potential transactions from the buyer’s perspective. The gold standard for buyers is a business that delivers a desirable return on investment with minimal integration risk. Based on recent research, for CIOs, one of the top actions to achieving recovery/growth in the next 6 months include the acceleration on M&As.* And as part of a disciplined M&A program, lean greenfield can remove many of the obstacles that stand in the way of successful transactions — not the least of which is the need to keep a team of technology experts on-site at the acquired company long after the transaction has closed.
*Accenture Pulse Research, March 2021
