Overcoming the challenges of IT separation for M&A success

Divesting a business unit involves untangling interconnected IT systems across various functions.

At KPMG, we categorize these into five key dimensions: people, processes, assets, contracts, and technologies. A common pitfall is lacking a comprehensive overview of these entanglements.

For example, a project with a consumer goods company selling off 20 business lines showed a problem. There was no documented IT organization with clear cost allocations. This made it challenging to assess impacts on strategies, EBIDTA adjustments, and IT separation costs.

Early IT involvement is crucial in divestments. Neglecting a baseline IT assessment can delay the process.

We recommend building a inventory across the five dimensions and creating a dependency matrix to track applications use and assess separation complexity. This helps identify hotspots  for the Day-1 Transitional Service Agreement (TSA).

Starting with IT and establishing a baseline avoids delays and ensure a smoother divestiture process.

Underestimating the complexities of data segregation can lead to project delays and problems with regulations like GDPR and CCPA.

Our M&A team faced unexpected challenges with data migration for an industrial manufacturer. Their ERP setup included shared company codes in the SAP Public Cloud. This made it hard to separate the data.

To tackle this, we implemented a proactive data separation strategy in the ERP system, creating dedicated company codes for each business line.

We identified and categorized data relevant to the divested entity, factoring in compliance regulations. Comprehensive mapping of data entanglements allowed us to select appropriate migration strategies while maintaining data integrity.

To reduce data breach risks, we established a robust data governance framework. This approach benefited our client by reinforcing the importance of early data segregation planning.

We recommend organizing data from both an organizational and methodological perspective to make separations more efficient and cost-effective. Clear data ownership and access controls ensure regulatory compliance, while data mapping and categorization enhance long-term data quality.

Using technology in M&A can make these processes easier. This allows companies to focus more on their main business instead of spending too much time on data management.

A common obstacle in successful separations during M&A transactions is not predicting the costs of divestiture. This is especially true for IT-related expenses.

We often see sellers starting these processes without understanding the potential costs involved. These costs can include one-time fees, TSA charges, stranded costs, and dis-synergies.

In an industrial manufacturer deal, we leveraged the established IT baseline during M&A IT due diligence. This helped us estimate costs related to IT separation activities ahead of time.

This included assessing the personnel resources required, technology investments (like new licenses required for migration, hardware, early-exit fee), and potential external fees. This approach enabled us to effectively manage hidden divestiture costs and proactively tackle stranded costs and dis-synergies.

To reduce stranded costs and inefficiencies, we suggested creating different scenarios early. These can range from a full separation on Day-1 to options with different service scope of and TSA durations. Each scenario will have its own costs effects.

Furthermore, strategies such as consolidating redundant systems, decommissioning assets, leveraging cloud solutions, and implementing automation and digital transformation initiatives can further reduce these time-consuming costs.

By looking closely at IT separation costs, stranded costs, and possible dis-synergies, sellers can make smart choices. This helps them avoid surprise expenses later.