The Dark Side of CRE M&A: Making IT Systems Work Together

When one company acquires another, it usually means a big expansion of its market.

It also meant something else that will become obvious over time: the pain of integrating IT systems.

“Running dual IT systems can be very costly so it is important to execute a strategy to optimize efficiencies following an acquisition,” James McPhillips, a partner in global outsourcing and technology transactions at law firm Pillsbury Winthrop Shaw Pittman, tells 

Any time M&A is in force, so is the need to reconcile different computing and other technology systems. Typically, systems don’t immediately talk to one another. Even if they use similar file formats—hardly a given—there’s a lot of work that goes into making things work together. Scheduling, inventories, business processes, and more will be completely different. One of the factors that led to Katerra’s bankruptcy filing in 2021 was the three-companies-per-year pace of acquisition and integration it tried to maintain.

Just integrating third-party software packages alone is tricky. “I see in a lot of companies, when they integrate outside software, usually the software doesn’t get full integration and then the people need to work with different software [packages],” Doris Pitilon, chief technology officer for last mile industrial real estate investment firm Faropoint, told in April 2022.

That is cumbersome and an annoyance. Bringing systems from an acquisition together with existing ones in the acquiring company makes bringing in outside software easy in comparison. The companies may be geographically separate, making manual workarounds far harder to pull off.

How the different companies treat data becomes one of the most confounding issues. For example, one program has information on “162 W. Avenue” and another might use “162 West Ave.” The two aren’t automatically the same to software.

Or there is the issue of data labels and what they refer to. Inventory value could mean value of first in, of last in, average, or some other measure. Without reconciling such issues, the “integrated” systems of the new entity may have significant errors in inventory management, accounting, customer relationship management, and other key areas. 

“Integration challenges also magnify when a cross-border transaction occurs,” McPhillips adds.  “For example, if a US firm acquires a UK or European entity, then data privacy issues can complicate the integration because the US firm’s IT vendors may not meet EU and UK data privacy requirements, for example, GDPR.  If that is the case, then a complex remediation plan with the US firm’s vendors is likely required.”

All this can be magnified if the M&A is in commercial real estate.

“The integration challenges usually arise because of the sheer volume of vendors with whom a real estate firm does business,” McPhillips says.  “There could be hundreds if not thousands of IT vendors that require some sort of action—deciding whether to let a contract expire or amend it in order to fold in the new business, or keep the work separated.  Tackling such a huge effort requires a strategic plan that weighs factors like timing, cost, and risk.”

None of this means give up on M&A. Just be ready for the technical challenges that will likely appear.

Source link