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Business TransformationVisibility into data and IT infrastructure is non-negotiable for companies that are merging or acquiring assets.
According to a 2022 survey by Deloitte, 92% of US corporations and private equity firms expect to see an increase in the number of mergers, acquisitions, and divestitures over the next 12 months.
Despite this optimism, these kinds of transactions are exceptionally complicated. It might be easy to let elements like IT assets fly under the radar, but ignoring data infrastructure details about storage, compute, and cloud environments can be perilous.
Without a clear understanding of the IT infrastructure being inherited, companies can end up overpaying, delaying integration, or unknowingly stepping into operational or legal landmines.
Fortunately, for busy Mergers & Acquisitions (M&A) teams and executives, visibility into data environments can be easier than it sounds. But it has to be prioritized.
Let’s look first at what makes IT infrastructure so important in M&As, then we will consider what to look for in these infrastructures and how.
What are Mergers, Acquisitions, and Divestitures? And Why Do They Occur?
When two companies agree to join together into a new company, this is known as a merger. On the other hand, an acquisition is a transaction in which an existing company buys and takes ownership of another company or asset. A divestiture is simply the inverse of an acquisition, referring to disposing assets to another company via sale, exchange, or closure.
Companies merge with or buy other companies for a variety of reasons, including:
- increasing market share by purchasing a competitor’s business;
- eliminating an entire tier of costs by purchasing a supplier or distributor;
- preventing future competition.
On the other hand, reasons for divestitures include:
- Asset underperformance;
- bankruptcy;
- raising cash / strengthening balance sheets to pay down debt;
- eliminating non-core businesses to focus more on core functions / lines of business;
- stabilizing profitability;
- unlocking distinct value by decoupling businesses;
- complying with regulatory environments.
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Whether you’re in the middle of an M&A or expecting one in the future, we can help.
Risks of Mergers, Acquisitions, and Divestitures
IT assets can make or break M&A efforts. While mergers, acquisitions, and divestitures can provide enormous growth opportunities for all parties involved, there are serious drawbacks to miscalculation.
According to a recent article in Harvard Business Review, there are three risks in particular that can drag down M&A activities:
- Failing to perform due diligence
- Overpaying or overvaluing assets
- Underestimating integration challenges
These avoidable outcomes all result from a lack of transparency and visibility, especially when it comes to IT assets. The inescapable truth is that data infrastructures are critical for M&A decision-making.
Risk #1: Failing to perform due diligence
To ensure that they have a thorough grasp of the deal on the table, buyers should study as much as possible about the selling firm’s financials, contracts, customers, insurance, and other essential information prior to the transaction. “Other essential information” must include IT assets.
Potential buyers need to know what they’re getting into. For example, IT spending as a percentage of revenue is increasing, and there are significant variances between industries and firm sizes. A tiny hospital, for example, will spend a considerably higher percentage of income on IT than a large hospital system. In fact, a tiny hospital may easily spend more than 15% of its income on IT, while a huge hospital system spending more than 6% would be rare.
More importantly, what IT assets are revenue being spent on? How much data storage space is available? Is there room to grow, or is the infrastructure nearing capacity?
These sound like simple questions, but the answers are often unclear (even to the IT staff!)
Without data visibility, both buyers and sellers may be blindsided. Worse, buyers may become caught in obligations they aren’t ready to take on.
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Risk #2: Overpaying or overvaluing assets
Overpaying is a prevalent risk for buyers in mergers and acquisitions. While preparing for these major transactions, there can be a lot of pressure from all sides. Furthermore, both the seller and the buyer may be influenced by the agreement’s intermediaries, as well as internal teams in both firms, to push the sale through rather than work out a value-creating arrangement that includes any surfacing issues with IT infrastructure.
This is how organizations end up overpaying.
Sellers should also beware that they may face serious lawsuit risks if the value of IT assets is erroneous or unclear – or if the methodologies used to appraise those assets are flawed.
Large companies spend an average of between 3% and 5% of revenue on IT assets, according to conventional guidelines. At a minimum, buyers may want to verify that the acquired company spends within those thresholds.
It is even more important to know what kind of data is stored on those assets – and how.
Is hardware aging, or are most of the storage arrays newer? Is the infrastructure in the middle of a cloud migration with expensive contract costs expected in the future?
Ignorance is not bliss!
Risk #3: Underestimating integration challenges
Once a merger or acquisition is made, the complex process of consolidating the companies or assets begins. Not only does integration need to succeed on an operational level, but it also needs to generate more organizational value than before.
These “synergies” – ways in which the combined assets become more valuable together than separately – are primary reasons for M&As. If you get them wrong, you could be worse off after the merger or acquisition than before it.
This is where IT assets can have a truly outsized impact. For example, a seller may state that they have a certain amount of storage but fail to disclose any details about the data stored or how the platforms are managed.
Companies frequently start a merger like this: overconfident in the expected payout and misjudging the time it takes for synergies to materialize.
What hidden details could derail integration and hold back synergies?
- Over-provisioned platforms or rapidly multiplying data, both of which will necessitate more storage purchases soon;
- Aging arrays and equipment that will need to be replaced;
- Health issues lingering under the surface, such as misconfigurations or failing components;
- Low-performing applications in need of upgrades;
- Data silos between storage, compute, and/or cloud teams preventing infrastructure visibility.
These add up to needs for more staff, more budgetary resources, and less predictability. In other words, slower integration and diminished synergistic value for the whole organization, even if every other part of the merger / acquisition is going smoothly.
Seeing is Believing
Visual One Intelligence® can help with M&A infrastructure transitions.
You Need a Single Pane of Glass to Prepare for M&As
Visual One Intelligence® (Visual One) is an all-in-one storage, compute, and cloud reporting software that offers quick and easy visibility into important metrics for mergers and acquisitions.
Visual One is an agentless, off-premises software that can easily collect and report data from the IT infrastructure you are (or might be) acquiring.
Visual One helps buyers and sellers with:
- Capacity planning and trending reports that predict when physical and virtual storage platforms will run out of room (as well as when cloud subscriptions can safely be reduced);
- Health monitoring that identifies potential and urgent infrastructure concerns;
- Placement analysis that finds hidden free space and other opportunities for getting more out of the existing infrastructure;
- File analysis reports that help identify how much data can be archived on inexpensive storage;
- Unified visibility into 80+ products from over 17 vendors.
It doesn’t take much to imagine how this kind of information – often obscured behind outdated spreadsheets and employee retirements – can be critical for evaluating and implementing potential M&As.
If a merger or acquisition might be in your future, don’t wait until the need arrives. Ask your IT team to watch a demo and try us out for free. When it comes to M&A sales, it could make an eight-figure difference.
