IT Due Diligence Why You Should Consider It

IT Due Diligence Why You Should Consider It

We examine risk mitigation, future state considerations, and deal-value maximization from both the buyer’s and seller’s perspectives.

July 30, 2021

Mergers and acquisitions tend to be one of the most complex undertakings for any organization. With so many moving parts and stakeholders involved, it is important to continue to focus on all the aspects of the entity being transacted (i.e., the “Target”) throughout the transaction lifecycle. Most businesses significantly rely on information technology (IT) services and platforms, and this reliance is increasing by the day. Today, IT is truly becoming the enabler of the business.

It is important for any key decision maker – including the C-suite and the deal team, representing both the seller and the buyer – to understand what implications IT can have on the deal and how to maximize value.

Risk Mitigation

Seller’s perspective

As a seller, you should be able to understand what IT risks exist in the Target in advance of the deal timeline. IT diligence efforts can help you identify this information and provide you the opportunity to mitigate risks that can significantly impact the deal. Some key risks may include cyber-attacks that can result in the loss of sensitive data, lack of business continuity procedures in the event of a disaster, etc., which can have a significant financial, reputational, and regulatory impacts. In addition, even if the deal is not materialized in the near term, it is still important to mitigate any risks that can negatively impact your overall business.

Buyer's perspective

As a buyer, you should be in a position to understand the current state of the IT environment you are acquiring, prior to finalizing the deal. A robust IT diligence process can help you uncover the key limitations and risks, such as older technology, lack of an integrated application landscape, single points of failures within the IT organization, etc., in addition to cyber and business continuity risks. The process can also prepare you to undertake the integration of the Target to your environment.

Future State Consideration

Seller's perspective

Separations and carve-outs can have a significant impact to your IT operations after the transaction is complete. For example, the scale of IT networks and infrastructure that remains is likely suited to support a larger organization and may result in stranded costs. There is also a possibility of certain IT capabilities, resources, applications, etc., not available to the seller in the future as they were part of the Target’s IT organization. IT diligence can help the seller identify areas where potential stranded costs may exist and plan for scaling the IT capabilities up and down to accommodate the future state.

Buyer's perspective

To avoid potential business disruptions, buyers should have a clear understanding of what the future state of the Target’s IT should be. Capabilities that were supported by the seller will need to be established for the Target, by extending the buyer’s current capabilities, acquiring third-party services, etc. Given the long implementation timelines associated with IT initiatives, it is important to plan the future state prior to closing the deal. IT diligence can help identify the potential future state capabilities, costs, and timelines associated with implementing the future state.

Maximize Deal Value

Seller's perspective

IT diligence can help with highlighting the existing strategic capabilities of the Target’s IT – for example, a robust data warehouse and analytics environment. IT diligence can also help in identifying steps to improve the operational performance in advance, such as implementing application programming interfaces (API). Such steps can improve the marketability of the Target’s IT environment. Potential buyers are interested in acquiring organizations that have or are in the process of incorporating leading IT practices and extending them to their organizations for maximizing the value from IT.

Buyer's perspective

IT diligence can help with the identification of one-time costs and increments to run-rates associated with the Target’s IT budget following the deal close. For example a potential enterprise resource planning (ERP) software replacement can cost millions of dollars in one-time and significant ongoing annual support costs. These numbers tend to have an impact on the overall value of the deal. Identification of such costs during the deal process can help buyers negotiate to extract the most value from the deal.

IT Diligence Guidance

Yes, IT diligence can be challenging, but it can provide significant gains for both buyers and sellers. Having an objective IT diligence advisor can help both parties plan and manage the diligence process effectively.

More information about Stout’s IT diligence capabilities.