On the importance of IT in divestitures

Why is research on IT-related aspects of divestitures important?

Below I want to share my motivation for conducting research on this topic:

Acquiring and divesting business units are standard instruments of strategic management [1]. Increased globalization and deregulation, external growth ambitions to capture new markets or protect existing market shares, a focus on the core business, and value driven portfolio management are the key drivers of this development [2-4].

Carve-outs refer to the operational activities needed to divest and separate a part of an organization, usually a strategic business unit (SBU), into a carve-out object. This object is to exist as an independent viable unit that can then either be integrated into another organization or can operate as a legally independent, standalone organization [5]. Examples include the disposal of IBM’s personal computer business and its integration into Lenovo in 2004 [6] or the carve-out of the semi-conductor branch of Siemens, followed by the establishment of Infineon in 1999 [7]. Besides its transformational impact on individual companies, carve-outs play an important economic role. In 2009 more than 12.000 divestitures were conducted worldwide, having a total transaction volume of more than 600 billion US dollar [8].

The extant literature focuses on the acquisition and integration of new strategic business units, typically referred to as post-merger integration (PMI). In contrast, the divestiture of SBUs has rarely been researched [5]. In both research and practice IT typically receives limited attention relative to its complexity and financial implications. An explorative study of Leimeister et al. [9] has revealed an inaccurate relationship between the IT sub-project, accounting up to fifty percent of the total cost, and other project stakeholders. IT is typically the most complex and most underestimated aspect of carve-outs [10]. The case of Roche illustrates the importance of an early IT-involvement in the due diligence. When selling their vitamins division, “they had underestimated the cost of disentanglement and integration by a factor of 20” [11].

Furthermore the study of Leimeister et al. [9] emphasizes that the success of carve-outs is largely dependent on the experience of the carve-out manager. This becomes especially important because carve-out projects are different from regular IT projects. Typically the project teams are inexperienced as carve-outs are rather seldom for a single company. In addition, carve-outs lead to major company transformations, leaving no options for roll-backs, imposing a high success pressure. Moreover carve-outs impose high time pressure due to short lead times before the announcement of the divestiture as well as short project life spans due to external regulations [9].

References

1. Kromer, G., Stucky, W.: Die Integration von Informationsverarbeitungsressourcen im Rahmen von Mergers & Acquisitions. Wirtschaftsinformatik 44, 523-533 (2002)
2. Kaplan, S.N., Weisbach, M.S.: The Success of Acquisitions: Evidence from Divestitures. The Journal of Finance 47, 107-138 (1992)
3. Jaeger, F.: Der globale Markt als größeres Haus für größere Firmen. In: Siegwart, H., Neugebauer, G. (eds.) Mega-Fusionen: Analysen – Kontroversen – Perspektiven, pp. 11-38. Paul Haupt, Bern (1998)
4. Jansen, S.A.: Mergers & Acquisitions: Unternehmensakquisitionen und -kooperationen. Eine strategische, organisatorische und kapitalmarkttheoretische Einführung. Gabler, Wiesbaden (2007)
5. Müller, H.: Einführung zum Mergers & Acquisitions Management. In: Wirtz, B.W. (ed.) Handbuch Mergers & Acquisitions Management, pp. 1187-1207. Gabler, Wiesbaden (2006)
6. Barbini, E., Bukovinski, J., Guang, Z., Lee, A., Lisio, P.: Lenovo to Acquire IBM Personal Computing Division. IBM Media Relations (2004)
7. Schumacher, U.: Hauptversammlung 6. April 2001. Infineon Investor Relations (2001)
8. Deloitte Corporate Finance: Divestiture M&A News – Q1 2010 Divestiture Activity Reflect Strengthening of overall Economy.  (2010)
9. Leimeister, S., Leimeister, J.M., Fähling, J., Krcmar, H.: Exploring Success Factors for IT Carve Out Projects.  European Conference on Information Systems (ECIS), Galway, Ireland (2008)
10. ATKearney: Putting out the for-Sale Sign. Executive Agenda 22, 37-43 (2004)
11. Applegate, L.M., Watson, E., Vatz, M.: Royal DSM N.V.: Information Technology. Harvard Business School Case 9-807-167, (2007)