Real-World Lessons on Overcoming Legacy IT Challenges in Mergers & Acquisitions

When companies merge or separate, their IT infrastructures often play a critical yet underappreciated role in determining the success of these transitions. For organizations involved in mergers and acquisitions (M&A), legacy systems can be the most significant barrier to successful integration or separation. Here, we’ll look at three M&A scenarios—separations, carve-outs, and acquisitions—and dive into real-world examples of the complexities that legacy IT systems can impose.

Each story highlights the technical and strategic considerations, from “rip-the-band-aid” migrations to more intricate carve-outs and reveals how modern IT practices could ease these transitions.

Scenario 1: Simple Acquisition - When It’s “Rip the Band-Aid Off”

The buyer typically absorbs a smaller, independent company with its landscape product, apps, and infrastructure, in a straightforward acquisition. These scenarios often involve minimal technical integration because the acquired entity is self-sufficient with established IT, HR, finance, and supply chain management services and infrastructure. Once the acquisition is finalized (referred to as “Legal Day 1”), new ownership is communicated, and contracts are renegotiated.

A textbook example of this approach is Oracle, known for its rapid integration strategy. When Oracle acquires a company, it frequently imposes the “Oracle way” by migrating the acquired firm’s data onto Oracle’s infrastructure, which speeds up integration and maximizes control. While this approach achieves a fast return on investment, it comes at the cost of personnel turnover. Many employees from acquired companies feel that the culture and legacy of their organization are stripped away in the process.

The result? Oracle loses some talent, but in these cases, they’ve bought the business for intellectual property and technology, not the people. For Oracle, the value lies in acquiring client relationships, software, and intellectual assets—not preserving a separate company culture.

Key Takeaway: In straightforward acquisitions, rapid data migration achieves fast integration but may impact employee retention. A well-planned change management strategy is critical to mitigate talent loss.

Scenario 2: Complex Carve-Out - Managing Shared andLegacy Systems

A carve-out involves greater complexity when, for example, adivision being sold shares infrastructure with the parent company. Here, thebuyer may face technical challenges that make integration far more complex andcostly.

Consider the example of a large, global healthcaremanufacturing company, and its decision to divest its water care division to aprivate equity (PE) firm. The healthcare manufacturer’s environment was deeplyembedded because of its shared services model, with custom applications andon-premise software—especially SAP—intertwined with the company’s otherdivisions.

The PE firm had only a year to separate the systems withoutimpacting the business model, and they had to choose between public cloud,private cloud, and traditional data center options.

While cloud options are popular, the manufacturer’s applications weren’t cloud-ready, which ruled out AWS and left private cloud hosting as the only viable option for a “lift and shift.” Over 800 applications, including a massive SAP ECC 6 instance, had to be migrated. The team initially tried a “clone-and-go” approach for SAP but quickly realized that disentangling the healthcare manufacturer’s data was unfeasible. The SAP migration required a complete, time-sensitive data cutover with downtime risks.

Despite completing the transition on time, the PE firm faced operational challenges due to needing more personnel with specialized knowledge to maintain the complex legacy environment. The result was costly—the PE firm had to bring in an outsourcing partner for ongoing support and eventually invest in application rationalization and modernization to make the environment sustainable.

Key Takeaway: Carve-outs with shared systems demand a flexible strategy that often involves private cloud solutions for speed but can incur high integration costs.  By taking this approach, the team saved on six months of transition costs and paid double the cost of integration of key applications like SAP. Unfortunately, the “lift and shift” model while expedient, did not provide incremental value required to meet the PE Business case.  The water care business was a simpler business and could have benefited from a simplified approach in key applications.

In retrospect, identifying the key elements that drive business value upfront versus a pure “lift and shift” would have provided the PE greater value over the period they hold companies.  Planning for future modernization upfront and balancing a hybrid approach could have helped avoid duplicative costs of integration and operational constraints, and also reduced the support cost associated with complexity and technical debt.

Scenario 3: Very Complex Separation - When Every System is Interconnected

The most complex scenario occurs when an integrated brand has multiple shared services, from point-of-sale systems to supply chains and co-developed intellectual property. In these cases, transitioning to the IT environment requires diligence and strategy that extends far beyond a simple migration.

An example of this complexity is a music box retailer’s brand spin-off from a big box retailer. This transaction involved shared services, physical assets, distribution centers, and co-developed IP, which posed unique challenges. During the two-year transition, both entities had to negotiate service charges, license allocations, network costs, and inventory management. The transfer of co-developed intellectual property became a sticking point, with some IP slipping through the initial due diligence. This oversight led to renegotiations and delays, showing how critical comprehensive portfolio management is during separations.

If automated portfolio management tools and IT service management (ITSM) platforms had been in place, many of these issues could have been identified and managed earlier, saving time and resources. Additionally, setting up a Separation Management Office (SMO), an advanced project management office specifically for separations, could have provided strategic oversight to avoid such pitfalls.

Key Takeaway: In highly integrated environments, a Separation Management Office and robust portfolio management can streamline the process, reduce oversight issues, and protect IP, leading to a smoother transition.

Lessons Learned: Modern IT Tools for Legacy System Challenges

Legacy systems remain a barrier in M&A, but modern tools and strategic planning can ease these transitions. Here are a few key strategies:

• Rapid Data Migration: For simple acquisitions, prioritize fast data migration with robust change management to retain key talent.
• Flexible Migration Strategies: Carve-outs require agility in choosing the right hosting environment; a “lift-and-shift” approach might work in the short term, but long-term modernizations should be planned from the outset.
• Integrated ITSM & Portfolio Management: In complex separations, having a clear view of your application and service portfolios can prevent costly oversight and streamline negotiations.

Navigating IT challenges in M&A is complex, but with the right strategy and technology, you can turn these obstacles into opportunities for growth. At Silver Tree, we believe in a collaborative approach, where we work together to help you confidently tackle these transitions.