Understanding the key business systems and associated IT infrastructure during the M&A due-diligence process is imperative for success in today’s uncertain environment. Whether your next deal is driven by Private Equity or Venture Capital, understanding the exposure from ‘technology debt’ for unaccounted improvements enables you to determine whether an acquisition will produce a liability or support investment objectives.
Firstly, what is ‘tech debt?
Technology debt is often referred to as the implied cost of additional development that results from, essentially, ‘quick fixes’ rather than resolving and improving the application or updating the technology architecture.
Over the last year, we have seen many transactions where the price has been chipped because the buyer realised the acquiree had been underfunded and unprepared to modernise their technology or address vulnerabilities. When taking into consideration the costs to maintain or integrate the legacy systems, the investment requirements to achieve their short-term strategy are beyond what can be accounted for within the valuation.
Due Diligence and IT Operations
Due Diligence of Operational IT during the M&A process aims to identify and inform of how technology is utilised within a company, the strategic gaps and how the technology can be integrated post-deal. With the associated financial and reputational damage that derives from tech debt, IT specialists are becoming ever so important in the process of analysing mergers, and as a result, supporting business and shareholder confidence.
Between the acquirer and acquiree, the applications and databases that are decommissioned or part of the planned integrated business are crucial. Customised applications, databases and other technologies utilised may have followed ineffective controls or carry unrealised resilience risks that can damage the integrity of your business in the future.
When considering the shortcomings of past M&A deals, IT specialist involvement can be beneficial in assessing the business today against their short-term objectives, the technology required to get there and the associated cost to mitigate the tech debt over the three to five-year plan. It’s important to realise whether the valuation supports the integration cost, on top of the market and future financial metrics.
An Effective IT Integration
Effective IT due diligence pre and post-merger should be customised to the needs of the business; the focus on detecting technical risks and the cost to mitigate, as well as identifying opportunities in the long and short term for integration and supported growth to meet objectives. How you manage and mitigate technical debt and associated IT integration will directly affect the outcome of any mergers.
To summarise, M&A Due Diligence on IT operational infrastructure is one of the most challenging, and often overlooked, aspects of a deal. Our Technology Due Diligence specialists combine substantial IT experience and in-depth knowledge to deliver effective results, and we understand that strategic buyers and Private Equity have different priorities.
Successful IT operational management requires very careful planning and deliberate follow-through to ensure execution is on track and kept up to date. This is particularly important for the realisation of anticipated synergies, many of which are highly dependent upon IT. Identifying whether the current infrastructure supports your development going forward should form a key part of your Merger and Acquisition process.
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