ERP software integrations for mergers and acquisitions | Baker Tilly

Loading...

ERP software integrations for mergers and acquisitions | Baker Tilly

In which M&A agreements is the ERP solution a factor?

Not all mergers and acquisitions require it, but both sides need to think carefully about consolidating ERP solutions, whether capturing a new customer base, creating a joint venture, or adding a new business model.

In some cases, the acquirer is happy to let the target continue to run on its existing system with no need to tie into the new corporate parent outside of general reports and spreadsheets.

Potential M&A ERP system transition scenarios

There are a variety of factors that could affect the acquiring company’s approach to their ERP solution.

An aging ERP system software or an entry-level accounting system may be a warning sign of a lack of clear insight into the business and a maturity level in operating the business. While there are factors that could convince the acquiring company to wait until after the deal closes to worry about the ERP solution decision and undertake that process months later or longer, that may not be the best approach.

Consider consolidating ERP solutions if the acquired company fits these conditions:

Doesn’t have an ERP system
Uses only spreadsheets or QuickBooks
Runs an outdated or legacy ERP solution that no longer meets the needs of the business

Capture a new customer base

Leakage isn’t confined to revenue. For example, when an acquisition intends to capture a new customer base, customers can still leak out to competitors during that transition if the CRM and ERP software aren’t in place.

The transition service agreement (TSA) costs can be prohibitive so the faster the new entity can be independent the more it will save in fees and other costs.

Joint ventures

Joint ventures might require a decision on the future state of business systems if the two companies are standing up a separate entity that will require financials.

Those scenarios are often more comparable to private equity activity that doesn’t have the time pressure of a merger.

Add a new business model

Acquisitions that add a new business model, such as a traditional software company bringing in a software-as-a-service (SaaS) company or a computer hardware company buying an internet of things (IoT) business, require careful attention to the ERP software requirements.

For example, a company accustomed to standard fees for services or products likely won’t be familiar with revenue recognition rules and its existing ERP software may have difficulty supporting the requirements in this area.

Similarly, IoT businesses will need to integrate potentially thousands of new data sources. Financial systems that can properly account for and report on those new requirements are vital to the success of the combined company.

In cases like these, the difference between getting big chunks of revenue up front or the slow trickle of subscription fees can strain systems, particularly the lead-to-cash process.

ERP software implementation considerations

Choosing an ERP solution should be informed by the planning that goes into the merger or acquisition.

Consider these questions:

Will the two companies be operated independently?
Will a single finance team or human resources (HR) team support both organizations?

If so, running two separate systems will soon become untenable.

ERP software implementations impact every part of the organization and can put tremendous strain on the finance team and others.

Under normal circumstances, they require a great deal of planning and effort, and around a merger or acquisition the same advice applies:

Gather executive sponsorship
Cleanse all data and verify its accuracy before transfer
Invest heavily in training and user adoption
Avoid simply migrating poor business processes to a new system

M&A implementation factors to consider

Merger timeline

Make sure an ERP solution decision is part of the M&A timeline.

A company moving an acquisition onto its existing ERP software needs to consider change management. An immediate ERP software migration can cause another disruption to an already chaotic time.

Training and costs

Leaders need to weigh the implications of training staff on a new system and whether the benefits of consistent processes and a single source of data outweigh the disruption.

Unless both companies will operate independently, running two separate ERP tools can be problematic. The costs associated with licensing two different sets of software and, in the case of on-premises systems hardware and databases, finding and training staff on two systems can make moving worthwhile.

ERP software solution acquisition: Example one

In March of 2011, Pfingsten Partners, a private equity firm, acquired SII Holdings, a manufacturer and distributor of playground equipment. Management felt it needed a system that could support its existing needs as well as future growth. It brought in consultants to create an IT infrastructure transition in the fall and began implementing a new NetSuite ERP system software by November.

Not everyone can work that quickly. Acquisitions can be tricky, as can ERP software implementations — a business might determine revenue leakage is acceptable if ERP consolidation would be too disruptive.

Even if companies decide to wait, ERP consolidation can be problematic. Plenty of implementations have been waylaid by poor planning or the wrong implementation partner, leading to lawsuits and worse.

ERP software solution acquisition: Example two

In some cases, the acquired company’s ERP system can add value to the deal.

iAutomation, a supplier of machine automation products and services, acquired Integrated Motion in 2007, the first in a series of acquisitions. The cloud-based NetSuite ERP software that Integrated Motion ran turned out to be a better platform than the mix of Sage Peachtree, Goldmine, and other on-premises applications iAutomation used and within a year the combined company was on NetSuite.

By 2013, it saw double-digit revenue gains to more than $70 million, and customer service improvements, better pipeline forecasting, and cross-sell opportunities due to the single system.

With an understanding of the type of M&A activity at stake, due diligence teams can begin factoring in when they want to bring in new ERP solutions, whether to install a new instance of their existing system, or let things continue until a later date.

As with a normal ERP system software implementation, there needs to be a project team that includes business process owners, IT, finance, and an executive sponsor.

With ERP tool implementations in M&A, it may take a larger team and one focused on the merger or acquisition as well.