Although IT due diligence has many benefits when it comes to determining and confirming the value of a technology transaction, it can prove to be at least as valuable in planning the post-transaction integration. Here are some ways IT due diligence can assist in the integration process.
If the target company is being folded into the acquiring company, it’s critical to have a good sense of the strengths, weaknesses and personalities of the target company technology staff. This will allow you to make better decisions when planning an integrated IT or software development team.
If you determine through IT due diligence and integration planning that there will be skill gaps in the combined company, proper budgeting can take place and recruiting can begin sooner.
If a premise of the transaction is that IT staff cuts and the related expense reduction will be possible, IT due diligence can identify whether this is truly feasible. For example, are there key proprietary systems or tools used by the target company that are maintainable by only the person who developed them? That person had better not be on the list of people to be terminated after the transaction closes. IT due diligence can confirm whether staff reductions are feasible, and if so, the best way to achieve them.
If the target company staff will be required to conform to acquiring company standards in the areas of coding, security and other technology processes, training can be planned prior to deal close so the integration of the teams can begin right away.
Identify the Path to the Full Value of Anticipated Cost Savings and Economies of Scale
Many technology transactions assume that there will be expense reductions in areas such as telecom contracts, hosting, hardware, software licensing, etc. IT due diligence can confirm that these potential savings exist, and identify the path to achieve them.
Licensing is an important area to review. There may be a cost involved in transferring key software licenses to a new organization. Don’t assume that an “enterprise” license simply converts to the new, larger enterprise without additional license fees.
The transaction financials may presume that Internet connections or phone systems can be combined or that data center hosting arrangements can be consolidated. Such contracts are often costly to terminate early. For example, many telecom contracts contain a provision that effectively requires full payment of the remaining contract term at the time of early termination. IT due diligence can identify such contracts.
Similarly, a termination notice date for an expensive contact may arrive just after the transaction close date. If IT due diligence occurred prior to closing, this date should have been identified and the integration priorities planned to accommodate contract termination and the technical and operational steps required to achieve the expense reduction.
Provide Needed Planning Time
When a public company is involved in the transaction, it’s often difficult for the two parties to cooperate in the integration planning process prior to the deal closing. In the case of private parties, there may be more flexibility. In any case, at least the acquiring company can begin to make integration plans based on its due diligence.
The integration of even a small company may take three to six months. A plan for such a long effort takes time to develop. If the planning can take place prior to the deal closing, it makes it more likely that the integration can get off to a good start and ultimately be successful.
Depending on the intent of the integration, the following issues may need to be addressed in the integration plan:
- Post- transaction product strategy and offerings
- Physical space (offices, data hosting, etc.)
- Phone system and network integration
- Security and coding standards
- Technology conversions
- Risk identification
- Integration plan metrics
As you can imagine, it’s better to start working on these things prior to the transaction closing, and with a detailed understanding of the underlying technical issues at the target company. This understanding comes from technology due diligence.
Objective Opinion or a Head Start on Relationship Building?
There are pros and cons to having a third party undertake your transaction’s IT due diligence effort.
If a third party is used, you’re more likely to get an objective opinion as to the technology resources, staff and IT challenges facing BOTH the acquiring and target organizations.
If you use internal staff at the acquiring company, you risk a bias towards the resources and methodologies at the acquirer but you gain the opportunity to start relationship building prior to the deal. This pre- and post-close continuity can go a long way toward easing the nerves of the target company’s staff during the integration. To gain this benefit, it’s important to consider the issues around the onsite visit discussed in the IT Due Diligence Guide. You can read about the need for a good cover story that doesn’t create later distrust in the sample content from the book.
Either approach to IT due diligence can add real value prior to the transaction close.
A successful IT integration requires the acquiring company to hit the ground running. Without IT due diligence, you have two choices: you can start the integration immediately without a good plan or after a delay with a good plan. With a solid IT due diligence effort, you can start immediately with a good plan.