As the world evolves, mergers and acquisitions remain an important strategy for companies looking to expand, planning to increase their market share, and diversification. However, the process can be quite tedious and prolonged but with right steps taken prior to the merger can make things easier for both the parties. So before you begin considering a company for M&A, or considering an acquirer here’s what you need to know.
Technology Due Diligence During Mergers & Acquisitions
When a company plans to acquire another company through the mergers and acquisitions process, technology due diligence becomes essential. This process is beyond the financial and operational aspects of the targeted company. It involves a detailed review of the company’s technical environment, ensuring the buyer is fully aware of the IT infrastructure.
Key Elements of Technology Due Diligence
- Technological assets: This includes platforms, technologies, databases, applications, and intellectual property which is related to tech innovations. The aim is to decide the value as well as the relevance of these assets in the current and the future market.
- Infrastructure: This covers both the virtual and the physical infrastructures, such as networking equipment, servers, cloud deployments, and hardware. The condition of this infrastructure can affect the complexity of integrating the technology of the acquired company.
- Processes: Evaluating the technology driven processes of an organization provides insights into the adaptability, agility, and efficiency. This includes looking at the software development life cycles, deployment methods, and other tech-related workflows.
- Potential Risks: Every technological environment has vulnerabilities, such as weak points, pending tech upgrades, and outdated technologies, that could lead to cyber threats and data breaches. Identifying these risks can help foresee the potential future costs as well as problems.
- Technological scalability and resilience: It’s important to assess how adaptable the technology framework of the targeted company is. This includes deciding if the technology can support growth and how resistant it is to different interventions or changes in the tech world.
- Compliance and Regulations: In finance, health, and e-commerce areas, the company’s technology must follow global and regional standards. This includes data protection laws such as CCPA, GDPR, and the regulations as the per the industry.
- Technical Debts: These are the future costs that may arise due the technological decisions taken in the past. For instance, outdated software that needs to be upgraded or technologies which are at the end of their life and need replacement.
- IT practices and policies: It’s important to examine how the company manages its IT departments. This includes hiring practices, project management, relations with the vendors, and hiring practices. These factors reveal the organizations technological maturity and future goals.
Due Diligence : Whose Responsibility?
Now that you know how crucial due diligence is for the acquirer, but it’s also important for you to know that it is equally important for the company that’s being acquired. Although most of the people would say that the responsibility of IT due diligence lies primarily with the both the parties as they each have their own role to play.
The company that acquires primarily conducts due diligence to understand the technological value of the target company. This leads to making the right choice regarding valuation, negotiation, and post-merge integration. However, it’s also best if the company that is being acquired conducts their own due diligence. This way they can identify and rectify potential issues beforehand, the target company can then present itself in a good light. It can lead to a better pricing and smooth negotiation procedure, benefiting both the parties. Taking a proactive approach towards due diligence can expedite the M&A process by addressing as well as resolving any concerns before they are raised.
Overall, technological due diligence is a combined effort which improves the quality and the execution of mergers and acquisitions. When both sides conduct due diligence, they help in ensuring that the process is both financially and operationally sound, future-proof, and free from any pitfalls.
Why Is Technology Due Diligence Important Before M&A?
The benefits of technology due diligence extend to both the target company and the acquirer, contributing to the overall success of the M&A process and the outcomes. Some of the examples of how due diligence can benefit the parties of M&A:
Mitigation of Risk
Every business comes with its share of risks, especially in terms of the cybersecurity. These risks can often be hidden, especially behind financial values and operational successes. Through a diligent technical assessment, potential liabilities such as outdated systems, security vulnerabilities, compliance issues come towards the top. By uncovering these challenges, companies can either negotiate the terms, prepare for necessary updates, and even consider the viability of the acquisition.
Valuation of Assets Accurately
The value of an organization is not entirely based on the market presence and the financial performance. The technological foundation also plays a role in determining its worth. By understanding the technological infrastructure, software assets, intellectual property rights, and other tech-related resources, companies can accurately valuing their investment. This ensures that the investment is based on the real tech assets rather than just speculating and market trends.
Strategic Alignment
Aligning technological strategies is very important for a successful M&A. Performing technology due diligence involves a detailed review of the target company’s stack, innovation strategies, and processes. This reveals how well the target company technology fits with or complements the company’s system or vision. Ensuring the alignment helps the entities operate smoothly, leveraging other strengths and minimize the weaknesses.
Post-Merger Integration
The post-merger integration phase is when two separate companies aim to function as a combined force. This is one of the most challenging part of an M&A process. Technology due diligence helps make this phase is easier by identifying potential synergies and challenges ahead of time. Understanding the target company’s tech landscape in advance allows better planning and allocation. Whether it involves merging IT teams, combining different software platforms, aligning cybersecurity measures, has a clear plan which significantly reduces post-merger friction and costs.
M&A Technology Due Diligence Checklist
An effective due diligence process focuses on identifying potential issues, but also aims to provide a better understanding of strengths, opportunities, and a strategic fit. Here is a breakdown of the components of a thorough IT assessment:
1. IT Security
Previous cyberattacks
- Focus on cyber incidents and the historical breaches.
- Evaluate the company’s responsiveness, learning, and the post-incident changes to make the defenses better.
2. Reviewing Security Policies
- Determine if policies follow the best practices and industry standards
- Examine important security policies and procedures
3. Security Gap Analysis
- Search for proactive measures in place to fill in the gaps.
- Highlight the potential vulnerabilities in the current IT structure.
4. BCDR or Business Continuity and Disaster Recover Policies
- Assess how the practical and effectiveness of different plans through historical data, if available.
- Explore the company’s success in managing through different crises through the business continuity and disaster recovery strategies.
5. Data Privacy and Governance
- Check compliance with international standards like GDPR and HIPAA.
- Examine different measures that can protect data and user privacy safeguards.
6. Legacy Systems Assessment
- Identify outdated software and hardware.
- Assess risks and costs that are associated with different legacy systems.
7. Monitoring Threats
- Evaluate the organization’s ability to respond to new threats quickly.
- Understand different tools and processes for surveillance of continuous threats.
8. Endpoint Evaluation
- Assess the strength of defenses for network devices and workstations.
9. Mobile Security
- Ensure these measures meet the modern standards of security.
- Review different measures to protect mobile devices, their data, and applications.
10. IT Environment and Administration
IT Resources Summary
- Create a complete list of all the technical assets from hardware to software.
- Identify redundancies, upgrades that need to be installed, and the outdated resources.
Customer System Overview
- Investigate the technical interfaces used for interactions of clients.
- Ensure the user experience, security, and performance that meet or exceed expectations.
Software Procurement and Maintenance
- Examining the lifecycle management of the software, from purchasing to the retirement process.
- Assess the cost-effectiveness and efficiency of different processes.
Reviewing Vendors Contracts
- Identify hidden liabilities, opportunities for renegotiation, and long-term commitments.
- Evaluate different agreements with third party service providers.
Business Automation Analysis
- Assess their impact on return on investment, efficiency, and strategic relevance.
- Investigate different automation tools used in the operations of the company.
Utilize Professional Expertise for IT Due Diligence
IT due diligence can be quite complex and requires attention to detail and in-depth reviews. Rushing this process can easily lead to overlooking issues, resulting in costly problems especially the acquisition. Many organizations partner with experts, you can also hire Ashton Solutions to handle the due diligence process. Experienced professionals use specialized tools to uncover hidden risks and also highlight the opportunities through which you can ensure a seamless and profitable M&A procedure.
Conclusion
After learning all of the following information, you are now well-equipped for any upcoming mergers and acquisitions. For any questions and assistance, feel free to reach out to Ashton Solutions. Our team includes experts in the field who can guide you through the process and also provide you with the right advice related to technical due diligence.
