COVID-19 and M&A — Cloud, Integration Hubs, and Security

At NTT DATA Services, we believe it's best to start with then end in mind when looking at the right integration model for any transaction. CXOs should consider right-sizing their target state model to fit the needs of the target business — whether that is a carve-out, spin-off, or an acquisition. Examine your transaction principles, business imperatives, and existing contract commitments; is the intent of the transaction to acquire-prime-and-sell or to buy-and-hold? Looking at the value horizon for a transaction will allow companies to right-size and "lean out" the target operating model. What works for the seller or the buyer today may not work after the close. If the intent is to realize value from the transaction in the near term, then focusing on reducing costs and investing in an asset-light, on-demand, flexible, cloud-first infrastructure may make sense.

The COVID-19 recessionary environment is now prompting companies to think about integrating an acquisition completely or fostering a co-existence model in the near term. Anyone who has experienced an integration post-close knows this is a very complex process, to say the least. A complete migration, cloning, or systemic integration strategy on Day One may not only introduce additional risk but can also be prohibitively expensive. Companies should think carefully about using a transaction to build a transformative target state; a rip and replace strategy typically has higher costs, may take longer, and may come with higher risk and workforce implications.

Reaping the benefits of a cloud-first model
Operations can also be best managed in the near term. A vendor-first model can provide critical managed services in an SLA. If the intent is to hold, integrate and scale, it is important to consider a more reliable and architecturally sound target state. While a cloud-first, asset-light, and on-demand architecture is still critically important, it will also be important to think about ensuring seamless integration into a broader operating ecosystem. Building core capabilities internally will be important.

Either way, consider investing in a cloud-first architecture model. This provides accelerated savings and a mature target architecture that can help reduce the cost of a custom build. Cloud-based models encapsulate most proven best practices, including:

• Component-based architecture
• On-demand ability to scale up
• Fit-for-purpose allocation of compute resources
• Built-in security.

Cloud-based models also allow pre-built adapters and software that can help ensure the seamless transition of data and systems into the cloud footprint.

Connecting disparate systems via integration hubs
In the near term, integration hubs provide a way to connect disparate systems post transaction while keeping them separate, speeding up the process of data and logic transfers. These integration hubs can sometimes be set up even before the deal is signed to ensure that a single view of the supply chain systems and processes can be provided. While true integration and migration may take more effort and could be delayed during a transaction, businesses typically need immediate visibility into reporting to comply with business priorities and statutory requirements.

Data integration hubs provide a mechanism by which companies can continue to live in a world with disparate systems, but there is a singular view of the business processes to help drive operational efficiency and transaction effectiveness. These data integration hubs are cloud-based connectors that allow companies to rethink how to connect disparate operations and systems to build an interim single view. These hubs are also typically pre-built by functional area, and the process workflow can be automated, thereby reducing the time and effort to connect systems when needed. Standard adapters and connectors can help accelerate the integration and allow organizations to link data to key processes that need to be enabled during a consolidated workflow. Investing in such data integration capabilities can help companies lay the foundation for future transactions while reducing the effective investment per transaction.

Reducing risk by increasing security
An additional integration risk that should not be minimized is cybersecurity. In this COVID environment, there has been a spate of cybersecurity and phishing attacks, and the frequency of these attacks during a deal increases tremendously. A study by the Ponemon Institute showed that companies showed a 5% drop in their stock value upon a data breach; such a security breach also impacts the target's brand value, resulting in deals that are abandoned. Hackers seek to exploit data and network vulnerabilities, which can compromise systemic and financial information and have a material adverse effect on the value of the deal — resulting in termination. Investing in a pre-built security platform and a framework to help identify, monitor, and remediate potential security risks across both the IT and operational environments is critical to deal success.

Digital orchestration
Finally, digital is changing the way companies are planning and executing a transaction. Even though the optimization of IT assets takes centerpiece during a transaction, digital initiatives may provide greater deal value during and after the transaction. Buyers are looking at deal flow management software that leverages AI to identify, qualify and analyze prospect data to identify the right target for acquisition and unlock value. Automated Workflow Management software can encapsulate project management, ensure cross-functional dependency management, and link in transaction data securely to help provide a master plan for the transaction. These can accelerate value during the diligence and integration planning phase by setting up a clean room and then transition the data during deep dive integration planning that may follow.

Welcoming the new normal
As with many impacts of COVID-19, this new normal is probably not so much a different destination but an accelerated destination of trends that were present pre-COVID, just like digital, SaaS, etc. Organizations nimble enough to respond quickly will position themselves to be the most successful in the future, especially as M&A will continue to be a key strategic tool for transforming businesses. At NTT DATA Services, we're calling that the Big Pivot.

To learn more, check out the rest of the posts in this series:

• Part one: Is COVID-19 Driving the New Normal in M&A?
• Part two: What CXOs Need to Consider
• Part three: Preparing for the Future

To better prepare for what's now — and what's next — in the coming weeks, I invite you to read upcoming posts by NTT DATA executives and experts as they offer industry insight into M&A.