Proceedings of the 37th Hawaii International Conference on System Sciences - 2004

A Framework for Assessing IT Integration Decision-Making in Mergers and Acquisitions

Manjari Mehta University of Houston mcmehta@mail.uh.edu Rudy Hirschheim Louisiana State University rudy@lsu.edu

Abstract
Organizations have actively pursued mergers and acquisitions (M&As) over the past several decades but unfortunately almost half of these M&As have been unsuccessful, forcing researchers and practitioners alike to rethink the merger integration process that is so critical to M&A success. One vital aspect on the integration agenda is the integration of the two IT functions within the merging partners. In this paper, we offer a conceptual framework to understand why and when certain IT integration decisions are made during M&As. Three theoretical lenses symbolism, power and strategic alignment are offered to interpret mergers in their pre-merger, merger and post-merger phases. It is contended that three factors govern much of the IT decision-making during merger integration: (a) the aura of the Wall Street and the promise that the merging firms make to Wall Street analysts to achieve extraordinary cost-savings within a restrictive time frame; (b) the acquirers influence on the acquired firm, enforcing certain system choices on the acquired people; and (c) the goal to achieve business-IT strategic alignment. Influenced by Wall Streets expectations and the acquirers persuasions, the new merged IT function may not be able to identify the best new arrangement of information systems infrastructure, people and processes, as prescribed by the strategic alignment lens, at least in the early phases of the merger process. We conclude the paper by illustrating some typical IT integration decisions that may be interpreted using these three lenses, and resulting practical implications. Through this paper, we hope to bring the M&A context to the IS researchers attention and provide a theoretical grounding to base future empirical research on.

1. Introduction: Motivations and Objectives

While corporate mergers and acquisitions (M&As) have been an active strategy for many decades, the

volume in the past few years has been astonishing. From the years 1998 to 2000, nearly $4 trillion worth of mergers deals were closed - more than the total worth of mergers completed in the past 30 years (BusinessWeek, October 2002). With such sizeable sums of money involved, it is crucial for the merging firm to find the right partner and achieve the expected synergies yielding a successful merger. Synergy, in this context, is generating revenue due to combined offerings. A merger is considered successful if it achieves the synergies it promised at the time of announcement of the deal, and its share prices and revenue growth rate increase post-merger. Achieving these synergies, however, requires more than finding the right merging partner. It requires continued commitment, and careful planning and implementation over several years. A Business Week study (October, 2002) announced that 61% of the acquisitions completed since 1998, decreased shareholder value for the acquiring firm. This failure rate of mergers have made researchers [e.g., 14, 24] that while mergers may be a good growth strategy, it can be difficult to realize promised merger synergies and sustain and improve post-merger performance if the firms have not paid appropriate attention to the integration process. Sure enough, poor integration has been noted as one of the foremost causes of M&A failure [46, 48]. The difficulty of successfully integrating two large monoliths such as HP and Compaq was not lost on Carly Fiorina and her integration team as noted in the Financial Times (2002). One of the main reasons for merger failures in the late 1980s was the lack of attention to the integration of information technologies and systems [28]. In a recent study1 (Keys to the Kingdom: How an Integrated IT capability can increase your odds of M&A success, 2002), Accenture found that 75% of senior management underestimated the critical role of IT in achieving merger success. In their study of 57 mergers in the late 1990s, only 16% conducted significant IT due diligence
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See: Aponovich, D. IT Integration Seen as Key to Merger Success, CIO Update, March 27, 2002, http://www.cioupdate.com/reports/article.php/11050_999541

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Proceedings of the 37th Hawaii International Conference on System Sciences - 2004

in the per-merger phase (i.e. before the merger deal was announced). With such little planning, it is not surprising that post-merger integration faces severe implementation difficulties. In the Lloyds and TSB merger2, Lloyds and TSB were unable to integrate their back-office systems resulting in bank tellers unable to access a common set of banking services. The expected synergies were not realized. On the other hand, the success story of Sallie Maes acquisition of USA Group was the result of a successful post-merger IT integration [6]. This suggests that IT integration does in fact contribute to the overall success of a merger. Merger Process In this paper, the terms mergers and acquisitions are used interchangeably. Several researchers [27, 7, 24] outline a merger process as having several phases. For this paper, a merger consists of three broad phases, occurring in succession: pre-merger, merger and postmerger. The pre-merger phase broadly consists of: strategic planning, searching for a partner, due diligence analysis, negotiations and announcement to media and analysts all activities up to and including the approval of the Federal Trade Commission (FTC) and European Commission (EC) and shareholders. The relatively shorter merger phase typically begins after the shareholders approve the merger and end on Day One the day the two entities close their deal and legally become a single entity. The post-merger phase begins on Day One and continues until the new firm settles down. Previous studies have suggested that the majority of post-merger changes occur within two years of Day One [7, 1, 15] but the integration process may continue for several years afterwards [58, 15]. Integration Surprisingly, very little literature directly defines integration [48, p. 63]. Some researchers [49, 18, 7] have offered frameworks to identify different types of integration. In this paper, the term integration is used to imply a blending together of organizational components [49, 48] including IT components such as infrastructure, processes, applications, people (skills) and culture. Few researchers have specifically explored how the IT functions of the two firms are integrated. Weber and Pilskin [59] and Giacomazzi et. al. [16] have studied IT Integration levels and IT infrastructure strategies and effect of organizational culture on mergers. Brown and
See: Hammer, Banking 2000 http://www.bankingmm.com/Features/featurespage3.htm, Similar problems were faced by Bank of America, for it had made too many acquisitions, and the back-office systems were a mess.
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Renwick [5] proposed different IT governance arrangements for different types of acquisitions (viz., related, concentric, unrelated, and vertical integration). Main and Short [26] have followed a seven-month planning process of the merger of AHS with Baxter, but they focus on the planning phase and do not say much about the post-merger implementation process. Only Brown et. al. [6] have provided details of the postmerger IT integration process, identifying several critical success factors and lessons learnt along the way. Objectives Recognizing the fact that integration, specifically IT integration is important for effective merger performance and that few IS and M&A researchers have ventured in this arena, the objectives of this paper is to provide a framework for studying how and why certain IT integration decisions are made along the merger timeline. These decisions have consequences for the eventual success of the IT integration process. This framework is part of an ongoing longitudinal research program that is being undertaken to study IT integration in six Fortune 500 firms (three mergers) as they proceed from their pre-merger and merger phases, to postmerger phases. This framework may only be applicable to such large global organizations who acquire/merge with organizations that are almost their equal.

2. Framework and its constituent theoretical lenses

Our framework involves three lenses for understanding IT integration decisions during mergers. These lenses are hypothesized to explain IT integration decisions at different points in time. The three lenses are: (1) The Wall Street3 Effect; Aliases: Efficiency-asEnds/Efficiency Mantra (2) Organizational Power Differentials between Acquirer and Target (or Acquired) Firm (3) Business-IT Strategic Alignment In this paper, we suggest that firstly, the Wall Street strongly influences integration decisions, particularly those pertaining to IT, with its strongest influence felt in the pre-merger, merger and the first quarter of the postmerger phase of implementation. Thus the decisionmaking in the early part of the merger is governed by the desire to achieve the cost-savings promised to Wall

3 It is understood that there are many privately owned firms that also merge or acquire other privately owned firms. Our focus is on mergers of publicly held firms. Nevertheless, the cult of efficiency argument can be made similarly for both publicly and privately held firms.

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Proceedings of the 37th Hawaii International Conference on System Sciences - 2004

Street. Dazzled by strategic fit,4 organizational fit5 is largely ignored [for a literature review, see 24]. The promise to Wall Street, the quarterly reports, the media hype, and similar artifacts suggest to us the need to focus on symbolic metaphors as a suitable lens to explain how the aura of Wall Street is ingrained in peoples minds. Secondly, (organizational) power differentials between the acquirer and the target firm may cause the IT integration process decision-making to be highly politically charged - hence the need to also focus on power theories as a lens for understanding M&As. Thirdly, the IT integration process may actually be driven by the objective of achieving businessIT strategic alignment in the merged firm. Firms may systematically and objectively approach decisions such as the new application portfolio (which application will be kept or modified and which will be discarded), and which IT processes, infrastructure and skill set matches with the capabilities and the business goals of the new firm6. It is also plausible that the reason why acquirers dominate the target firm is because they must deliver their promise to Wall Street in a limited time frame [18, 24]. In the absence of the Wall Street Effect and the implied time constraints, it is conceivable that the acquirer takes time to assess the IT function of the target firm and select systems, processes and people from the target firm in order to arrive at a best-of-breed applications portfolio for the merged firm. In addition, the influence of the acquirer over the target firm will also taper off after some of the employees of the target firm leave the merged organization. The rational goal of achieving strategic alignment between business and IT surfaces much later in the integration implementation phase, largely after the Wall Street Effect has tapered off. This is because organizations are under so much pressure to deliver on Wall Streets expectations that they may end up making system choices based on their operating costs, rather than the systems ability to align with the business imperative. Later, typically after the first quarter that follows after Day One, organizations start to address the alignment concern if they have already met Wall Streets expectations and delivered the expected synergies. If they have not meet Wall Streets
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expectations within the first quarter, then the Wall Street Effect continues into later months and even years.
Business-IT Strategic Alignment The Wall Street Effect

Acquirer Target Power Differentials

Pre-Merger

Target Employee Attrition Peaks First Quarter Results FTC & Merger Reported Shareholder Post-Merger Approval Day One

Three Years Later

Figure 1. Integrated Framework How the three lenses explain decisions in the pre-merger, merger and post-merger phases In Figure 1, we show how these three lenses explain IT integration decisions along the merger timeline. In the figure, the x-axis depicts time while the y-axis reflects influence, i.e. which lens (set of factors) seems to exert the most influence in the decision-makers minds, at any particular point in time. We believe the Wall Street lens is the most influential during the premerger and merger phases but its influence wanes during the post-merger phases, in that it settles down to the same level as any other non-merging public organization. The power of the acquirer appears more influential in the merger phase but again diminishes during post-merger. The strategic alignment lens grows in influence during the post-merger phase. The figure takes a somewhat optimistic view assuming the merged firm is able to deliver expected merger synergies at the end of the first quarter after Day One. Once it delivers the expected synergies, it is not under intense scrutiny of the Wall Street analysts any more. Lens #1: The Wall Street Effect/Efficiency Mantra Importance of the Symbolism lens The motivation to study the Wall Street Effect arises from the literature [e.g. 50, 38, 30, 21, 18] as well as from everyday life examples (e.g. The Wall Street Journal, The New York Times). Having witnessed the announcement of several M&As and noting that some

The strategic fit we refer to here is not Business-IT alignment but the fit between merging firms- in terms of their strengths and weaknesses, their opportunities and their threats. 5 The organizational fit can be assessed in terms of how well the organizational cultures, structures and processes of the merging parties complement and supplement each other. 6 However, the issue of business-IT strategic alignment for the merging IT units could be viewed as a moving target (This is true even in the absence of a merger context, cf. Thompson, 1967). If so, it will undoubtedly be difficult for two IT functions to sustain strategic alignment with two businesses strategies that are constantly changing while they merge.

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Proceedings of the 37th Hawaii International Conference on System Sciences - 2004

Table 1. Symbols underlying M&A practices that reify the aura of Wall Street
Symbol Literature The Wall Street Effect Metaphor: Merging firms think of their estimated synergies See [6] to see how Sallie Mae delivered their Promise to Wall Street not as estimates but as a solemn pledge, that if not delivered promise to Wall Street (public cost-cutting post-merger, will have dire consequences goals). Metaphor: Achieving cost-savings beyond those expected Beating Wall Streets by Wall Street is seen as a thrill of beating the competition in expectations a race, which enhances the firms reputation Myth: There are some benefits of achieving efficiency, Be Efficient! Simon [50]; Efficiency-as-an- Using M&As as an opportunity indeed. But there are boundaries to where the notion can be End-in-itself [30, 38] to cut costs and lay off applied - an unquestionable belief about practical benefits employees (cost savings) of certain techniques (lay-offs) Rites: The audiences here are the Wall Street analysts, and Favors short-term thinking and produces Split-second soaring and the investor community. The elaborate, repetitive activities insensitive feeling (Hillman, 1995). Financial plummeting stock indices; involve presenting quarterly reports, especially post-merger. markets can penalize you for your long-term Quarterly reports that focus Specific individuals are assigned roles of public relation to view (Brabeck1, Nestle CEO, 2001) entirely on financial returns conduct these activities. from merger Rites: The audiences are investors and public in general. I am not going to run a company based on what Buy-hold-sell The roles are assigned to Wall Street analysts and the the market wants at any given moment and make recommendations by Wall elaborate, dramatic, repetitive activities involve the buymistake after mistake because I told the analysts Street analysts that follow a one thing one day to make them happy (merger) announcement hold-sell recommendations. (Brabeck, Nestle CEO, 2001). Magic: Economies of scale is not a magic bullet a The organizations belief that merger is very demanding and strenuous on its managers and financial performance can be employees. Their morale may suffer terribly, which makes delivered largely by economies us question whether financial performance is the true of scale as a result of indicator of organizations overall health. consolidation

have beaten Wall Street expectations and delivered synergies promised to analysts, we have come to believe that Wall Street plays a critical role in the merger decisions (among others). We wish to identify exactly how Wall Street has taken on this quasi-mythical, larger-than-life form that has become so ingrained in peoples minds that it goes seemingly unquestioned. We wish to question the rather short-term, excessive cost-cutting that Wall Street infuses into organizational decisions pertaining to M&As. Turning to symbolism the practice of representing events/acts as symbols, we find that symbolism has already awakened organizational theorists and helped them see non-obvious implications of everyday events [51]. Mitroff [31] shows us why: symbols provide emotional support that is needed in coping with a precarious and often terrifying world (p. 388). Symbols help to simplify and comprehend a complex world [22], allow social actors to maintain order [13], provide a means of communication for interacting individuals [22] and a means to express their attitudes and beliefs, which are not directly observable. Instead, one must observe the behavior of decision makers to unveil their underlying beliefs for their decisions/actions. To understand the attitudes and beliefs that surround the Wall Street effect, we explore different symbols, which managers use to explain their actions and decisions regarding merger integration. Components of the Symbolism lens

Astley [2, p. 270] quotes Cummings [p. 533] idea of management by ideology, which encourages others to accept, to believe, to commit, to expound accepted doctrine, and even to glorify, but never to question. Astley makes it clear how symbolism plays a key role in the managers world through management by ideology. The components of this ideology are theories, worldviews, goals, visions, expectations, plans, myths, stories, rituals and terminology, which affect practice directly and indirectly in all organizations. Myths are unquestioned beliefs about practical benefits of certain techniques a dramatic narrative of imagined events [55, p. 655]. Myths are images that do have some basis rooted in the reality we experience, while magic is an image or a symbol that is merely a faade. Magic is a set of beliefs that cannot be destroyed by the presentation of contrary evidence [11, p. 9]. Understanding how managers attribute something to be magical is important in order to control their behavior, for the worst mistake we can make is to assume that the manager, even in the twentieth century, is a rational being [11, p. 12]. Metaphors compare one entity with another better-understood entity [32], the use of which simultaneously triggers change and reifies tradition [40]. Rites and ceremonies are elaborate, repetitive and planned activities that specifically benefit an audience, assigning specific roles to actors [55]. Literature support for the Wall Street Effect Mintzberg [30] notes that the innocent meaning of efficiency - the greatest benefit for the least cost,

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assumes negative connotations when efficiency is not a means to an end anymore and becomes a goal in itself. Thus, organizations obsession for Taylorism and scientific management [38], often costly to its customers and suppliers, results in glorifying efficiency as some sort of a mythical chant (mantra), the practice of which will miraculously lead to immediate gains in organizational performance. Not only does the efficiency mantra invoke a short-term thinking, it also makes organizations insensitive to its surroundings [21]. Hillmans [21] contention is easily evidenced in organizations obsessive desire to deliver shareholder value, particularly in an M&A context, with relatively little regard for other stakeholders. The fact that mergers are considered successful if they increase shareholder value post-merger, and the fact that a merger is not finalized until shareholders approve of the deal is indicative of organizations unquestioned submission to its shareholders, who in turn are highly influenced by Wall Street analysts. The association between the efficiency mantra and the Wall Street is symbolized in organizational artifacts such as quarterly and annual reports, which specifically address Wall Street s expectations:
I.B.M. reported declining revenue and profit in the second quarter but fared better on both scores than Wall Street had expected (emphasis added, July 18th 2002, The New York Times Direct).

contention that Efficiency-as-Ends notions are amplified in a M&A context. In short, the efficiency mantra, the public goals of cost cutting, the quarterly reports filed to the Securities and Exchange Commission, increase in shareholder value as a measure of merger success and standard rules of thumb regarding integration decisions are all symbolic of the strong influence of Wall Street over the minds of senior organizational management. Perhaps surprisingly, none of the above symbolic beliefs and practices are ever questioned. Such is the aura of Wall Street. Table 1 provides further support for our contention that there are several different kinds of symbols (myths, metaphors, magic, and rituals) that how the aura of Wall Street is magnified even more, and clearly discernable in M&A integration efforts. Tying this lens back to the framework shown in Figure 1, these symbols are more intense and more visible during the pre-merger and merger phases in the merger process. Lens #2: Power Differentials Between Acquirer and Target Importance of the Power lens Environmental conditions that force people to exercise power, and applicable to an M&A context include scarcity of critical resources [44], disagreement on important decisions [44, 39], uncertainty [54] and disagreement on means and goals [54]. These conditions appear magnified when two organizations (competitors, actually) with different cultures and business processes unite; merger conditions are ripe for power to be exercised. In fact, Buono and Bowditch (1989) suggest that the type of merger actually provides merging parties with a power base to negotiate and steer merger integration. The potential for political action in combining firms is considered to be very high [34, 3]. With respect to integration-related decisions, an acquirer may exercise power if it perceives that the target firms integration-related goals and the means (decisions and actions) are not compatible with its own [34]. The urgency to influence the target firm is driven by the pressures to meet short-term performance expectations [18]. The impact of size differences is actualized not only through sheer magnitude, but also through escalation of beliefs about the acquiring firms legitimate right to dictate to the target firm [34]. Often, managers of the acquired (target) firm are not allocated senior titles, reducing their relative status and power [17]. Because of this acquirer-target power differential, it is the target firm that must tolerate the acquirers policies, systems and plans [47]. Thus, as these researchers have shown, power theories do provide a fascinating interpretation of the events that unfold

The efficiency mantra is also symbolized in Wall Streets buying and selling practices based on splitsecond rise and fall in stock prices, yet another artifact of short-term thinking, which is invoked by the efficiency-as-ends perspective. In merging organizations, this efficiency mantra is simply amplified. Halspeslagh and Jemison [18] even suggest that acquirers dominate the target firm because they are under pressure to deliver merger synergies to Wall Street and the investor community, within a rather short time frame. In their MIS Quarterly Executive article, Brown et. al. [6] provide clear evidence of how acquirers dominate the target firm: the standard rule of thumb during Sallie Maes merger integration effort was the adoption of the acquirers systems unless the targets systems contributed to higher cost-savings or lower integration risks. Thus, either the targets information systems should be more cost-effective than the acquirers, or the acquirer goes forward with its own systems. Both of these choices would fulfill Wall Streets expectations of delivering more merger synergies in less time. Brown et. al. also show how Sallie Maes IT integration process resulted in meeting the public goals of cost-cutting. These public goals are part and parcel of the Wall Street Effect and leads to cost-cutting becoming a goal in itself - hence our

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within the IT function, and in our case, in two IT functions merging into one.

of power and what type of data could be collected in an M&A context to support it. The acquirer typically uses

Table 2. Power lens concepts and related it integration issues

Internal System of Influence Authority Ideology Expert Research issues Who are the decision makers? What is the formal, legitimate relationship amongst these agents? What are the shared meanings and beliefs of each IT function? How does this ideology impact the role of IS in each organization? Which of the merging partners is more progressive has a better state of information systems expertise? Do the experts lead the IT integration decision making? In what ways is political power exercised and who exercises them? How do social norms impact the IT decision making for each merging party before and after the merger decisions? What direct controls are implanted within the merging firms? How do FTC/EC restrictions impact the merger integration? How does a campaign from a special group impact the merger decisions?

External

Political Social Norms Direct Controls Formal Constraints Pressure Campaigns

Components of the Power lens The most classic definition is provided by Dahl [12] power is possessed by a person and can cause others to do things they do not wish to do. Power was intentionally exercised to change the will/intention of others. After considering the literature on power (Dahl, Pettigrew, Pfeffer, Hickson and Hinings, and Clegg), we settled on Mintzbergs model of power to inform our framework largely because we believe his model encompasses the key notions of the other researchers as we attempt to show next. Sources of Power After reviewing the literature [e.g., 10, 38, 37, 30] we arrive at the following set of power sources: previous power positions, formal (legal) structure and authority, trading favors, possession of knowledge, and possession of resources, personality (or political skills), and access to social network. This list is not inclusive almost anything and anyone can be a source of power! Means of Influence7 [Based on 30] These are the actual mechanisms, which leverage the sources discussed above, to bring about the intended change in behavior or impact organizational outcomes, given a facilitating environment and political skills of the players. These mechanisms at the disposal of the players are different for people internal (i.e. full-time employees) and external to a firm. Table 2 offers some research questions associated with Mintzbergs model
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its size, organizational culture and financial resources to dominate the target. However, the target firm may exercise power by employing a system of politics or expertise as well. As noted earlier, almost anything (social network, authority, resources, skills) can be used as a source of power at the right time. External Means These means of influence are available to owners or investors, suppliers, clients, competitors, unions, general public, governments and board of directors. 1. Social Norms general norms and ethics that inform all organizations about what is acceptable behavior. 2. Formal constraints: specific impositions on one or many organizations and on specific types of actions they must take. For example, the SEC has now adopted a constraint that for M&As, the accounting method of pooling-of-interests has been abolished. 3. Pressure Campaigns: informal, episodic, focused influence carried out by specific groups (e.g., the HP family led a pressure campaign against the HP-Compaq merger). 4. Direct Controls brings external players closer to or even inside the firms boundaries. Internal Means These are means of influence available to the CEO, CIO, and CFO, senior and middle management, unskilled and skilled operational-level workers: 1. System of Authority - This is legitimate or formal power vested in the office by which the CEO and middle managers give direct orders to their employees. 2. System of Ideology - This can serve to knit all of the insiders into a cohesive unit and is based on traditions and beliefs that insiders share as members.

Mintzberg does not think of power of a person as different from the power that the person actually exercises and uses the terms influence interchangeably with power.

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3. System of Expertise - Using this system, skilled and knowledgeable specialists or experts can influence those who are not. 4. System of Politics - This is illegitimate power, typically used to circumvent, resist or even disrupt the other systems of influence in order to accomplish the ends they personally believe to be important. Tying this lens (see Table 2) back to the framework in Figure 1, we argue that these means of influence will be exercised more often during the pre-merger and merger phases towards making IT-related decisions. Lens #3: Business-IT Strategic Alignment Importance of the business-IT alignment lens Prior research [56, 57, 23] has consistently argued for aligning a firms IT strategy with its business strategy for improved organizational performance. But achieving business-IT strategic alignment has been a constant struggle for many organizations, even as single, independent firms. We can only imagine the complexity and effort required to achieve this alignment when not one, but two firms are trying to merge into one. It can be argued that merger success measured in terms of the organizational performance of the single combined firm depends on successful IT integration. We believe the success of IT integration depends on the degree of alignment between the merged business and the merged IT function. Components of businessIT alignment lens In general, strategic alignment is the extent to which the business mission, objectives and plans support and are supported by the IS mission, objectives and plans [41, 45], which is not an event but a process of continuous adaptation and change, as emphasized by Henderson and Venkatraman [19] and Hirschheim and Sabherwal [23]. The business and IT strategy are aligned if the scope, competencies and governance of business match with that of IT [19]8. Corporate and Business Strategy The strategic management literature classifies strategies into three levels: corporate, business, and functional. For a single-business firm, the corporate strategy and business strategy are one and the same. But in a multi-business firm, it is the corporate strategy that drives the business strategies, which in turn drive the functional strategies. Typically, but not always, the

business level strategy is congruent with the corporate strategy. For the purpose of M&As, it makes sense to use corporate9 strategy, since the unit of analysis is the merging firms entire corporations as a whole. Past management and IS literature has applied several typologies for corporate/ business strategies. Sabherwal et. al. [43], and Camillus and Lederer [8] have used the Miles and Snow [19] typology defenders, analyzers and prospectors. Other researchers [e.g., 8] have used Porters three generic strategies, specifically costefficiency, combination and differentiation. Other possibilities that can be drawn from strategic management literature include the use of a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis based on an organizations goals to maximize strengths or overcome weaknesses and an organizations means based on internal redirection of resources within the firm or external acquisition or merger for resource capabilities to ultimately select a corporate strategy from product development, market development, vertical integration, horizontal integration, conglomerate diversification, concentric diversification, joint ventures, divestitures, turnarounds, innovation, and liquidation. Since this study focuses on mergers and acquisitions only, we can safely exclude all the strategies that focus on internal redirection of resources within the firm. Since we are studying M&As, we shall exclude joint ventures as well. Thus, we are left with four alternatives - Vertical Integration,10 Horizontal Integration, Concentric Diversification, Conglomerate Diversification which are similar to the ones proposed by Brown and Renwick [5] who note the need for alignment of IT governance arrangements with the acquisition strategy: IT Strategy and Structure IT Strategy is typically identified using the following typology: low cost, differentiation, and combination [8, 4, 43]. With regards to IT structure: Brown and Magill [4] use centralized, decentralized and hybrid to operationalize it. They explain that in a centralized structure, IT decision-making is completely controlled by a centralized or corporate IT unit. In a decentralized structure, IT decision-making is controlled completely by each business unit, resulting in multiple IT personnel reporting to the business units. A hybrid IT structure is a design where part of the decision-making authority
Alignment of IT strategy must occur with the highest level of strategy and usually this is the corporate level; if there is no corporate IT function, then IT strategy must be aligned with the business level strategy of the SBU. 10 The term integration here implies a specific kind of merger and not the actual process of combining the organizational assets and management of the merging partners.
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We focus on strategy rather than structure as it is assumed that strategy is more likely to drive IT infrastructure and processes rather than organizational structure.

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lies with a centralized IT unit, and part lies with the business units. Centralization affords greater efficiencies (economies of scale), standardization and integration; while decentralization provides local (business unit) control and ownership of resources, quicker responses and better customization to business unit needs [60]. Thus, we may associate a centralized IT structure with a low cost IT strategy, a shared structure with a combination of low cost and differentiation IT strategy and a decentralized IT structure with differentiation IT strategy [e.g., 23, 9]. In keeping with this prior literature, IT structure is analyzed using the centralized/decentralized/hybrid typology. Based on the work of Henderson and Venkatraman [19], the components of IT structure are: architecture (application portfolio, telecommunications network), processes (system development, security procedures) and skills (hiring and training IT personnel). Hirschheim and Sabherwal [23] take a somewhat different view in that they conceive of IT structure as a constituent of IT strategy. They view IT strategy as being composed of IT role, IT sourcing arrangement and IT structure, which in turn would be identified in terms of IT infrastructure, IT processes and IT skills (See Table 3). IT Role reflects the way the IT function is perceived by the organizations senior business management [36, 23]. An IT role focused on efficiency is achieved through process-level improvements and realized through a centralized IT structure. An opportunistic IT role focused on market flexibility requires quick decisions and is achieved through seizing new opportunities [23]. It is attained through a decentralized IT structure. Comprehensive IT role is achieved through careful decisions and quick responses and is realized through a hybrid or a shared IT structure. IT Sourcing refers to the internal and external sources of IT product and services offered to a particular firm [23, p. 89]. IT outsourcing refers to third-party management of IT assets, people and processes. Sourcing 80% or more of an IT budget to third-party vendors is considered outsourcing, appropriate for IT when it is merely a commodity (support) function. Sourcing 20% or less of IT budget to third-party vendors is considered insourcing, appropriate when IT is a critical differentiator. Sourcing between 20 to 80% (40% typically) of IT budget to third-party vendors is called selective sourcing, appropriate when the role of IT is to be comprehensive. IT Structure has already been discussed earlier. In addition, we may contend that a centralized IT structure not only provides for economies of scale, but helps manage IT outsourcing arrangements without redundancy [42], and a decentralized structure enables responsiveness to users in insourcing arrangements

[23, p. 90]. A shared IT structure would then map to a selective sourcing arrangement. Table 3: Business IT strategic alignment framework showing components and operationalizations of corporate and IT strategy
Constructs Corporate Strategy Typology Vertical Integration Horizontal Integration Concentric Diversification Conglomerate Diversification Efficient Comprehensive Opportunistic Outsourcing Insourcing Selective Sourcing Centralized Shared Decentralized

IT Strategy: IT Role IT Strategy: IT Sourcing IT Strategy: IT Structure (Infrastructure, processes, skills)

Ideally, organizations should seek a high level of strategic alignment [23]. But an ideal alignment profile typically contributes to firm performance in the longterm. In the relatively short merger phase, it may not be appropriate to suggest an ideal alignment profile. In the analysis of the post-merger phase (see Table 4), we suggest the ideal alignment profile, depending on whether the two merging firms are undergoing a vertical integration, a horizontal integration, a concentric diversification or a conglomerate diversification, based on the works of Pearce and Robinson [35] and Brown and Renwick [5] and the ideal alignment profile discussed above: Vertical Integration: This occurs when a firm acquires or merges with another firm with which it earlier had a supplier-customer relationship. Backward vertical (customer acquiring supplier) integration is used to ensure dependable supply and quality of raw materials. A vertically integrated firm would have better control over its costs, leading to improved profit margins through the expanded production system. Forward (supplier acquiring customer) integration is undertaken to increase the predictability of demand for its output. In either case, the business strategys focus is on improvement of profit margins via cost control and not on developing any critical differentiators, we would ideally expect the role of IT to be governed by efficiency as well, if the IT strategy had to be in consonance with the business strategy. To achieve this integration (that perhaps existed earlier in the form of interorganizational systems between the two merging firms) the IT structure should be centralized and the IT function outsourced (see Table 4, row 1).

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Proceedings of the 37th Hawaii International Conference on System Sciences - 2004

Horizontal Integration: This growth strategy quickly allows the merging firms to increase the production capacity, where the merging partners have similar businesses producing and marketing at the same stage of the value chain. It provides access to new markets for the acquiring firm and eliminates competitors. Thompson and Strickland [53] also suggest that if a firm competes in a rapidly growing market and has a weak competitive position and lacks either critical competitive capabilities or sufficient economies of scale, then it would consider horizontal integration. To align with the primary business goal to either gain economies of scale or competitive advantage, the IT function will be viewed by senior management either in an efficiency (support) role or in an opportunistic (strategic) role. Accordingly, the IT function will either outsource and centralize the IT structure or insource and decentralize the IT structure, respectively (see Table 4, row 2). Concentric Diversification: When a firm acquires another business related in the areas of markets, products or technology, it is called a concentric diversification. Thus, the acquiring company searches for new businesses that are familiar but not identical, synergistic but not wholly interdependent [35, p. 227]. For both the acquiring and the target firms, this strategy involves keeping some of their old businesses, products and technologies and launching new ones too. Aggressively expanding product lines or operations would entail that IT play a more comprehensive role in that it not only makes the existing processes costeffective but also seeks out new opportunities to support new businesses or products. Therefore, we may argue that ideally, a concentric diversification strategy aligns with a comprehensive IT role, selective IT sourcing and shared IT structure (see Table 4, row 3). Conglomerate Diversification: Adopting this strategy, the primary and often only concern of the acquiring firm is the profit extracted from the venture. Relatively little attention is given to creating product/market synergy with existing businesses. Unlike the concentric diversification strategy, this strategy does not emphasize commonality or compatibility of markets, products or technology. Assuming that the target business remains a separate organization in terms of its business goals, operations and IT function, we believe that the ideal post-merger IT strategy in alignment with the postmerger business strategy would be the pre-merger IT strategy governing the IT function in the target firm, if the pre-merger IT strategy is aligned with the premerger business strategy. The same arguments may be made for the acquiring firm as well (see Table 4, row 4). But, if the business-IT alignment has not been achieved in the pre-merger phase then both target and acquiring

should independently strive for business-IT strategic alignment. Table 4. An Ideal Post-Merger Business-IT Alignment State for Firms A and B For Different Corporate Merger Strategies
Corporate Strategy Vertical Integration Gain Horizo compe ntal Integra titive advant tion age Gain Econo mies of Scale Concentric Diversification Conglomerate Diversification IT Role Efficient Opportu nistic IT Sourcing Outsourced Insourced IT Structure Centralized Decentraliz ed

Efficient

Outsourced

Centralized

Compreh ensive

Selective Shared Sourcing Configuration Maintain pre-merger IT strategy, if it is already aligned with the business strategy of A and B before the merger. If premerger IT strategy is misaligned with pre-merger business strategy, then ideal state of IT alignment for B in the conglomerate (A) will depend on the Bs business level strategy, whatever that might be. The case here is similar to that of aligning IT strategy with business strategy in a single non-merging firm.

3. Concluding Remarks
Whilst our framework is in a theory-building phase, we believe we have offered a number of constructs (really concepts) that can be used for theory testing. In the theory-testing phase, our data may reveal the typical IT integration decisions that integration teams face: (a) Eliminate application(s) altogether (b) Select application(s), further subject to a decision to insource/ selectively source/ outsource/ backsource (c) Allow two systems belonging to each party to operate until further decisions are made and temporarily port data from both systems to another database or spreadsheet software (d) Buy off-the-shelf software to interface two systems inherited from the merging partners (e) Develop interfaces in-house (f) Develop new applications and plans (e.g. Business Continuity Planning) triggered by the needs of the merger (g) Retain and hire people with certain IT skill-sets

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Proceedings of the 37th Hawaii International Conference on System Sciences - 2004

(h) Select/Eliminate IT processes How and when such decisions as these are made and how they can be understood by the three lenses, is the subject of research we are currently undertaking. For example, we may identify data that speaks of selecting IT systems, processes and people for the merged firm only to deliver public cost cutting goals or promise to Wall Street, which tells us that the Wall Street Effect influences IT integration decisions. If the data speaks of nine out of ten times we go the acquirers way or the acquirer is a 800-pound gorilla, we may know that the acquirer dominates the target firm regarding IT integration decisions. If the data speaks of system choice based on merged business needs, products and services then the IT integration decisions are based on goals of realizing business-IT strategic alignment. Knowing what drives IT integration decision-making will allow managers to plan for it, particularly if the target firms IT function is more strategic and sophisticated. The target firm may choose to draw on other sources of power (e.g. IT expertise) to steer negotiations with the acquirers IT management. By realizing that IT integration decisions are largely based on systems ability to contribute to the promise to Wall Street and not necessarily on what the new and dynamic business needs are, managers may conduct a more elaborate due-diligence process, focusing on realizing business-IT strategic alignment from the very beginning of a merger deal. With this paper, we have attempted to bring the M&A context to the IS researchers attention. We believe this is an important topic for our field and hope other researchers will begin developing new theories regarding how, when and why IT integration decisions are made during the M&A process.11

Acknowledgements
We thank. Andrew Szilagyi for his very constructive suggestions on an earlier draft of this paper. We also thank Kelly Rainer and the two reviewers.

References
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11 Due to space limitations, we have no doubt not been able to do justice to certain concepts associated with M&As and IT integration. We have also cut back on our discussion of the literature reviewed that led to the final choice of the three lenses, which make up the framework. We have also not been able to show how our preliminary data collection for three mega-mergers has been supportive of the framework.

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