IT Due Diligence – Key To M&A Success

In Mergers and Acquisitions, inadequate Information Technology analysis can undermine the value of a deal. IT analysis and issues can make or break a deal. Per recent studies, 45 to 65% of the expected value creation of acquisitions is directly linked to the success of IT integration.

Without conducting a thorough IT and Cybersecurity due diligence early on, buyers aren’t getting an accurate view of a company’s potential value or risks. Overlooking this aspect can negatively impact post-deal financial results. IT costs and integration timescales may be misunderstood, particularly with respect to post-close integration of IT systems.

IT due diligence provides a clear understanding of the technical health of the business, which can significantly impact the value and success of a transaction. It can reveal hidden liabilities, such as outdated technology, security vulnerabilities, and compliance issues.

Lack of IT due diligence can lead to:

• Unforeseen liabilities
• Financial misrepresentations
• Operational challenges
• Financial losses
• Legal issues

Results feed into financial models and risk mitigation strategies. It can be used to determine whether the target has the necessary IT assets, resources and processes to support the combined business in achieving its future strategic objectives.

It can also identify IT opportunities and synergies between the acquirer and target systems, as well as potential investment needs. If analysis indicates a substantial impact on the operating model, this information may be leveraged during negotiations with the seller.

It’s critical to conduct IT Due Diligence as early in the deal cycle as possible to avoid risks and gain a true value of a target. A comprehensive review of a target company’s technology, infrastructure, systems, and processes to identify potential risks and opportunities associated with a potential acquisition, investment, or merger is required.

• IT Infrastructure — Hardware, software, networks, and data centers. Evaluating functionality, reliability, scalability, and compatibility with acquirer systems.
• Back-Office IT — Core business systems like ERP, CRM, and HRIS, examining functionality, data management, and integration capabilities.
• Production Infrastructure — Systems and applications used for production, including backup and disaster recovery procedures.
• Hosting Setup — Data centers, cloud usage, and overall hosting infrastructure to understand the target’s environment and potential integration challenges.
• Proprietary Applications — Custom-built applications, assessing functionality, underlying technologies, and potential technical debt.
• Software Development Processes — The target’s software development lifecycle, testing procedures, and product management practices.
• Information Security — Security policies, procedures, and controls to identify potential vulnerabilities and risks.
• Technology Organization — IT and development team structure, skills, and maturity to understand their ability to support the integrated entity.
• Technical Debt — Accumulated technical debt including outdated systems, inefficient processes, or code that needs significant rework.
• Integration Complexity — Complexity of integrating the target’s systems and processes with the acquirer’s existing environment.
• Cost of Integration — Estimated costs associated with integrating the target’s IT infrastructure and systems.
• Legal and Regulatory Compliance — Compliance with relevant laws and regulations related to technology, data privacy, and cybersecurity.
• Intellectual Property — Ownership and usage of IP related to technology, software, patents, and trademarks.
• Data Privacy and Security — Compliance with data privacy regulations and ability to protect sensitive information.

Cybersecurity has become a top priority for company leaders, boards and investors. M&A makes the need for cybersecurity more critical. M&A leaders need to understand the risks of a company as cyber threats can have severe consequences for businesses.

Too often organizations don’t consider the cyber risk of a company they are acquiring or they will wait until the deal has closed. Unfortunately they learn too late the undisclosed data breaches or lack of security practices they have inherited, increasing their financial, compliance and reputational risk. Assessing the cybersecurity risks of an acquisition early in the process can save millions of dollars in avoided data breach costs, and provide awareness around the risk you’re inheriting.

Acquiring companies should integrate cyber due diligence into the M&A process as soon as they can, even when initially screening target companies. Unfortunately, only 5% of buyers perform cyber assessments pre-acquisition, and 57% perform it while the transaction is being completed or post-acquisition. Many M&A deals are closed without knowing what data and assets have been put at risk, which could compromise the overall deal success as well as cause substantial risks to the buyer.