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12 Feb 2024

To Integrate or To Federate, that’s an IT M&A Question

In the world of post-merger IT, finding the path to success often feels like navigating through a maze of complexities. One pivotal question is: Should we aim for seamless integration or consider a federation of IT systems? Here, we will compare the benefits of IT centralisation with those of autonomy.

Data

 

Data integration in a merger or an acquisition offers the benefits of better analytics and decision-making but also the challenges of system complexity and security concerns. Facilitating data integration involves developing a clear strategy, understanding each other’s data landscapes, establishing strong data governance, and culminates in choosing the right integration tools. Deloitte's Acquisition Closure Divestiture Carveout (ACDC) services for example provides solutions to help buyers and sellers assess, separate, transfer, and manage unstructured data assets by leveraging machine learning to simplify the issues, aiding planning and creating a unified data system with strong governance. Its successful application at a multinational pharmaceutical firm led to over $53 million in cost savings, highlighting the importance of strategic data management in M&A.

On the flip side, federation of IT provides flexibility and autonomy, especially when data ownership and control are a paramount requirement. It allows each entity to preserve its data repositories, thus enabling greater control over its data assets and to uphold its data governance norms, privacy measures, and compliance standards. Yet, managing data synchronisation, ensuring data consistency, and facilitating efficient data sharing between federated entities also presents challenges and the issues in the diagram below should be considered:

Collaboration

 

Collaboration is key to a successful merger. It can be achieved through IT integration that unifies communication tools and platforms. This promotes efficient teamwork and communication by implementing common tools such as project management systems and virtual meetings. IT federation may encounter hurdles due to different tools used by each entity, leading to fragmentation and limited interoperability. Nevertheless, efforts can be made to establish integration points or interoperability mechanisms to bridge the gap between the federated systems:

  • Integration points and interoperability mechanisms: Establishing these can bridge the gap between federated systems.
  • Middleware and standardised protocols: Implementing these can improve communication and data exchange across platforms.

IT expenditure

 

In M&A, companies must balance the upfront costs of IT integration, which offer long-term savings, against the ongoing costs of IT federation, but the choice between the two has considerable financial implications.

IT Infrastructure

 

Following a merger or acquisition, the decision to integrate or federate IT systems can have substantial long-term implications. Integration streamlines systems, potentially offering cost savings and unified operations. However, it may pose significant challenges for future divestments as separation of fully integrated systems can be complicated and costly. On the other hand, federation, while it may initially seem complex, allows for a large degree of autonomy. It fosters interconnectivity and shared resource access, which can be especially advantageous in future divestments, due to its modular nature, leading to easier and less expensive separation. The table below sets out the key activities for each IT infrastructure component under integration and federation strategies and provides a roadmap for decision-makers to navigate the post-merger IT landscape.

The choice between integration and federation should be made carefully, considering the unique IT architectures of the merging entities, their strategic objectives, and the potential for future disentanglement or carve-outs. For example, organisations with very different IT structures may benefit more from a federation approach to ensure seamless interoperability, while those with similar systems may find integration a more streamlined and cost-effective option.

Applications

 

There are four distinct strategies (Converge, Combine, Coexist and Continue), ranging from full integration to full federation, that reflect different levels of integration of applications and business transformation.

Converge (Transformation) represents full integration and extensive business transformation. This strategy involves fully integrating an acquired company's applications into the existing ones, such as a ground-breaking data analytics tool being integrated into the acquiring corporation's existing IT applications infrastructure. The goal in this example would be to harness the innovative tool's capabilities, thereby transforming the business model.

Combine (Metamorphosis) is a balanced approach to integration and federation, coupled with a high degree of business transformation. This strategy might, for example, involve merging certain applications such as the databases or inventory management systems of two merging companies to improve efficiency while retaining the customer-facing applications of the separate systems.

Coexist (Symbiosis) involves minimal integration but enhanced cooperation, signifying higher application autonomy and less business transformation. This could be akin to a healthcare provider acquiring a specialised healthcare application and integrating it to facilitate interoperability for data sharing, but otherwise leaving the application to operate independently.

Continue (Retention) represents full federation, with applications operating independently with minimal business transformation. With this approach, for example, an acquired software company might continue to run its unique applications independently, with the acquiring company benefiting merely from the expanded product portfolio.

Nonetheless, the journey towards application integration, especially with the Converge and Combine strategies, often requires comprehensive development, customisation, and sometimes code modifications to fill functional gaps. The ensuing heavily customised applications can be costlier to maintain and may restrict future upgrades. Therefore, the expected cost synergies from full integration can sometimes be over-stated. The overall cost, including the upfront integration efforts, customisation and increased long-term maintenance, could exceed the combined total of federation costs and individual application operating costs. Hence, strategic decisions about application integration should be based on a careful assessment of the complexity of application technologies, the potential for future divestments, and implications for long-term maintenance.

Extending the federation vs. integration conversation

 

In this section, we look at some aspects of integration and federation that are often overlooked but which help to provide a more holistic view of the strategic choice between them.

Timing in IT M&A is crucial. A rapid integration of diverse IT infrastructures can create a range of problems such as communication breakdowns, service disruptions and system incompatibilities. These risks can lead to potential operational inefficiencies and unforeseen difficulties in consolidation.

On the other end of the spectrum, a slow and deliberate federation approach provides an opportunity for carefully orchestrated transition. This approach reduces the risk of immediate disruption by allowing existing systems and operations to continue while a gradual transition occurs. Yet, this also poses several challenges. Maintaining separate systems can be expensive and resource-intensive and in the long run may require the eventual decommissioning of less efficient or redundant networks.

An integration approach, which aims to combine the systems, processes, and structures of the merging entities, can incur substantial upfront costs. These include the costs of aligning the disparate systems, merging databases, and rebranding. However, these costs may be seen as a necessary investment to ensure a seamless customer experience and consistent brand identity across the unified entity.

In comparison a federation approach, which allows the acquired company to operate its systems autonomously, can limit the immediate financial burden and resource demands. This approach reduces the need for substantial upfront investment in system integration and operational alignment. However, the downside is the potential delay in achieving hoped-for operational synergies and long-term cost savings. The autonomy of systems and operations may also create inefficiencies and prevent the realisation of the full potential of the merged entity.

Managing change after a merger or acquisition is another critical aspect of IT M&A. A federation strategy, which allows the acquired entity to operate with a degree of independence, can limit disruption to business-as-usual (BAU) operations. This approach can help to maintain stability in the face of change, potentially mitigating risks of employee turnover and customer dissatisfaction that can occur due to abrupt change. However, this non-disruptive approach may also delay the realisation of potential synergies that a merger or acquisition aims to achieve.

Conversely, a full-scale integration approach can accelerate the alignment of systems, processes, and cultures, thereby promoting the achievement of the merger's or acquisition's goals. However, such an approach could significantly disrupt business as usual (BAU), leading to a potential loss of productivity and fall in morale due to the stress of adjusting to rapid change. In addition, any future divestment out of a fully integrated IT environment is typically much more costly and complex when compared to a carve-out out from federated systems.

So the choice between integration and federation of IT systems after a merger or acquisition is by no means straightforward.

Get in touch with us to discuss how federation might work for you as part of your M&A strategy.

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