COVID-19 and M&A — Preparing for the Future
- January 25, 2021
The COVID-19 pandemic has shown that companies need to build an agile model to ensure that they are prepared for the future. In the face of much uncertainty, companies need to scan for disruptors, proactively plan mitigation strategies, and balance short-term commitments against the long term. At NTT DATA Services, we believe it is also important to build preparedness for the future. While the COVID-19 pandemic has had far-reaching consequences on the operational model in the near term, we do not believe this is a structural issue. Demand and volume for M&A will rise, and opportunities to invest post-pandemic will only grow. Companies will be best positioned that use this period to identify opportunities for the future and lay the foundation for growth.
Sustaining resilience while revamping internal capabilities
A recessionary environment provides an opportunity to re-examine the portfolio, shed non-core businesses, and explore cost savings. Examining SG&A and shared service functions is a key component to overall enterprise cost reduction, especially as the corporation shrinks due to these restructuring activities. But this must be done with minimal business impact to either inflight or future transactions. A focused spend optimization framework can help companies identify both near-term quick wins and longer-term initiatives that can provide greater structural advantage.
Due to COVID-19, inflight deals have a greater emphasis on synergy management and cost reduction. Companies are looking for greater governance in the realization of projected synergies than in the past. This is also leading to a push to phase out investments and consider paying for them through savings realized in the integration process. Additionally, companies are also including more worst-case, zero-revenue scenarios into their 30-60-90-day integration plans with a push to identify and realize synergies earlier in the integration process. A structured cost and productivity framework can help identify business and IT synergies during the integration planning process and ensure greater success in their realization.
Consider leasing out noncritical, offshore sites and assets
The current crisis and the recession will leave companies strapped for cash. These organizations will face increasing pressure from shareholders to reduce costs and shore up their balance sheets. The need to raise cash, coupled with the perception of diminishing returns from their offshore captives, may lead companies to sell their large-scale captives. Companies should examine their site operational and IT support agreements and work with vendors in tailoring them to fit business needs. Vendor SLAs can be linked to post-close M&A operational commitments to ensure back-to-back governance.
Leverage Migration Driven Business Architecture
CXOs should consider adopting a lean Migration Driven Business Architecture (MDA) approach to measure the impact of IT integration on the business. A business capability framework helps connect business and IT capabilities and can align business-driven integration imperatives with IT plans. This is critical in an environment that is looking at reducing cost and improving speed to integrate.
In our experience, 20% of the systems and process areas account for 90% of the business synergies captured. Leveraging an MDA approach to business architecture and application dispositioning helps pre-decide the target state model — resulting in reduced cost and effort during integration. MDA provides a way to connect the decisions made on the target’s application disposition to business impacts and synergies.
Consider gain sharing in Transaction Service Agreements
In an environment with heightened risk, companies are looking more closely at Transaction Service Agreement (TSA) clauses, decommission costs, exit conditions, TSA support representations, inclusions, and exclusions. TSAs become an instrument to negotiate greater assurance from the sellers to deliver key services in transition. Buyers will be looking to ensure that the TSA is set up to address mitigation of operational risk in the interim and support business continuity of the sold division. They want to get out of paying for TSA services and ideally would like to insource these services as soon as possible. Sellers are not set up to be service providers and therefore incur higher costs to provision and deliver these business and IT services. CXOs are advised to explore gainsharing arrangements with vendors, which can reduce capital expenses during a service support transition. Linking TSA SLAs to operational short-term and long-term deal commitments helps ensure greater effectiveness of the transaction. Additionally, a Service-Based Approach that involves gain sharing arrangements with IT Service vendors may allow both buyers and sellers to take advantage of savings tied to commitments. Companies should consider shortening the TSA period leveraging such a Service-Based Approach – in our experience, leveraging such a Service-Based Approach can help provide at least 10-12% savings on TSA run and exit costs.
The future is in the cloud
This introductory series on the impact of COVID-19 on M&A includes what CxOs need to consider to complete transactions successfully. The series concludes with the various integration models for M&A post-pandemic. Stay tuned.