In our recent report , we highlighted that the capital markets sector is witnessing a strong upward trend in M&A activity: aggregate deal value has more than doubled, from $48 billion in 2015 to $105 billion in 2020. In fact, despite the economic impact of covid-19 pandemic, the year 2020 witnessed the highest aggregate as well as the largest average deal value in the last five years.

It’s clear that capital market players are using M&A as an integral part of their corporate strategy. While board members and shareholders are approving these deals, they also have soaring expectations. In fact, CXOs have ever higher stakes to ensure that the intended synergies from the deal are realized within the planned timeframe.

This makes it imperative for leaders to focus on the key value-creation activities across the deal life cycle. Interestingly, synergies are only estimated, and not realized, during the target identification and due diligence stages of the transaction. It is the PMI phase where the synergies are actually identified and realized. In our analysis of the situation, we found that among the key elements of PMI, information technology (IT) enables more than half of the synergies directly or indirectly. Hence, it is critical to understand how to get the best out of your IT integration.

IT Levers to Maximize Integration Value

IT is critical to virtually every operational process in the capital markets sector, including customer onboarding, pre-trade analytics, order management, matching and netting, trade execution and settlement, custody, payment processing, and fund analytics. IT also plays a critical role in key functions such as data management and compliance.

This indicates a strong opportunity to enhance technology capabilities and further optimize operations by embedding IT value-creation levers in the integration process. These levers ensure that maximum value can be unlocked from PMI within planned timelines:

Figure 1: Key IT Value Creation Levers to Maximize the Value of PMI

• Integrated operating model: Design an operating model with seamless integration across front, middle and back office functions. Remove low value-add activities and consolidate any overlapping business units, functions, IT assets and human capital.
• Digital transformation: Digitize, standardize, and automate all manual processes across various core and support functions. In addition to saving costs, digital transformation lever improves customer experience and offers revenue synergies as well.
• IT process optimization: Design time-efficient and cost-effective ways to meet the technological and informational needs of the merged entity. For instance, remove any redundant steps to procure or release IT assets and streamline data migration and data archiving processes.
• Application & vendor rationalization: Many enterprises underutilize some of their  IT applications and services. This makes it imperative to assess the combined pool of IT applications and vendor services of both target and acquirer, prioritize them, and do away with the redundant ones, saving significant costs.
• Infrastructure & license consolidation: Consolidate the underlying IT infrastructure including servers, data centers and licenses of various business tools to meet the combined needs of the merged entity. Adopt a suitable cloud platform to enable remote and real-time access to data in a cost-effective way.
• Contract renegotiation: Depending on the scale of the new entity’s business activity, renegotiating your contracts with IT vendors can generate economies of scale and lower per unit cost.
• Hyper-personalization: Leverage artificial intelligence and machine learning to offer a more personalized experience to customers and empower them with self-service tools. For instance, AI-enabled investment management platforms may provide tailored advice based on a client’s specific goals; risk appetite; and environmental, social, and corporate governance (ESG) preferences.
• Data monetization: For some deals, integrated data sets of acquirer and target may offer an opportunity to create a new revenue stream or strengthen an existing revenue stream by developing and selling data driven-focused insights to customers. Data monetization can also improve brand positioning and, accordingly, deliver additional revenue synergies.

A Structured Approach Makes all the Difference

A theoretical understanding of IT value creation levers does not suffice. It is imperative to take a well-planned, systematic approach to the challenge and on-board skilled resources with hands-on IT integration experience at each stage of the deal lifecycle:

Figure 2: Structured approach to IT Integration across the Deal Lifecycle

• Design a targeted IT operating model: During the IT assessment stage, it is critical to evaluate the operating model and IT functions of the merging entities in the context of the “core purpose” of the deal. Next, use IT value creation levers such as IT process optimization, digital transformation, and hyper-personalization to design an optimized IT operating model for the merged entity. Adopt the best elements from each entity – or design a new one according to industry best practices, ensuring seamless integration between front, middle, and back office activities.
• Rationalize the combined portfolio of applications: The application rationalization lever is the first step of integration planning and execution stage. Scan the combined pool of applications and prioritize them based on their business value and potential risks. Decommission redundant applications. For duplicate applications, use the license consolidation lever to optimize cost. For the rest, identify asset-monetization opportunities to transition licensing cost from a capex model to an opex model.
• Integrate data and leverage analytics: Assess the existing data landscape including data structure used to store sensitive information and the reporting processes followed by different functions. Take a deep-dive into the algorithms used to clean and analyze data sourced from external vendors. With this analysis and industry best practices, redesign data storage, reporting and processing workflows to develop an integrated “single view of truth.” Further, develop commercial use cases to monetize integrated data and generate additional revenue streams.
• Consolidate and streamline enterprise architecture: Analyze the existing architecture of the combining entities to identify key gaps from sustainability and scalability perspectives. Again, use digital transformation and IT process optimization levers to design an integrated enterprise application architecture of the combined entity. Formulate a detailed roadmap with clearly defined milestones for developers to execute the desired enhancements in a seamless and timely manner. Some of these milestones may continue even post-integration as architecture enhancement is an evolving process.
• Integrate and modernize IT infrastructure: Using the levers of infrastructure consolidation and contract renegotiation, integrate the underlying IT infrastructure of the combining entities. Then modernize the IT infrastructure by adopting cloud technology, keeping in mind the long-term IT needs of the combined business. Use the R-Lane Migration approach to categorize applications based on their functionality, business criticality, and maintainability – retire, retain, re-host, re-platform, re-architect, re-write, and replace. Finally, make the desired changes in the applications so that they run seamlessly on the cloud environment.

IT integration is no less than the game point to make the PMI journey a successful one. Done well, it can be a source of tremendous synergies and help maximize the enterprise value of your organization.