Make Cloud an Asset during Mergers and Acquisitions

Chris
May 9, 2023
7 min read

Updated: Jul 12, 2023

A shocking 70% of M&A transactions fail to achieve their expected value (Christensen et al., 2011)(1). Cloud can be a liability, especially if the transaction participants are using different cloud providers or not using the cloud at all. Another common scenario I see is when the acquired company is a startup on the cloud and the acquiring company is not on the cloud. But the cloud can be a significant asset during M&As.

M&A transactions go beyond asset exchanges, encompassing individuals, procedures, and technology that require meticulous management and integration. In this post I'll go through some of the major challenges faced during transactions while investigating how capitalizing on the cloud can enhance transaction value, actualize synergies, and enable successful M&A integration.

The Challenges of M&A

During M&A transactions, several non-technical hurdles can emerge. This list isn't exhaustive, but gives you an idea of what you might face during a transaction.

Leadership Deficiency: Without active, visible sponsorship, M&A efforts can be derailed, leading to stalled activities and a loss of focus (Appelbaum et al., 2017)(2).
Impractical Goals: Setting unrealistic timelines and outcomes can cause undue pressure, often triggering rushed decision-making and flawed execution. This can undermine the potential value of the merger or acquisition.
Insufficient Planning: A poorly planned M&A strategy can result in operational inefficiencies, budget overruns, and failure to meet goals, significantly reducing the expected benefits of the M&A (KPMG, 2019)(3).
Cultural Disparities: Distinct corporate cultures and work habits can present significant integration obstacles. Conflicts between these cultures can slow down integration efforts, disrupt typical decision-making processes, and adversely affect employee morale and productivity (Cartwright & Cooper, 1993)(4).
Complex Integration: Differences in business processes can complicate integration, leading to inefficiencies, change resistance, and increased employee turnover.
Skills Gap and Talent Retention: M&As can reveal skill gaps in areas like project management, integration, and change management. Uncertainty during M&As can also prompt a talent exodus, resulting in a potential loss of essential skills and institutional knowledge (Hitt et al., 2001; Olie, 1990)(5,15).
Misalignment: Structural, cultural, and systemic discrepancies between merging entities can disrupt operations and create inefficiencies, undermining the M&A's anticipated synergies (Marks & Mirvis, 2011)(6).
Architectural Complexity: Integrating intricate, interwoven IT systems can increase costs, extend timelines, and potentially disrupt business functions (IBM, 2013; TechTarget, 2020)(7,18).
Innovation Integration: Integrating divergent approaches to innovation can pose significant challenges during M&As.
Change Fatigue: Prolonged M&A activities can induce change fatigue, leading to disengagement, decreased productivity, and morale issues (Balogun & Hope Hailey, 2004)(8).
Risk Factors: M&As entail regulatory, security, and governance risks, potentially resulting in non-compliance, reputational damage, and considerable financial loss (McConnell & Nantell, 1985)(17).

These challenges underscore the necessity for comprehensive planning, effective communication, and solid change management in M&As. Effective change management is integral to M&A integration, ensuring that transactions fully realize their potential.

Data: The Heart of M&A

I'd argue that data is the heart of any organization, and its integration post-transaction is equally crucial. A common hurdle faced by most organizations today is separate, siloed data scattered across the organization, hindering data-driven decision-making and operational efficiency. This is the legacy most of us face, whether it grew this way organically or was the result of M&As throughout the organization's history. Going through an (another) M&A transaction could make it worse. For instance, integrating a traditional data warehouse and a cloud-based data lake can be complicated and time-consuming, potentially impacting data integrity and subsequent strategic decision quality (Bughin, Chui, & Manyika, 2010)(14).

Data Management strategies such as Data Lakes, Data Lakehouses, and Data Meshes can help:

Data Lake: Data Lakes provide the capability to intake an unlimited volume of data, potentially arriving in real-time, from various sources. The data is transferred into the data lake in its raw, unmodified state. This approach enables scalability to accommodate any data size and conserves time that would otherwise be spent on defining data structures, schemas, and transformations. Odds are the organization you just merged or acquired has a data lake or two as well. This leads us to the next two data management strategies.
Data Lakehouse (Data Lake + Data Warehouse): A data lakehouse is an architectural paradigm in data management that melds the prime features of both data lakes and data warehouses. It harnesses the advantages of a data lake, like economical storage and wide-ranging data access, along with the perks of a data warehouse, including structured data and management functionalities. Post merger integration of the centralized data warehouse functions is key.
Data Mesh: A data mesh strategy decentralizes data ownership and architecture, promoting more agile and responsive data practices (Zhamak Dehghani, 2021)(12). This approach could be an efficient way to combine data resources when both merging companies already have a data lake. Learn more about how JPMC implemented a Data Mesh.

Implementing a solid data governance program, alongside these technical approaches, ensures data quality, reliability, and accessibility while helping to ensure data protection.

Leveraging the Cloud to Maximize Transaction Value

The Cloud offers transformative capabilities that can significantly enhance the success rate and value realization of M&A transactions. The cloud allows companies to rapidly scale and innovate while achieving cost efficiency and operational flexibility. By leveraging the cloud, companies can:

Enable Revenue Synergies

Harvest / Synergize Data Assets of Merging Entities: Cloud's robust data, analytics, and machine learning services enable the integration and extraction of value from the data assets of merging entities.
Enable Cross and Up Sell: Using data lakes, lakehouses, or meshes in the cloud, companies can leverage advanced analytics to generate cross-sell and up-sell opportunities, optimizing both customer value and revenue streams.
Modernize Core Digital Product: The cloud enables the incorporation of advanced capabilities such as AI/ML and IoT into core digital products. This enhances product differentiation and improves architecture and interoperability.
Digital Product Innovation: The cloud supports rapid prototyping and faster innovation cycles. This allows companies to respond more effectively to customer needs and explore new market opportunities.
Time to Market: The cloud's DevOps tools can increase the velocity of releasing new features and services, reducing development cycles and improving collaboration (Fitzgerald & Stol, 2017)(19).
Software Product Integration: Leveraging cloud expertise, companies can better manage the front-end and back-end integration of the merging entities' software products.
Global / Regional Growth Strategy: Companies can leverage cloud's global infrastructure for enhanced performance, improved user experience, and regional data compliance.
B2B Marketplace & Ecosystem: Cloud providers offer advisory services to help companies set up their own B2B marketplace platform & ecosystem, extending their product offering and creating new revenue streams.

Harness Cost Synergies

Data Center Consolidation: Cloud platforms enable reduction or consolidation of physical data center facilities, generating substantial savings on real-estate and infrastructure (Zhang et al., 2010)(20).
Storage & Backup Reduction: Cloud storage offers scalable solutions, eliminating the need for costly onsite Storage Area Networks (SANs) and tape backup systems.
End User Compute Standardization: Cost savings are achieved by standardizing end-user computing tools via Desktop-as-a-Service (DaaS) solutions, scaling to provide thousands of desktops globally.
Mainframe Cost Reduction: Cloud migration or re-architecture can significantly cut mainframe maintenance costs and human resource expenses.
App & Data Integration: The cloud offers efficient and cost-effective solutions for data transformation and application integration, reducing overall costs.
Network Data & Voice Optimization: Savings can be achieved through site consolidations, reduced network bandwidth requirements and costs, including VoIP services.
Call Center & Telephony Modernization: Cloud-based omni-channel contact center solutions enhance customer service while reducing costs.
Security Standardization and Automation: The cloud can standardize and automate security tasks, reducing manual overhead and enhancing regulatory compliance.
Database Cost Reduction: Cloud-based databases can improve performance, lower costs, and reduce management effort.
Cost Optimization: Cloud technologies offer various strategies for consolidating and optimizing cloud and IT spend, leading to substantial cost savings and improved service delivery.

M&A Execution Maturity Roadmap

Successfully navigating the M&A journey involves a maturity roadmap. This roadmap includes:

Keeping the lights on: Ensuring business continuity during the M&A process.
Implementing processes: Establishing effective M&A processes and structures.
Eliminating value leak: Identifying and addressing areas where value is being lost.
Value-based prioritization: Prioritizing M&A activities based on their potential value contribution.
Strategic value unlock of deal thesis: Realizing the strategic value envisioned in the deal thesis.
Patterns: Identifying patterns and lessons learned for future M&A activities.

Conclusions

The challenges of M&A are many, but the strategic use of the Cloud can overcome many obstacles, maximize transaction value, and enhance the likelihood of a successful merger or acquisition. Embracing these strategies and carefully managing the associated risks can significantly increase the likelihood of successful M&A integration and value realization. As you progress through your M&A journey, remember that the key to success lies not only in addressing the technical challenges but also in effectively managing the non-technical aspects of the deal. By doing so, you'll be well-positioned to unlock the full potential of your M&A transactions.

Keep You Head in the Clouds...

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