Successful factors of it integration and carve-out in a post-merger and divestiture context

(1)

●

S

UCCESSFUL FACTORS OF

IT

I

NTEGRATION AND

CARVE

-

OUT IN A

P

OST

-

MERGER AND DIVESTITURE

CONTEXT

●

Amir Hossein Zadeh

amir.hosseinzadeh@student.uva.nl

10851968

Supervisors

Jaap Crum

Erik de Vries

Jurriaan Amesz

Dick Heinhuis

Diederik Bakker

ABN AMRO Bank University of Amsterdam Master Information Studies

Business Information System

A Thesis submitted in partial fulfillment for the degree of Master of Science

Master Information studies:

Business Information Systems track

(2)

Acknowledgements

I would like thank everyone who has been involved with me throughout this journey of four months. I would like to thank my university thesis supervisor for his patience and guidance as he steered me in the right direction, whenever I was going in the wrong direction.

My sincere thanks also go to Jaap Crum, Jurriaan Amesz and Diederik Bakker, who facilitated the opportunity to join them for an internship. Moreover, they made sure I had all the facilities I required from within the bank. Whenever I was in doubt they gave me confidence to go on.

Gratitude goes towards my colleagues on the floor for being there to help me and answer any questions I had. Moreover, thanks also go to my interviewee candidates for being so cooperative and patient with my questionnaires.

Lastly, I would like to thank my family and friends for supporting me, especially in the last days, as things got chaotic in order to meet the deadlines.

(3)

Abstract

Well planned IT integration and carve-out are becoming the key elements to success during mergers, acquisitions and divestitures for firms. However, these elements are still underestimated, as Information technology (IT) is left out of due diligence, putting firms at risk to fail the mergers due to lack of adequate planning for IT integration. Similarly, a lack of attention to post-merger/separation plan can undermine a good strategic merger or separation. The banking sector is no stranger to this. Therefore, this thesis will identify the post-merger/divestiture factors that are key drivers of success in IT integration and separation in the banking sector. This thesis uses the mix-methodology research (consisting mostly of multiple case study approach with a complimentary survey) to investigate three business and IT capability propositions - acquirer’s capabilities gained from prior experience, business and IT strategic alignment and infrastructure scalability – as factors that lead to successful post-merger/divestiture IT integration/carve-out factors in banking sector. These propositions are tested on four case studies regarding the mergers and separations ABN AMRO went through in the last decade - The Consortium takeover(RBS carve-out and Fortis merger), HBU divestiture, separation from International Card Services and Credit Suisse private banking assets takeover. Results support all three propositions suggesting that if these factors are adhered to, then a company can mitigate a wide variety of challenges encountered in such undertakings; leading to successful post-merger/divestiture IT integration/carve-out projects.

Key words: IT Integration, M&A, Divestiture, Business and IT capabilities, Business and IT strategic alignment, IT Carve-out, Scalable IT infrastructure.

(4)

In this day and age, IT integration during merger & acquisitions (M&A) has become one of the main topics of discussion as there is great amount of absence in IT synergy between the companies (Sarrazin & West, 2011). Large companies utilize their portfolio of SBUs to accomplish their strategic objectives such as growth and diversification by either acquiring other business and creating synergies with them or divesting business units to free up capital and focus on other business (Decker & Mellewigt, 2007). However, more often than not, CIOs or other IT executives are usually left out of due diligence, as it usually is considered a task for lawyers and accountants (Wijnhoven et al., 2006). This concern is also shared by Leimeister et al. (2011), suggesting that CIOs are not only left out in due diligence of merger and acquisitions but also during divestures. This leads to disruptions in IT synergy as IT systems enable the operations related to finance, HR, logistics, and customer relationship management (CRM). This eventually limits functionality of the company because the IT systems of the acquired company are not fully integrated yet on to the buyer’s IT platform (Mehta and Hirschheim, 2007). To recover from this, countless resources (Time, labor and costs) are utilized in post-merger stages to cope with issues that come with integrating IT systems.

Looking from a different perspective, studies regarding IT carve-outs projects have also been getting fair amount of attention as the studies emphasize that SBU’s that are heavily integrated with their parent company face high difficulty in a carve-out project as illustrated in the example of IBM’s carve-out of its PC business, in order to sell it to Lenovo (Böhm et al., 2010). IT Carve-out projects can cause distress in the parent company due to the short time frame (three to nine months) it has to disentangle the organizational and technological elements within the company (Fähling et al., 2009). Therefore, similar to IT integration projects, IT element in an carve-out project account for the highest proportion of the costs that are involved in such projects (Leimeister et al., 2008), which is why the impact of technical issues plays a considerable role in the success of a divestiture (Fähling et al., 2009, 2010).

With that being said, in the last 20-30 years M&As (also divestitures) have been occurring at an accelerating pace in the financial sector (Focarli et al., 2002; Campa & Hernando, 2006). Toppenberg and Henningsson (2013) state that most studies have focused on manufacturing (6) and banking (5) industries when it comes to studying success factors and challenges in IT integration in an M&A setting. Moreover, there are little to no studies in regards to IT carve-outs in the banking industry. Therefore we limit the scope of research by focusing on success factors that need to be considered for such projects in the financial sector. Hence our research question:

“What are the key factors of success in a post-merger/divestiture IT integration/separation in the banking sector?”

Success is classified here as having IT capability to capture the benefits of a merger or divestiture strategy. For this research we draw on literature regarding the acquirer’s and divesting firm’s business and IT capabilities to address IT integration/carve-out challenges (Henningson and Yetton, 2011, 2013; Fähling et al., 2010; Böhm et al., 2010, 2011). These studies state that these business and IT capabilities are pre-condition factors to carrying out successful integration and separation projects in order to gain

(7)

2 IT-based value. In this paper three conditions relating to business and IT capabilities are investigated: business and IT capabilities gained from prior M&A and divestiture experience, Business and IT strategy alignment and IT platform scalability. These conditions are also tested in IT-carve out studies (Henningsson, 2011, ; Fähling et al., 2010; Böhm et al., 2010, 2011).

In order to do this, this paper takes a multiple-case study approach. It provides a general background study on M&A and divestitures in banking sector, role of IT in these settings, and the IT integration and carve-out processes. Then the literature review narrows its scope by focusing on the relation of merger and divestiture objectives to IT integration and cave-out strategies, and how previous business and IT experience, business and IT alignment strategy and IT infrastructure scalability influence the selection of these strategies in order to carry out the integration/separation process mitigating as many challenges as possible. After the empirical background, a research framework is provided which tested four case studies regarding M&A and divestitures that ABN AMRO experienced in the last 10 years with a cross-case synthesis technique (Yin, 2009) to provide the readers with an appropriate conclusion and recommendation.

2. Conceptual Framework based on Literature

2.1. Mergers, Acquisitions and Divestitures

Mergers, acquisitions and divestitures (even carve-outs of business units) are common occurrences among multi-divisional organizations as they use these strategies to manage their business portfolios (Fähling et al. 2013).Mergers and acquisitions (M&A) are generally the most common known ways in which firms expand their businesses (Giacomazzi et al., 1997). With acquisitions, the buyer firm tends to offer money, stock, or both to buy assets (technical and financial) of the target company. Whereas mergers happen when two firms combine their resources (crossing stocks) offering the best to each other to form a new organization (Epstein, 2004; Giacomazzi et al., 1997). Next to the incentive to expand, M&As are also incentivized by goals to gain bigger market share, increase efficiency, achieve synergy and economy of scale, and to access new knowledge and competencies (Holm-Larsen, 2005). On the other hand, divestiture is regarded as a disposal of partial or full business unit in order to generate liquid assets (Cascorbi, 2003). In a divestiture, a term that is also known as demerger, disintegration takes place instead of the more common integration process in an M&A transaction (Böhm et al., 2010). In IT field, this disintegration is also regarded as IT-Carve out. Leimeister (2008) states the following common reasons for divestiture:

Focus: a firm wanting to concentrate the allocation of its resources on its core business, as a result of which it sells business units that do not contribute to the core business.

Weak economic results: Loss generating business unit probes the parent company to divest or reorganize the unit.

Need for capital: a firm facing liquidity issues can decide to divest one of its business units to for example pay off its debts.

(8)

3 The financial industry, banks in particular, has been confronted with M&A at an accelerating pace over the past years (Focarli et al., 2002; Campa & Hernando, 2006; Altunbas & Marques, 2008). This is mostly due technological advances, financial deregulations, international globalization, and an increase in level of competition which leads to consolidation of weaker and inefficient banks (Amihud et al., 2002; Focarli et al., 2002; Altunbas & Marques, 2008). Therefore to stay competitive and survive banks engage in M&A to achieve various benefits which corroborate with the basic benefits of M&A mentioned earlier: Efficiency development by achieving economies of scale and cutting costs with the removal of redundant operations and merging integrating back-end office operations; achieving portfolio diversification by taking over banks either abroad or banks that offer different products (Campa & Hernando, 2006; Altunbas & Marques, 2008)

2.2. Role of IT in Merger, Acquisition, and Divestiture

Nowadays IT plays an essential role in capturing expected value during a Merger, acquisition and divestiture (Sarrazin & West, 2011). For this thesis, we draw inspiration from the papers of Wijnhoven et al., (2006) et al. and Buchta et al. (2007) to describe Information technology (IT) as a broad term which consolidates the following: information technology system (applications, IT contracts, agreements and licenses, databases and processing functionalities), IT infrastructure (e.g. data networks, servers, Operating system, LAN, WAN, etc) and IT organization/policies (IT procedures, IT management, IT coordination, IT support and education etc). When an M&A takes place, among complicated companies, it touches various surfaces on functional level such as legal, tax, administration, organizational production, and IT which need to be considered when evaluating the value of M&A (Giacomazzi et al., 1997). Giacomazzi’s (1997) article further emphasizes on importance of IT integration, as it is consider one of the biggest cost driver in M&As. This view is enforced by Roehl-Anderson (2013), shown in Figure 1, as he mentions that failure to recognize importance of IT integration early on in an M&A can result in unexpected merger/divestiture

costs, significant delays in capturing benefits and adopting expensive temporary IT solutions, all of which could lead to disrupting the original strategic value of the M&A. Moreover, a survey by Curtis & Chanmugam (2005) among 334 executives (of both IT and Business) carried out in a report by Accenture points out IT integration (31%) as the most critical factor of success of

merger, followed by management and leadership (30%), cultural integration/adaptability to change (26%) and internal M&A merger integration capabilities (13%). Sarrazin & West (2011) back this claim up by mentioning that most mergers face difficulties due to lack of importance given to IT integration planning during due diligence. Findings of a study conducted by Weber and Pliskin (1996) found positive relationship between investments in IT during M&As and its and the effectiveness of the IT integration.

(9)

4 Sarrazin & West (2011) state that half of the benefits of M&A in the healthcare, industrial, and financial services sectors are realized with IT integration.

Therefore, it is important to keep the IT involved throughout the whole M&A process. For instance, the higher up the chain a CIO is involved during an M&A, the more value can be added as he/she can help identifying strategic IT opportunities (Sarrazin & West, 2011). In the context of an M&A, the goal of IT integration can help achieve anticipated synergies by combining the resources of the companies to eventually realize the benefits envisioned before the merger deal is signed. Most synergies that come forth are Shared overhead costs, economies of scale, Cross-Fertilization, Operational Integration, and Synthesis of capabilities (Roehl-Anderson, 2013). These synergies help create benefits such as increased market share, lower costs, expansion of technical and management capabilities, improved market position, diversification, greater flexibility to cope with law and judicial regulations, and Integration along the value chain (Roehl-Anderson, 2013; Tanriverdi & Uysal, 2011; Henningsson & Yetton, 2013). This relation of Synergies, attained by allocating IT tasks, creating benefits is illustrated in table 1.

Reduce Costs Increase Market Share Enter or Create New Markets

Shared Overhead  removing duplicate IT roles and functions

 Cost reduction via standardization

Economies of Scale  Common IT platform and systems  Combined IT procurement  State-of-the-art scheduling, forecasting, or yield management  Global systems  Combined electronic delivery channel infrastructure Cross-Fertilization  Groupware  Intranets  Workflow  Customer database  Data mining  Selling derivative information  Channel innovation

Operational Integration  Integrated

operational system

 Work flow engine

 Order-entry or customer facing systems  Data warehouse  Internet presence  Truly integrated products and services

Synthesis of Capabilities  Computer-aided design  IT technology transfer  Uncommitted product and customer models  Cross-industry business models  Content/ Context/ Conduit

Müller suggests (as cited in Fähling et al., 2010) that when we speak of carve-out, carve-out object is created from a part of organization, generally strategic business units (SBU), so that it can be later integrated into the acquiring company or gain its own autonomy by becoming fully independent, standalone firm. According to Böhm et al. (2010), during a carve-out project, IT departments face the biggest challenges as they have limited time frame (few months) to maneuver through the technological and organizational complexities related to IT carve-outs to carry out the separation of a SBU from the company. In contrast to IT integration, the term IT carve-out is referred as the activities that are carried

(10)

5 out to detach the IT assets of the business unit that is being separated from the parent company. IT carve-out projects are generally incentivized by the need to minimize both costs and risks, increase speed to deliver and to acquire sustainable competitive advantage gained from IT landscape (Böhm et al., 2010).

As mentioned earlier, whether it is IT integration or an IT Carve-out project, they both need to be planned and executed with the highest consideration in order to realize the benefits which made the merger or demerger an attractive option before the deal was signed off, to anticipate and eventually mitigate the challenges involved in these projects

2.3. Post-merger IT Integration and Separation strategies

Whether it is a merger or acquisition, a firm has to decide as to what degree it wants to integrate both IT and the organization. This decision is generally motivated by the objective of the merger. Therefore, it is not uncommon for IT strategies to be dependent on the merger objectives. Similarly, in a divestiture, a company also has to decide which carve-out strategy to apply, depending on the benefits it seeks to gain by divesting a SBU and the IT systems related to that SBU with it. This illustrates the delicate and interdependent relation the business and IT share with each other, as the success of the merger or divestiture is dependent on the alignment of these two entities of a company. This alignment is further discussed in the next chapter.

2.3.1. Merger objectives

Merger goals are generally dependent on the benefits the firms want to gain as a result of an M&A. In order to achieve these benefits, literature identifies the three merger objectives which are generally utilized: Absorption, Symbiosis, and Preservation (Wijnhoven et al., 2006; Mehta and Hirschheim, 2007; Mckiernan and Merali, 1995; Sudarsanam, 2003; Böhm et al., 2011).

During absorption, the target company is consolidated by the bidder company, at which point the target company ceases to exist. With this objective, companies are usually aiming towards benefits such as economies of scales and increasing market share.

Symbiosis approach is primarily concerned with gaining synergies via combined strengths of both parties involved in an M&A. Usually advantages related to scope are considered with this approach to further improve a firms own processes and operations. This can be done by bringing together the strengths of both parties and abandoning redundant processes, helping the acquiring firm gain better competitive market position.

A preservation strategy involves leaving the capabilities (no changes in processes or personnel) of the target company untouched, so that it can continue developing its processes to provide beneficial gains for the acquiring firm. For instance, this can occur when a firm is looking to diversify its product portfolio by taking over a niche player to gain access to its expertise. The only change comes on a strategic level, whereas the operational decisions are left at the discretion of the acquired company.

(11)

6 IT integration strategies and methods

These merger objectives help pave the way for planning which IT strategy is most appropriate in carrying out the IT integration with least amount of complexities. Wijnhoven et al., (2006), Giacomazzi ett al. (1997), Henningsson & Yetton (2013), Kelly & Gouillart (1995) Böhm et al., (2011) Roehl-Anderson (2013) and Johnston and Yetton (1996) suggest that there are three strategies involved during post-merger IT integration phase: Complete integration, Partial integration and Co-existence. Depending on the strategy, four integration methods are utilized: Consolidation/Takeover, Standardization/Best of breeds, Synchronization and Renewal (Wijnhoven et al., 2006; Giacomazzi ett al., 1997; Henningsson & Yetton, 2013; Kelly & Gouillart, 1995; Böhm et al., 2011; Roehl-Anderson, 2013; and Johnson and Yetton, 1996)

Complete integration indicates a buyer’s high ambition for absorption by integrating of the IT systems of the target company. In order to do so, it utilizes consolidation method. However due to complex elements involved in such a process, a company can choose to utilize best of breeds and synchronization methods by integrating crucial systems first and then gradually work its way to total integration afterwards. Similarly, partial integration is led by symbiosis merger objective as it focuses on integrating most crucial systems and processes to realize synergy benefits as soon as possible. Afterwards the firm can choose to integrate the remainder of the IT systems in later stages. Lastly, the co-existence strategy follows the preservation objective, in which case there is no integration involved, realizing only marginal operational synergies by for instance exchanging data over interfaces built between IT systems.

The consolidation integration method corresponds with the complete integration strategy, as the chosen IT system takes over the IT system operations of the other merging party. In which case the target company’s IT system ceases to exist, as its applications are running of the IT platform provided by the acquiring firm in an attempt to avoid cost of IT redundancy, and gain benefits such as economies of scale. However, significant amount of resources (i.e. costs, knowledge, infrastructure, man-power) are required to fully absorb the IT systems of the target company. Therefore it is necessary to have a scalable IT platform that can accommodate the additional IT portfolio of the target company.

Best of breeds, enables partial integration strategy, as it combines the best IT practices of both IT systems to create a more optimal IT platform. This is done by selecting the superior structures, processes and systems from both parties with the aim to create a more efficient and/or effective IT system.

With the synchronization integration method, the target firm is allowed to retain its IT systems (among other capabilities and culture), and integration is only limited to financial reporting and contracting consolidations. The lack of integration here coincides with the preservation merger objective, as the objective is to diversify a company’s business and IT portfolio by gaining new expertise and capabilities (economies of scope). The acquiring firm’s mostly stays out of the operational level decisions, and just concerns itself with overseeing the managerial level governance, ensuring that target company meet the performance targets and expectations. This strategy is least complex one to execute as it does not

(12)

7 require a firm to make any changes to IT systems, except for minor changes to meet possible accounting and regulatory requirements.

Unlike the best of breeds strategy, where it focuses on optimizing the IT platform, renewal strategy focuses on creating a whole new system by combining organizational and technological resources in both firms which can also be associated with the complete integration/absorption merger objective. Generally, this model is popular among organizations trying to create new business models because the IT platforms can no longer support the structure of the company after the merger. Pursuing this model requires has strong impact on people (i.e. determine what kind of knowledge and discipline background is required to assemble a team for the new venture), process (i.e. identifying in house process, to see whether they can be used or do new processes have to be developed) and technology (i.e. what kind of technology is required, is the technology available in-house?). These relations among merger objectives, IT integration strategies and synergies can be found in table 2 below.

Merger objectives

IT Integration strategies IT Integration methods Synergy benefits Absorption Complete IT integration Renewal

Consolidation Best of breeds

Cost reduction

Increase market share Economies of scale Symbiosis Partial IT Integration Best of breeds Enhance market position

More efficient and/or effective systems Preservation IT Co-existence Synchronization Future development

Economies of scope

Divestiture Strategies

Before picking a carve-out strategy it is essential to identify the cause of the divestiture taking place and what kind of separation a firm is aiming to pursue. Generally, the main causes can be categorized under three components: Focus, economic failure of the business units, and liquidity (Cascorbi, 2003; Leimeister et al., 2008; Schlingemann et al., 2002). In regards to focus, firms reduce the degree of diversification with the goal of running the core-business with higher efficiency (hence the focus) (Schlingemann et al., 2002). Moreover, when a business unit is not performing well, it can be divested rather than re-organized to bring losses to a halt (Cascorbi, 2003). Lastly, according to research of Schlingemann et al. (2002), liquidity is one of the major reasons for divestment, as the cash flow received from the divestiture provides firms a way to gain access to capital in order to either pay off debts or invest in new projects. Other causes for divestiture involve factors such as external pressure from the competitors, take-over resistance, and meeting external legal regulations (Leimeister et al., 2008). These causes can eventually help determine which type of demerger needs to be carried out. Leimister et al. (2008) and Penzel (1999) mentions three types of carve-out objects within a separation project: Stand alone, merger and joint venture carve-outs (Leimeister et al., 2008; Penzel, 1998). Stand-alone carve-out happens when a business unit is looking to become fully independent in making its own

(13)

8 business and IT decisions. Looking from the perspective of merger goals, this can also be related to a co-existence strategy. Occasionally in a stand-alone carve-out, a firm also seeks to become fully autonomous company with its own shareholders, and becomes entirely independent from parent company (also known as spin off). In regards to IT, the stand alone carve-out project requires little to no customization for target architecture, since it has no need to integrate with any buyer’s IT platform as the existing IT system is simply adopted by the carve out object. In a merger carve-out, the carve-object is separated and made ready for its integration with the buyer’s IT system. From the opposite perspective, this can also be seen as an absorption strategy by the acquiring firm. Lastly, in a joint venture carve out project, both firms combine their business units to create a new company in an attempt to create a more efficient and effective IT architecture. This can also be seen as symbiosis strategy as mentioned earlier as one of the merger objectives.

IT Carve-out strategies

IT carve-outs involve 3 strategies: Logical, Physical and stepwise separation strategies (Böhm et al., 2010, 2011; Leimeister et al., 2008). It is important to note that in most cases these strategies are rather part of the separation process starting from logical and ending with physical separation.

Logical separation strategy involves the separation op IT applications (ERP application such as SAP) related to the carve-out object from the parent’s IT system on the same IT platform. This is done by copying the client and installing it on the same hard drive and kept separated with the help of a firewall. All the data that is not relevant for the parent company is removed. Occasionally, logical separation is considered enough. This usually occurs when the 2 firms agree on a co-existence IT strategy, in which the carved-out entity is allowed to keep utilizing IT architecture of the seller company.

Physical separation strategy is usually considered the next step after logical separation, as the applications are made ready to be transferred on the target IT platform (buyer’s or stand-alone’s IT architecture). At which point, the carve-out object no longer runs its applications on the seller’s IT system.

The combination of these two strategies is also known as stepwise separation strategy. As the buyer is not able to integrate the carved-out object on day one, so a logical separation takes place as a temporary solution, until the physical separation can take place. The timeframe can vary from weeks to years, depending on the complexity

of the project. During this time transitional service agreements (TSA) are utilized as an insurance policy that the seller company will be committed to provide services until the physical separation is carried out. TSA’s are generally not optimal from a buyer’s viewpoint,

as they form barriers to achieving benefits which were forecasted as a result of the acquisition (Buchta Figure 2. Matching IT carve-out and IT integration (Böhm et al., 2011)

(14)

9 et al., 2007). Think of the restrictions on strategic flexibility for both organizations and additional operational costs incurred by the buyer to keep the applications running. As seen earlier, there are some relations between IT merger and IT separation strategies, as logical separation enables the co-existence IT strategy and the physical strategy does the same for most of the IT strategies except for renewal strategy (see figure 5). This is corroborated by (Böhm et al., 2011) as he points out that IT integration strategies are dependent on IT carve-out strategies.

2.4. Capabilities based on prior experience

Most literature regarding IT integration and carve-out projects in the context of M&A regard prior experience as one of the most important factors to carrying out the process with minimum amount of complications (Leimeister et al., 2008; Henningsson & Yetton, 2011, 2013; Fähling et al., 2009,2010; Mehta and Hirschheim, 2007). Holm-Larsen (2005), Johnston and Yetton, and Seddon et al., (2010) researched IT integration cases in the financial sector and reported the importance recruiting, developing and retaining knowledge in house to carry out successful IT integrations. Based on these experiences, companies develop capabilities which can be used in future integration/carve-out projects. Grant (2002) mentions that a capability of a firm, an intangible resource, is considered as undertaking action with available resources to achieve the goals of the firm. Therefore, capabilities of a firm are essential conditions to ensure successful post-acquisition IT integration. In an M&A and divestiture context, a firm’s capability is referred to its ability to select and execute one of the integration/carve-out without disrupting its business and IT alignment strategy (Henningson and Yetton, 2013; Fähling et al., 2010). This is corroborated by Zollo and Singh (2004) as they mention that an organization not only needs to develop its integration decisions but also its ability to execute those decisions.

Moreover a firm’s capability can be categorized on two levels: Business and IT (Henningsson & Yetton, 2011). With Business capabilities, when there is a change on a corporate level, a firm has to develop the business capabilities to accommodate the new strategy. IT capabilities focus on the acquiring firm’s ability to easily integrate or replace the target company’s IT infrastructure and application portfolio with its own.

With the selection capability, Henningson and Yetton (2013) refer to the ability of the firm to detect threats and opportunities of a post-merger scenario to identify the potential values, so that they can take well-informed decisions. Similarly, the implementation capability is referred to the ability of a firm to carry out the strategy chosen earlier and to realize IT-base value which was foreseen during selection of strategy. When considering which IT integration strategy to pick, an organization needs to understand the IT-based value that is derived from each of the strategies it chooses. Therefore, capabilities developed from prior experiences are considered one of the key factors to successfully carry out such projects.

(15)

10

2.5 Business and IT alignment

2.5.1. Why Business and IT alignment?

In a merger setting, business and IT alignment helps the company to come up with the most suitable IT integration strategy that is based on the existing IT capabilities of the company to ensure that the projected synergies are realized for a successful merger (Wijnhoven et al., 2006; Mehta and Hirschheim, 2007; Johnston and Yetton, 1996; Giacomazzi et al., 1997; Henningsson & Yetton, 2011, 2013). Similarly, with a divestiture based on the IT capabilities a company can use the business and IT alignment model as a tool to identify possible challenges of the carve-out process (Böhm et al., 2010, 2011; and Fähling et

al., 2010).

Considering the essential role IT plays in the success of mergers and demergers, it is imperative for a company to strive for a high business & IT alignment to accomplish the synergies in IT integration and carve-out strategy by minimizing complexities that occur during the execution phase (Roehl-Anderson, 2013). IT Complexities are regarded as issues such as high costs, delays, limited flexibility and agility, limited IT governance, continuous high maintenance costs, and other elements keeping the company from achieving its strategic objectives, losing out on the projected synergy benefits.

Drawing inspiration from resource based-view of strategy (Peteraf, 1993), business and IT alignment focuses on creating value by utilizing the resources within the company to build complimentary business and IT capabilities which enables the firms to gain competitive advantage and stay significant in the market (Reynolds et al., 2010).

This is particularly of great importance for Multi-business organizations (MBO) involved in numerous businesses where strategies are developed on corporate and strategic business unit (SBU) level (Grant, 2010). Henningsson & Yetton (2011) and Böhm et al (2011) emphasize the importance of Sharing resources across strategic business units (SBU), otherwise, the performance of MBO is a mere total of individual performances of SBUs. Moreover, by building IT capabilities that leverage the business capabilities provide a more sustainable competitive advantage (Melville et al., 2004), as opposed to investing in the latest technology or business application software, that can easily be imitate by competitors.

2.5.2. What is Business and IT Alignment?

Among all the alignment models introduced over the past years, Henderson and Venkatraman (1993) Strategic Alignment Model (SAM) is one of the most dominant model to this day (Leonard, 2008). However, the model has some limitations as it assumes a single strategy for business and IT each and does not take in to account the difference between not only corporate and SBUs strategies, but also between the SBUs themselves (Böhm et al., 2011; Henningsson & Yetton, 2011) . Therefore, Reynolds et al. (2010) adjust the model by providing a two-dimensional framework which distinguishes the business strategies at both corporate and business unit level and how they are leveraged by the IT strategy at respective levels.

Reynold’s iteration of the alignment model, as shown in figure 6, comprises out of four domains: corporate strategy, SBU strategy, Corporate IT platform Strategy, and SBU IT portfolio strategy.

(16)

11 Corporate strategies set policies about how to compete as a whole corporation, which markets to enter, which capabilities to develop and how to allocate resources throughout the enterprise. On the other hand SBU strategies determine the capabilities and resources it needs on a business unit level for the market its competing in. Corporate IT strategy specify how much to invest in IT, how the enterprise architecture should look like, what kind of IT governance policies are required, Whether to outsource IT, what the structure of IT should look like, and how the IT should be delivered (Reynolds et al., 2010). SBU IT strategy determines which technology and application selection is required for the respective business units it belongs to.

Together these domains create alignment across two dimensions: structural alignment (Corporate vs SBU level) and Functional alignment (Business vs IT). The functional alignment is achieved by developing complementary business and IT capabilities at both corporate and SBU level, as shown by the horizontal lines in figure 6. The structural alignment is represented by the vertical lines on both sides of the organization – Business and IT – illustrates the coherence between corporate and SBU strategies as well as the fit between corporate IT platform and SBU IT portfolio capabilities, at the same time making sure that the SBU IT capabilities of each SBU is independent from one another. Therefore, the capabilities of the IT platform should accommodate the corporate strategy. Similarly, SBU IT portfolio capabilities should support its respective business unit’s strategy and leverage the IT platform capabilities (Reynolds et al., 2010).

2.5.3. Business and IT Alignment IT integration

The alignment model (Reynolds et al., 2010) helps identify initial conditions affecting the complexity of the post-acquisition IT integration project. In an M&A the transferred complementary resources and

(17)

12 capabilities between two organizations bring added value (Capron et al., 1998). However this is only under the assumption that value is contingent on how high business and IT capabilities of the acquired business align with the acquiring company at both corporate and SBU level (Reynolds et al, 2010; Henningsson & Yetton, 2011).

Path-dependent M&As that draw on existing capabilities are considered less challenging compared to path-breaking acquisitions that require building new capabilities to gain the synergy benefits (Capron et al., 1998). This is due to the explorative and unpredictable nature of the path-breaking acquisition (Karim and Mitchell, 2000), as a company seeks to reinvent itself by acquiring new capabilities to pursue a different corporate strategy. The initial three IT integration methods (consolidation, Best of breeds, and Synchronization) fit in the path-dependent acquisition, as these strategies require firms involved in the merger to reallocate their existing resources to gain potential benefits. Alternatively, a path-breaking acquisition utilizes the Renewal integration method, as the combining companies draw on their resources to develop new IT capabilities (Henningson & Yetton, 2013). The business and IT alignment is considered low (misaligned) if the new corporate IT platform lacks the capabilities to support the corporate strategy, which can causes issues such as technical incompatibilities.

Hence, the complexity of post-merger IT integration comes with the need to develop new capabilities. Therefore, one can conclude that a firm requires a high level of business and IT alignment before the merger in order to achieve the synergies with post-merger IT integration (Böhm et al., 2011; Henningsson & Yetton, 2011). This also implies that companies with misalignment between business and IT pre-merger will likely not be able to achieve the post-merger synergies; rather it will increase the misalignment.

When a partial or complete integration strategy is pursued, efforts are spent to achieve a post-acquisition alignment by bringing coherence between corporate and SBU capabilities on both business and IT side. On the IT side, it is important to sort out the acquired organization’s IT platform capabilities from the SBU IT capabilities, so that they can be integrated at both corporate and SBU level (Henningsson & Yetton, 2011). On the corporate level decision is be made to either integrate or replace the acquired IT platform. On SBU level, the focus is to integrate the SBU IT capabilities in such a way that they are fully supported by the IT platform and simultaneously can operate fully independently from other SBUs.

In contrast, the co-existence strategy requires lesser work as there is no integration required, other than setting up some corporate level connections such as financial controlling and accounting (Böhm et al., 2011). Despite of the ease of this strategy, in the long run, this strategy causes misalignment between the two companies as there is no coherence of capabilities between corporate and SBU level.

2.5.4. Business and IT Alignment – IT Carve-out

Looking at the alignment model (figure 6), similar to an integration process, the coherence between corporate and SBU abilities need to be considered when executing a carve-out project (Böhm et al., 2011). On the business side, SBU should be autonomous when it comes to choosing how to compete in the market it is operating in. Looking from the perspective of IT, this can cause a difficulty as the level of

(18)

13 coherence between Corporate IT platform abilities and SBU IT abilities can have an impact on the complexity involved in the IT-cut. IT standards must be upheld and all the SBU IT systems (such as interfaces, source codes, data, and shared services) need to be documented so that they are easily found and replaced (if necessary) for the cutting process (Fähling et al., 2010). Lastly, measures should be taken to preserve the competencies that a company loses by divesting a SBUs.

The level of IT interdependency between SBUs also influences the complexity of the cutting process (Böhm et al., 2010). The more dependent the SBU IT capabilities are the more adjustments have to be made on the IT landscape to accommodate the carve-out. Therefore it is important for each SBU to have its own IT capabilities. If IT capabilities of an SBU are being shared among other SBU, then it can be difficult to separate the SBU. Similarly, these dependencies also have to be spotted and replaced by the parent company. Lastly, as a carve-out takes place, there is possibility of being deprived of the human assets, IT knowledge and IT capability in the parent company. Therefore, a company should consider preserving this knowledge and capability by cloning these elements (Fähling et al., 2010).

Therefore, similar to an integration project, the success of the IT carve-out project depends on the level of business and IT alignment of a company before the deal is signed for the divestiture.

2.5.5 Measuring business and IT alignment in an organization

Leonard (2008) states business and IT alignment models such as the SAM focuses on what needs to be aligned rather than how the alignment is achieved. Luftman’s (2004) strategic alignment maturity model provides firms a tool to measure the business and IT alignment within the firm. Moreover, it also provides a roadmap for a firm, indicating which criteria it needs to improve on to achieve optimal alignment levels by focusing improvements on six elements: Communication, IT valuation, IT governance, Partnership between Business and IT, IT Scope and Architecture, and Skills Luftman (2004). The criteria and roadmap to optimal alignment is displayed in Appendix A.

2.6. IT Infrastructure scalability

Next to having the capabilities to carry out such projects, it is also essential to have a scalable infrastructure that helps the company realize the benefits from its M&A and divestiture ambitions (Henningson & Yetton, 2011,2013; Fähling et al., 2010). Lack of attention to a scalable infrastructure can result in higher costs, technical incompatibility, delays in the execution process, and possibly decline in quality of products, that eventually decreases the value of the project (Henningson & Yetton, 2013, Buchta et al., 2007; Böhm et al., 2011).

Ideally, scalable IT resources come with flat and/or decreasing costs which enable a company to gain the benefits from such projects. The IT infrastructure scalability type required varies per each integration and separation method (Henningson & Yetton, 2013; Fähling et al., 2010). Using the consolidation integration method, the acquiring company would potentially be required to expand its tangible IT resources to accommodate the conversion and transfer of IT systems of the target company to the acquiring company. In a best of breed integration method, a firm is required to adjust and enhance its IT platform so that it can accommodate the new acquired IT-based business processes. The synchronization (co-existence) integration method requires the company to be able to integrate the

(19)

14 acquired organizations unique IT resources on to its IT platform without bringing any changes to those resources. Lastly, the renewal method requires a company to provide the IT platform that can support the re-invented IT resources.

From the perspective of an IT carve-out, as mentioned earlier, difficulties arise from interdependent IT capabilities of SBU with its parents and among other SBUs. With high levels of standardization within the company, the SBU IT portfolio is known to run on the IT platform of the parent company. However, with a carve-out when a parent loses a SBU it also loses some economies of scale, due to the vacant capacity not being utilized. If the vacant capacity on which the SBU IT portfolio was running is not decommissioned or re-used for other purposes, then it can decrease the value of the divestiture.

3. Analytical Framework

Based on the literature gathered here, three Business and IT capability propositions can be made about the following:

- Acquirer’s Capabilities gained from prior experience - Business and IT strategic Alignment

- Infrastructure Scalability

Together the sequential effects of these three components create IT based value when the firm learns how to integrate its IT resources and how to keep away from any complications in the IT context defined as Business & IT strategic alignment and IT infrastructure scalability (Henningson and Yetton, 2013). Having lack of experience can generally lead to management selecting wrong integration and carve-out strategies resulting in an unsuccessful process. Therefore, knowledge gained by previous experience in such projects can significantly improve the performance of the projects as they have the know-how of what challenges to look out for, what benefits are to be gained from which type strategies. Thus experience in such matters can be considered as a pre-condition to successful execution of the project

Proposition 1: In an M&A and divestiture context IT integration and IT carve-out complexity is contingent on the Business and IT capabilities gained from prior experiences.

As mentioned earlier in the introduction by (Wijnhoven et al., 2006), IT is usually left out of the due diligence for M&A’s. This can cause major misalignment between business and IT strategies, leading to failure in retrieving potential benefits of a merger.

With the help of business and IT strategic alignment model, a firm can create value on corporate as well as a strategic business unit (SBU) level (Reynolds et al., 2010), offering opportunities for organizations to develop, reconfigure and retire capabilities depending on which strategy a firm is following. Before the acquisition or divestiture takes place, a firm needs to re-assess its position to see if its business and IT strategies are still in alignment. For instance, if the acquirer’s business and IT strategies are not in alignment, it could complicate the post-acquisition phase as it will lead to increased costs and require more time to accommodate the integration process, losing out on the potential benefits foreseen

(20)

pre-15 acquisition, unless the process is halted half-way to re-align the business and IT strategies (Henningson and Yetton, 2013): Thus making business and IT alignment an necessary precondition in such projects.

Proposition 2: In an M&A and divestiture context IT integration and IT carve-out complexity is contingent on the level of Business and IT strategy alignment

General literature has mentioned that one of the most common challenges in integration and carve-out process that occur, are related to infrastructure and applications (Leimeister et al., 2008; Tanriverdi & Uysal, 2006; Fähling et al., 2013). The level of complexity comes with level of need for adjusting the IT platform of the acquirer. It is imperative for acquirers to make investments in IT scalability before going through an M&A or divestiture, so it has a flexible and agile IT platform to accommodate the integration or separation with relative ease in terms of time, effort and costs. An IT integration project requiring development of new capabilities require direct (designing, building and testing) and indirect costs (time) Henningsson & Yetton, 2011).

Proposition 3: In an M&A and divestiture context IT integration and IT carve-out complexity is contingent on the scalability of the IT infrastructure of a firm

4. Methodology

This thesis is a mixed-method research (Yin, 2009) which takes an approach to examine the three propositions - Acquirer’s Capabilities gained from prior experience, Business and IT Strategic Alignment and Infrastructure Scalability – in merger and divestiture events that occurred over the last 10 years at ABN AMRO to see if they have any effect on the main unit of analysis: success of a post-merger/post-divestiture IT integration/carve-out process in the financial sector. These propositions were derived from literature review stemming from both IT carve-outs and IT-integration papers (Henningson and Yetton, 2011, 2013; Fähling et al., 2010; Böhm et al., 2010, 2011). Thus, In order to test these entities overall a multiple-case study approach is taken along with a complementary quantitative approach (survey) to help further investigate one of the complicated sub-units of analysis: The level of business and IT alignment.

Generally multiple case studies are preferred over single case studies as they provide more robust results with stronger, with possibility of increasing the external validity of the research design (Yin, 2003). Moreover, the multiple case studies here can be classified as an embedded case study as the research has multiple sub-unit of analysis that is being investigated over multiple case studies (Yin, 2009). Case study selection, data collection, and data analyses are carried out in accordance to Yin (1994, 2003, 2009), and Saunders and Lewis (2009).

4.1. Case Study selection

Yin (1994) suggests that case studies should be selected based on the condition that they match the criteria identified during the development of theory, so that later on they can be tested against the propositions that are based on the empirical studies. Furthermore, for multiple case studies, cases that

(21)

16 match the most with the (empirical theory) replication design should be selected (Yin, 2009). Four case studies are selected that comply with the criteria set in this research study and also share characteristics among each other so that they are eligible for testing the theory and comparing the results across the different cases to find patterns which help bolster the outcome of the thesis(Yin, 2009).

All case studies are regarding the M&As and divestiture that ABN AMRO has experienced over the past 10 years, which is related to the main unit of analysis: M&A and divestiture in financial sector. Moreover, similar to the empirical studies, ABN AMRO is also a multiple business organization, with strategies being developed at both corporate and SBU level. This introduces the element of business and IT strategy alignment, which has been discussed in the theory building part of this study. Moreover, due to the nature of the sequential events that took place, it will provide the bases to investigate if prior experience played any role in the other projects. These case studies provide details regarding how the IT integration and IT-carve out projects went, what challenges they came across, and how they coped with these issues. These challenges also include the technical aspects which will help determine if IT scalability has any influence on the execution of these projects. Overall there is rich amount of data to be gathered from these case studies, making them suitable for testing against the developed theoretical frame work. These case studies are the following stated below.

Consortium Takeover

In 2007, ABN AMRO was taken over by the RFS Consortium which consisted of three banks: Royal Bank of Scotland (RBS), Fortis, and Santander. The bank was split in three: Santander took over the operations in Brazil and Italy; RBS took over the commercial and private banking assets in Europe, Asia and North America; and Fortis took over the asset management, retail and private banking operations of ABN AMRO in Holland. All assets including IT assets were split among the consortium members, which required a major IT carve-out project.

Year later in 2008, harsh financial circumstances had triggered the intervention of the Benelux governments (Belgium, Netherlands, and Luxemburg), to step in and nationalize parts of Fortis. ABN AMRO and Dutch Fortis were nationalized by the Dutch government and encouraged both banks to merge in to becoming a new bank. Two programmes were initiated to carry out the IT integration of Fortis’ Retail and Commercial banking operation in to ABN AMRO: Technical Integration Retail (TIR) and Technical Integration Geld Administratie (TIGA). Therefore this case study represents the initial carve-out of IT assets of ABN AMRO, mainly with RBS, and then the eventual IT integration project to merge both Dutch Fortis and ABN AMRO in to one bank.

Divestiture of Hollandsche Bank Unie (HBU)

With the combined presence ABN AMRO and Fortis, the position of the new bank in the market was considered too strong. Therefore, in order to gain clearance and to comply with competition regulations, the bank was obligated by the European Commissioner of Competition Neelie Kroes to sell some parts of its business units which it had acquired over the merger with ABN AMRO. This included the sale of ABN AMRO’s subsidiary bank Hollandsche Bank Uni (HBU) to Deutche Bank. To carry out the sale an IT carve-out project, called the “Remedy” program was initiated.

(22)

17 Credit Suisse Private banking assets takeover in Germany by ABN AMRO Group Bethmann Bank AG In late 2013, to gain a stronger foothold in the private banking sector of Europe, ABN AMRO’s subsidiary Bethmann bank AG acquired private banking activities of Credit Suisse in Germany. This acquisition increased the client base of Bethmann Bank to a total of 20,000 equivalents of EUR 35 Billion in assets. It required an IT integration project as the customer base had to be transferred over to complete the acquisition.

International Card Service (ICS) IT migration

International Card Service (ICS), a subsidiary of ABN AMRO, is the biggest distributor of credit cards in the Netherlands with both business models: Business-to-Consumer and Business-to-Business. In August 2014 ABN AMRO agreed to allow ICS to carve-out its IT operations from ABN AMRO, enabling ICS to have its own IT infrastructure, rather than relying on the IT platform provided by ABN AMRO. This IT carve-out project was motivated by the need to cut down costs and to gain more agility (reducing the time to market).

4.2. Data Collection

Data was primarily collected by carrying out semi structured interviews, with complementary survey. Initially open ended interviews based were carried out to familiarize with the M&A and divestiture events that ABN AMRO went through. Together with the literature, the nature of these open-ended interviews was broad to help point out relevant criteria related to IT integration and carve-out projects. Moreover, both open-source and sensitive documents were made available for access which were complementary to the interviews. The interviews were taped and transcribed.

The selection of the interviewees was contingent on their involvement in the integration and carve-out projects that took place in the last 10 years. All the interviewees had extensive knowledge regarding the case studies that were chosen. People from all three levels in the bank (strategic, tactical and operational) were interviewed to gain various perspectives regarding how they experienced these projects. This also aided the investigation of the business and IT alignment on both strategic and SBU level (Reynolds et al., 2010). The distribution of interviewees across the case studies can be seen below in table 2.

(23)

18

Case study Number of interviewees

Roles at the time Type of Case study Consortium Takeover

- Separation of ABN AMRO assets (IT-carve out)

- Merger with Fortis (IT integration)

11 Service delivery

managers, contract manager, Data center specialist, Business IT consultant, Head of account savings and customer, Infrastructure Architect, Service level manager, IT

infrastructure program manager, Program manager, execution managers, Head service delivery manager

IT carve-out and integration

HBU Divestiture 1 Service deliver manager IT carve-out

ICS IT relocation (divestiture)

2 Service delivery

manager and account manager

IT carve-out

Credit Suisse private banking acquisition in Germany

6 COO, Deputy CIO, Data

migration project manager, Service delivery manager, Account manager, Project manager IT integration

The design of the questionnaire was based on the literature review and the proposal derived from the literature review, so that these could be tested. The questionnaire is split in two parts. The first part of the questionnaire tries to identify the capabilities, the level of business and IT alignment and the IT landscape conditions before and during the projects based on Luftman’s maturity assessment model (Luftman and Kempaiah, 2007). A complementary survey is used to verify the first part of the questionnaire (Luftman, 2003) maturity assessment model is utilized to assess this. The survey can be found in the appendix. The surveys were sent to the interviewees before the interview. These surveys were divided over two periods, first survey was to determine the alignment around 2007-2009 periods, and the second survey assessed the alignment around 2013-2014 period. From the 20 candidates, 18 managed to fill in the survey.

The second part of the questionnaire is about how the actual projects went to see if these prior conditions established in part one of the questionnaires had any influence on the execution of the project. So questions are asked to identify merger/divestiture objectives and why particular IT integration and carve-out strategies were used to achieve those objectives; how the preparations for these projects were like, and how were they executed; what challenges were encountered and how they were coped with. The questionnaire can be found in the appendix.

(24)

19

Case study validity and reliability (Yin, 2003 and 2009)

Concern Case study tactic Achieved by doing

Construct Validity Triangulation through multiple sources of data

Data collected through open-ended interviews, semi-structured interview with people from various hierarchical levels, survey, and documents retrieved from opens sources and from the bank

Establish chain of evidence All derivations of the evidences can be followed from case study research question to conclusion

Internal Validity Do pattern matching between case study and empirical data

Findings from the case studies can be traced back to the evidence provided in literature

External Validity Replication Logic The case study design makes it possible for findings of the study to be generalizable beyond the case study. The findings in this study were replicable in four similar but unique case studies.

Reliability Use case study protocol The research follows the case study protocol by stating research question, providing background information, based on which theoretical framework for the case study design is derived, which are tested by real life case studies.

Develop case study database Interviews are taped

4.3. Data Analysis

This is done by coding the data (Yin, 2009; Saunders et al., 2009) that will help test the proposals. The coding table is provided in the appendix. Once all cases are coded, a pattern matching technique is carried out to compare the results of the case studies looking for similarities and irregularities. These patterns of all the case studies are displayed in a table. This analysis technique is also referred to as the cross-case synthesis. This table provides display of structured data across all case studies to test the proposals based on which conclusions.

5. Main Findings

Before finding out how the integration and carve-out projects went through the case studies, survey was sent out to investigate what level of maturity ABN AMRO was at before and during the duration of these projects. Both surveys resulted in an alignment level of 3 (rounded to 3) out of 5 - 5 being the most

(25)

20 optimal level (Luftman, 2004). The questionnaire verified these results. IT assets were integrated across the bank and managers at senior level understood the impact that business and IT have on each other. IT was valuated across the bank with SLA and dashboards for performance which were improved yearly to gain more efficiency from IT process and systems. Vendors provided Service catalogue providing all the costs of IT. Strategic planning is mostly still done on the business side; however the method of executing the projects was decided by the IT side. IT is considered as a mutual partner with who risks are shared mutually. There was a steering committee which represents the interests of both sides. There are also opportunities throughout the bank for crossover trainings and job opportunities.

5.1. Case study Consortium Takeover

After the consortium takeover of ABN AMRO bank in 2007, it was forced to split up in three parts. Due to the autonomous nature of the assets taken over by Santander, the carve-out went with relative ease. However, this was not the case in separation with RBS and Integration with Fortis as they occurred simultaneously. Therefore, this case study is separated in two parts: IT carve-out with RBS and IT integration with Fortis.

5.1.1. RBS IT carve-out

With the takeover of ABN AMRO, RBS wanted to carve-out the commercial and private banking assets in Europe, Asia and North America IT assets of ABN AMRO and integrate it on its own IT landscape. Once the takeover was announced ABN AMRO’s played a role as the facilitator of the carve-out process, with the aim of providing a clean separation of IT assets among the members of the consortium.

Initially all the IT assets (Infrastructure, application, licenses and contracts) had to be documented and their value had to be determined. Once this was done, an asset split was done establishing which IT asset would go to which member. A multi-disciplinary team business involved people from IT, facility management, Legal, vendor procurement, Finance etc. Experience at senior level that understood the impact of business and IT on each was required to provide the separation of these IT assets:

“For RBS bought whole sale banking in both in Dutch and international market so the assets had to be marked at business level to figure out which where the assets would go. For that you require an internal configuration overview connected to respective business units, which is quite difficult. Take the Citrix for instance, was common for all business units, which had to work in a factorized manner. You needed people in senior positions, who had deep knowledge about how the IT infrastructure works, how to create the divisions in IT assets as well as on financial level related to these assets.”

This process was quite difficult because back then ABN AMRO’s assets were globally spread out. The IT landscape of ABN AMRO was decentralized; however on a regional level it was centralized. Not all the assets were primarily documented in regards of how each IT asset influences the other. Moreover, there were unstandardized applications connected to each other as various applications developed with different methods were connected to provide functionalities to different business units to save costs.