Leveraging IT With Mergers--And Divestitures

Market and financial dynamics last week drove SBC Communications to buy AT&T, Procter & Gamble to acquire Gillette, and Citigroup to sell its Travelers unit to MetLife. IT also played a role. Its absorption into the very fabric of business has turned it into an additional force underlying acquisition and divestiture decisions.

"IT drives companies to consolidate," says Haim Mendelson, director of the Center for Electronic Business and Commerce at the Stanford Graduate School of Business. "Core processes and systems can be leveraged over a large scale, reducing the average cost of transactions and making the combined companies more competitive."

Amalgamating IT functions after a merger remains a challenge, but technologies such as middleware, Web services, and XML simplify the linking of disparate systems. "The cluster of common functionality in most companies means that you can get a very good running start in integrating systems," says Benjamin Grosof, assistant professor of E-commerce and IT at the MIT Sloan School of Management.

But IT's inability to solve complex problems also can lead to divestitures. One example: Citigroup never created a supermarket of personal finance products, which industry experts say could be a factor in its decision to sell the Travelers insurance business. Technology, Mendelson says, has yet to replicate the advice a broker can give clients.

Eric Chabrow

Long-Distance Era May End

The move last week by Baby Bell SBC Communications Inc. to acquire AT&T, its former parent, for $16 billion is the latest step in a wave of mergers and acquisitions that are reshaping the telecommunications industry. The result is likely to be a handful of large full-service vendors that offer businesses and consumers a suite of wired and wireless voice, data, and video services.

In December, Sprint, the nation's No. 3 long-distance company, said it would buy Nextel Communications Inc. in an effort to focus on wireless services. That followed the completion of Cingular Wireless' acquisition of AT&T Wireless last year. And late last week, Qwest Communications International Inc. reportedly made a bid to buy MCI, the nation's second-largest long-distance company. Speculation also surfaced that Verizon Communications may make a bid for MCI. The completion of deals like these would spell the end of the independent long-distance industry.

The company that ends up with MCI would be in a position to compete head to head with SBC in just about every market. These developments will pressure other telecom companies to find partners or acquire rivals, says Dave Passmore, research director at the Burton Group.

SBC CEO Ed Whitacre, left, and AT&T CEO David Dorman shake hands.

SBC CEO Ed Whitacre, left, and AT&T CEO David Dorman shake hands.

Photo by Nancy Kaszerman/Zuma Press

SBC's acquisition of AT&T should take at least a year to win regulatory approval. By buying the nation's leading provider of business networks, SBC will be able to offer a more complete menu of services by combining AT&T's national and international business services with SBC's local, broadband Internet access, and wireless services. SBC says it will recover most of the costs of the acquisition by achieving $15 billion in synergies through new revenue, operational efficiencies, and nearly 13,000 job cuts.

For the telecom companies' business customers, the first change they may see as a result of the SBC-AT&T deal is a new account representative. It's not likely that SBC will make major changes to the services AT&T sells to businesses. The account-rep question concerns some. "I hope nothing changes," says James Romines, IT director of the Shaner Hotel Group. "We have worked closely with our account rep for five or six years, and we have a great relationship."

Michael Dyson, IT director at Construction Specialties Inc., is more interested in what will happen to the AT&T brand. If SBC abandons the AT&T moniker, it could signify a change in policies and principles. "If a sales rep comes in and says, 'I'm from SBC,' they'll have to jump through the hoops like any other vendor," he says. "But AT&T doesn't have to do that. They don't have anything to prove."

In the long run, industry consolidation could mean more one-stop shopping choices for business customers. Says David Willis, VP of technology research services at Meta Group: "IT managers should keep their contracts short, not overcommit to any one carrier, use multiple carriers, and play the market for a while and see how things shake out."

Paul Travis

P&G's Purchase Of Gillette Creates I.T. Powerhouse

Procter & Gamble Co. and Gillette Co. have long been on the front line of supply-chain technology adoption. Last week, P&G said it will buy the smaller consumer-products company for $57 billion. As a combined company, they'll have more resources to roll out collaborative supply-chain initiatives. With Gillette, P&G--the world's largest consumer-products company--could force rivals to step up their adaptive supply-chain initiatives to stay competitive.

Perhaps better than others, P&G and Gillette have led the industry in their data-synchronization and radio-frequency identification initiatives, not only with leading retailer Wal-Mart Stores Inc., but across the ocean with German retailer Metro Group. Both consumer-products makers participate in item-level RFID tagging at Metro's "store of the future" in Rheinberg, Germany. The store lets Metro and key suppliers develop and test under real-world conditions how RFID applications perform and how consumers respond to them. The store is outfitted with smart shelves, RFID self-checkout systems, kiosks, smart scales, and other leading technology.

Even with their tech expertise, P&G and Gillette face major challenges in merging their IT systems. Both companies run mySAP ERP, but the business processes mapped into their IT infrastructures aren't configured similarly. Executives must decide what processes and systems to keep, says Nils Herzberg, a senior VP at SAP. Generally, "integration between two companies could cost tens of millions, but that significant investment won't be taken unless there is a positive business case," Herzberg says. Benefits would include stronger sales, lower operating costs, increased customer satisfaction, and real-time insight into inventory transactions.

From one customer's perspective, P&G's acquisition of Gillette was welcome. "We're dealing with one less supplier with more volume," says Roger Lekberg, senior VP of supply chain at supermarket chain Safeway Inc., "so from a pure supply-chain standpoint, the less suppliers you have to connect with the more efficiencies you gain."

Laurie Sullivan

Back To Basics For Citi, Amex

Two blockbuster deals last week, Citigroup Inc.'s sale of its Travelers life and annuity unit to insurer MetLife Inc. for $11.5 billion, and American Express Co.'s spin-off of its American Express Financial Advisors unit, point up a back-to-basics philosophy among financial-services industry executives that's in sharp contrast to the financial supermarket vision embodied by the merger of Citibank and Travelers seven years ago.

For Citigroup, the deal signifies a step back from the notion that banking and insurance products could be peddled at the same time through branches, call centers, and over the Internet. The IT needed to execute that vision, including middleware to connect Citibank and Travelers systems to each other and to multiple delivery channels, was substantial. "The relationship-based architecture, as opposed to the product-based architecture, is very cumbersome to execute," says a former high-ranking IT executive in the financial-services industry.

Citigroup and American Express will be free to concentrate on their core strengths. "These deals will eliminate some of the clutter that builds up in large diversified corporations," the executive says, "clutter in their strategic thinking and in their technology and operating platforms."

Steven Marlin

After The Merger

When you stop and think about the skill and the time it takes to integrate the IT infrastructure from two multibillion companies that have merged, the task might seen intimidating. Recent acquisitions by powerhouses Procter & Gamble of Gillette, Oracle of PeopleSoft, and SBC Telecommunications of AT&T involve sophisticated and finely tuned platforms. But the task of linking IT systems doesn't have to be daunting.

IT projects that typically follow mergers include identifying new initiatives, integrating disparate existing applications and systems, and replacing legacy IT platforms that cannot serve or scale to the needs of the merged companies. "The goal isn't just to integrate the IT platforms from the companies that merged, but create a platform and a technology strategy by which it becomes easier to acquire new companies and fold them in," says Vijay Tella, Oracle's chief strategy officer for its application server 10g. "It's beyond integration and more about pro-active planning around how to organize the company's IT structure, so not only can it complete this merger, but set the stage for others to follow."

Since Oracle's applications are built on a service-oriented architecture, it's a principle the software maker has adopted within its own IT department. With its recent acquisition of software maker PeopleSoft, Oracle knows that if the IT integration is done correctly, the companies could see a financial payback in months. Aside from making the integration of two companies easier, IT can play a major role in securing the infrastructure that provides real-time information throughout its supply chain.

There are several steps companies can take to reduce the pain of integration, according to Tella:

  • First, identify across all departments common data and service standards, such as XML or Web services.

  • Second, identify the IT systems to be integrated and consolidated. If the company has multiple human-resources or procurement systems, put together a plan to consolidate them.

  • Third, create a common metadata model for defining data stored in systems across the company, such as customer, product, and financial status, to eliminate inconsistencies across the companies.

  • Fourth, set up unified security and user management for groups and individuals to access these combined systems and data.

  • Fifth, exploit service-oriented architecture tools, such as portals and business process execution language to implement new cross-functional applications such as end-to-end, multistep processes. These are select systems that help to automate and integrate the process using standards-based technology. Once successful, expand to include additional processes.

    Mega-mergers also don't necessarily have to disrupt IT initiatives under way. For most companies, these IT initiatives are being driven by industry compliance and requirements, or competition. For consumer-goods companies, such as Procter & Gamble and Gillette, they're mainly driven by the need to implement radio-frequency identification technology in the supply chain, synchronize data with their retail customers to make certain both companies are working from the same product information, or from outsourcing initiatives that have forced the manufacturing of their products to low-cost countries in Asia.

    But a merger among companies with equally sophisticated IT infrastructures isn't necessarily easier. Procter & Gamble and Gillette run the mySAP enterprise-resource-planning system, but customization from business processes mapped into their IT infrastructures makes the configuration different. And the array of applications being used at these two companies could take time to sort out.

    For example, Procter & Gamble runs SAP applications for finance, supply chain, warehouse-management-systems, and employee services, and its marketing reports and customer-management programs are developed in applications from Oracle or Siebel Systems, according to a company spokeswoman. A Gillette spokesman says the consumer-goods company runs Provia Software Inc. for warehouse management, Manugistics for manufacturing, and JD Edwards for supply planning.

    Integrating platforms that support the combined companies for those that have a strong IT backbone typically takes time because the executives must decide what processes and systems to keep. "Our research tells us that we should anticipate more of these mergers in the future," says Nils Herzberg, senior VP of solution management for manufacturing industries at ERP maker SAP.

    Depending on the reason for the merger, however, not every company immediately trashes one of the systems. There are a few companies that have let the IT infrastructure remain for years. Herzberg says many companies find that merging the two systems is where the business benefits surface.

    For example, if two large consumer-goods companies merge and they must work with a dominant retailer, it's important to understand how much they're selling to that retailer. It's estimated that, for Procter & Gamble, Wal-Mart Stores Inc. accounts for 17% of sales, and Gillette 13%.

    It's crucial to have the analysis from a combined order-entry system, invoicing platform, and processes to keep track of joint sales. There's a benefit to knowing that. Says Herzberg: "The business case for combining the software platforms is having real-time insight into total sales from the joint corporation to its customers."

    Laurie Sullivan

    For more about the impact of mergers and acquisitions on CIOs, see the February issue of Optimize magazine at optimizemag.com

    Illustration by Rob Day/Veer

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