Opportunities for post-acquisition optimisation in the energy industry

January 2022  |  SPECIAL REPORT: ENERGY & UTILITIES

Financier Worldwide Magazine

January 2022 Issue

In almost every asset acquisition the primary focus is to transfer ownership with no interruption to operations. In the case of a refinery acquisition, there is little room for error as any change in operational status can result in significant cost and value loss. Leading up to the change in control (CIC), the seller and buyer must agree on how IT capabilities that support the asset will be transitioned. In general, this will fall into one of the four categories outlined below.

Lift & shift. In this approach, the application in question is moved from the seller’s to the buyer’s application environment with minimal, if any, modification. The business application’s complete technology stack is moved to the buyer’s infrastructure ‘as-is’, including the database inclusive of development objects, configuration, reference data, master data, open and historical transactions, users and so on.

Carve-out. As commonly defined, a carve-out is typically performed on enterprise applications such as enterprise resource planning software, when a subset of the seller’s business is being acquired. The asset being acquired is ‘carved’ out as a standalone environment. A new environment is created, seeded with a copy of the seller’s business application, and data is already in place.

Conversion. A conversion is the most complicated application approach contemplated by a buyer in the context of an asset transaction. In a conversion scenario, the business processes supported by the seller’s IT application or solution under consideration are mapped and moved to a comparable application platform on the buyer’s side at CIC or later.

Leave-in-place. This application mitigation approach is the most straightforward and low risk for both seller and buyer mitigation teams. In this scenario, the application in question is left entirely as-is throughout the asset transaction from hardware, data and code to configuration and users, and so on. This approach is often best suited for the handover of local operational systems such as refinery process control that are owned and administered by groups other than IT.

During post-ownership transfer and CIC, the focus shifts to capturing the value expected from the new asset. From the business to IT, there are several key areas to assess to achieve maximum value, as outlined below.

Business process overlap

In many cases, the timeline from announcement to change in ownership is short, so only critical business processes are integrated. This covers the operations of the asset itself and, generally, will include key HR processes. Once CIC happens, the business needs to be ready with a prioritised plan of process areas to integrate. From enterprise services like procurement and accounting to trading and scheduling/logistics, each area needs to have a plan with a rationale supporting the prioritisation. If some business areas were integrated at CIC, process owners need to be prepared to assess their areas after the first business period (month) to course-correct as needed and meet value capture targets. Any manual processes in place at CIC to aggregate data, such as the roll-up of financials, risk/credit exposure and so on, will need to be automated or eliminated as systems and tools are harmonised. In addition, any differences in business models for overlapping functions will need to be addressed.

Carve-out integration

A common approach for the seller is to provide a ‘carve-out’ IT system to support the core business processes of the asset. Depending on the timeline from announcement to CIC, it is likely that most of the business processes supported by the carve-out system will remain in that system when ownership transfers. That can leave a substantial disconnect between core processes for the buyer – one set for the ‘legacy’ assets and one set for the new asset. In addition to the complication of supporting two sets of processes, the carve-out system frequently comes in an isolated IT-hosted environment. This can dramatically increase costs, which means integrating the carve-out business processes and supporting IT capabilities is a priority. This integration is not as easy as just converting the data over to the buyer’s applications. Performing this integration can be a full-time project as there will need to be training, data conversion, testing and deployment.

Application rationalisation

Regardless of the type of transition from seller to buyer, there will be many applications that need to transition at CIC. Application rationalisation to realise cost savings is a key step in the integration plan, but one that is often oversimplified. Over time, software licences and contracts have become more complicated, requiring serious attention to ensure that users can continue using key applications when an asset changes hands. Then, after the initial transition occurs, the business and IT can look deeper at the contracts and licensing. This involves going through each software contract and the business capabilities supported and determining the long-term plan. Once this is complete, either IT or procurement can approach selected vendors and notify them of cancellation or extension or attempt to negotiate a buyout as applicable. Critical to this process is tracking each contract and paying attention to the details; this is not something that can be done at a high level, as each contract will have nuances and timelines that must be monitored and acted upon.

Capability development

Rarely is an asset acquisition a simple ‘drag-and-drop’ into an organisation. Besides scale, there are always differences and nuances that make the asset unique. In many cases, either the addition of scale or those unique attributes can change or make the business case for developing a new capability to support and grow the business. Opportunities like this are often underappreciated in the initial scope of work post-transition, but they may be able to generate as much value as other business and application integration efforts. To take advantage of those new capabilities, the business needs to clarify the strategic direction across the organisation and then mobilise a team with the skills and authority to analyse and develop the necessary capabilities. One example could be the acquisition of an asset with marine capabilities when the buyer’s existing assets have none. Leading up to and around CIC there may be temporary processes in place to manage marine movements, but ultimately marine capability will need to be developed. This would include business processes for dock scheduling, vessel vetting, marine scheduling and a lot more, as well as necessary IT capabilities to enable those new processes and IT to support those new capabilities. Those types of opportunities are identified early on with a comprehensive review of capabilities and assessment of the gaps.

CIC of a new acquisition is a huge undertaking, but post-acquisition integration is where value is delivered to the buyer. From business processes and capabilities to IT application integration and contracts, there is significant work needed to optimise a successful integration.

 

Steve Roberts is a director at Opportune LLP. He can be contacted on +1 (713) 490 5050 or by email: sroberts@opportune.com.

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BY

Steve Roberts

Opportune LLP

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