Although financial and legal due diligence are common to most M&A transactions, technology due diligence is too often not considered. In fact, a 2011 survey by Ernst & Young found that dedicated M&A IT due diligence takes place in only about half of all transactions. This article will review several reasons that IT due diligence should be part of almost every deal.
IT is Key to Product Delivery and Operations
Are Ford and FedEx IT companies? Most would classify them as manufacturing and service companies, respectively. Even a non-IT expert, however, can probably appreciate the role that IT plays in their operations.
This is true even in much smaller companies. Technology is crucial to marketing, product delivery, sales and internal operations in most organizations today. If a small specialty marketing company’s business is concentrated around the holiday season, and their website suddenly goes down for a week, it can cripple their revenue and even put the company’s ongoing existence at risk.
Therefore, a thorough IT assessment is a critical part of most due diligence efforts today.
You Need an Expert Involved
If you accept the fact that a target company’s technology needs to be reviewed during M&A transactions, then it’s important to have dedicated IT due diligence experts as part of the team.
These individuals have the training and experience to assess the scalability, stability and proper ownership of a target company’s technology resources.
You wouldn’t ask your CIO to perform the legal due diligence for a transaction. Don’t count on a non-technical attorney or accountant to perform the IT due diligence.
IT Integration is a Key Consideration in any Transaction
Many deals contemplate IT savings as part of the calculation of transaction value. From a high level, it may seem reasonable to assume that data centers can be combined or that technical support positions will be redundant when companies are integrated.
These assumptions require review and validation by experts. What if the technology platforms of the two companies are incompatible? Early assumptions can easily be incorrect, and the associated cost savings can quickly disappear in the reality of integration. What if the target company doesn’t legally own its technology? There may not be a deal you want to complete.
Besides the added expense, unidentified incompatibilities after the deal closes may kill the momentum and excitement that can be a result of a well-planned integration. Instead of two companies’ staffs starting to work together productively, integration struggles can harm employee morale and lead to cultural rifts that may take years to heal.
Don’t ignore the value that an effective IT due diligence effort can bring to a transaction. IT is a contributor to the success of most modern companies. IT experts can confirm or deny initial assumptions that go into the calculation of a transaction’s value and put the buyer in the best position to leverage the technology assets in an acquisition.
About the Author
Jim Hoffman is the Chief Operating Officer of BESLER Consulting, a financial, operations and IT consultancy to the healthcare industry based in Princeton, New Jersey, USA. He has led numerous IT due diligence efforts during his career. He is the author of the IT Due Diligence Guide. More information is available at https://www.ITDueDiligenceGuide.com