What Are Some of the Risks Involved When one Firm Acquires Another Firm's It Infrastructure?

What are some of the risks involved when one firm acquires another firm's IT infrastructure?

An integration project or merger and acquisition involves a huge amount of data migration, whether it is to an entirely new system or to the other organization's existing system. Testing at each level of the integration highlights the problem and protects data from corruption and subsequent loss of crucial information.

First, vulnerabilities may be created when changing or developing new systems. With incidences of crime such as credit card fraud and identity theft becoming more common and awareness of them being raised, consumers have become increasingly security conscious. Financial services organizations in particular hold a great deal of sensitive, personal information within their systems and databases; migration of the data must therefore be carefully executed.

Second, when the two organizations have completely different information systems, access to timely and accurate information may be lost, may be unable to gain access to similar information from the combined organization. If the information systems are totally different, then sharing resources or delayed. Instead of reducing costs, merging the two information systems departments may increase costs. It may become necessary to write new programs and install communications equipment before the two systems can interact

Third, organizational cultures that do not match; every firm has an organizational culture which consists of the norms and values its employees have in common. If the organizational cultures collide then the people responsible for the integration of all the systems will have trouble working together on the problem and will often fail.

Fourth, difficulty encountered when trying to merge two firms is when their organizational structure differs. Each organizational structure has its own Information System that is best suited for this structure. This has as consequence that if two firms have different structure, their supporting Information Systems will also be very different. This will make it difficult to integrate the Information Systems, because the Information System of the one firm is not suited for the other firm and a choice has to be made which Information Systems to implement in the merged venture.

Why do firms often fail to take the target firm's information systems and IT infrastructure into account when purchasing other firms?

It can also help acquirers develop more informed opinions about the acquisition's value potential. For instance, through IT due diligence, acquirers can learn if existing IT systems require modifications or upgrades, if budgets are in place to support required changes, if a change in business control affects technology ownership and if hidden costs exist for acquirers interested in extending existing IT outsourcing arrangements. additionally, in this age of heightened regulatory scrutiny, IT due diligence can help uncover the details of a target organization's technology controls and identify areas of potential deficiency (McDonnell, June 2007).

Due diligence is not an optional process. Performing due diligence, especially with regard to information systems compatibility and integration issues, is absolutely critical. When correctly performed, due diligence can help identify risks and opportunities. The risks include sources of instability requiring immediate action. Opportunities to reduce costs, leverage resources or assets in new areas, and to improve IT effectiveness and increase business flexibility can be identified and fixed.

Finally, due diligence should confirm how much (or how little) compatibility there is between IT.

Projects related to mergers and acquisitions have a similar failure rate. Mergers and acquisitions are deeply affected by the organizational characteristics of the merging companies as well as by their IT infrastructures. Combining the information systems of two different companies usually requires considerable organizational change and complex systems

...