Before technologists can educate – they must be educated themselves. If no in-house Divestiture experience exists, hire an expert on your staff or hire a consulting company to help guide you through the process. The benefits will far outweigh the cost.

Topics technology organizations need to be at a minimum knowledgeable in:

1) Divestitures in general and the potential impact to technology resources
2) Legal, Compliance, Regulatory, Risk and Information Security requirements as related to separating the business unit
3) Divestiture Due Diligence process
4) Transition Service Agreement (TSA)
5) Licensing Agreements

Once technology organizations have been educated on the above topics, the below areas need to be in place or documented prior to approaching the Deal Team:

1) Executive Sponsorship
It is important that technology organizations have the appropriate executive sponsorship and involvement that can provide the Deal Team with guidance on contractual obligations being considered in the APA.
2) TSA Services
Prepare of list of TSA services that are typically included and excluded in a divestiture and brief rationalization or impact. The excluded services may include electronic mail, mobile phones, and desktops.
3) Licensing
Hardware and software licensing can be a considerable expense if included in the deal and can have real impact to the bottom line of the deal. There is a distinct difference between a Right to Use license versus transfer of a license.
4) Technology Assets
Prepare a list of infrastructure and/or application assets that cannot be included in the deal. These assets may include computers that are leased or applications that span other areas of the company that must remain behind to support the remaining business.
5) Timelines required to complete separation
Depending on the requirements from Legal, Compliance, Regulatory, and Information Security, there may be significant amount of work required to separate the business unit prior to the Closing Date. Activities may include movement of people, application logical or physical separation, and data/voice network installations.

In closing, it is important that the team that is negotiating the Deal with the buyer must understand the implications from a monetary as well as timing perspective prior to signing the Asset Purchase Agreement. It is the responsibility of the Technology leadership to understand the scope of the Divestiture in terms of people and technology, and weigh in on the impacts on the ability to execute the pre-LD1 activities.  Not to do so, may result in increased expense to the selling company and inability to meet the contractual obligations.

Poring over due diligence checklists for every conceivable commercial activity is a necessity for those thinking of merging or purchasing business. They need a due diligence checklist to enable better and secured operations for their intended business activity.

Of the many different situations that arise when two companies move towards a merger or purchase, one of the most important yet most neglected is that of human interaction. All too often, this aspect is neglected, yet the success or failure of the merger is heavily dependent on this very factor. To take care of the human resource aspect of mergers, there are due diligence checklists that address the issue. The salient points that need reviewing are the organization of the company recruitment, contracts of employees, training and development, pay, pensions and benefits, performance and quality management, working time, equal treatment, etc.

This checklist structurally approaches the problem and helps HR people look at domestic or international acquisitions, evaluate international personnel policies and enables first time HR entrants to use a due diligence checklist to get oriented to the new situation.

Besides Human Resource checklists, there are checklists for the company as a whole. So what do these due diligence checklists really have in them? Due diligence checklists are not confined to one particular area within a company; a due diligence checklist should have some or all of the following items listed below:

How is the company organized? What is the organizational structure of the company and does it list the officers and directors of the company as well as specify their duties?

Who owns and controls the company? Is information readily available as to how the company is capitalized, including capital stock outstanding, options, warrants, related instruments and convertible securities?

What assets does the company own and how does it operate? What is the performance of the company in financial terms and does it cover at least three previous fiscal years? In addition, the interim position of the company for the past year should analyze the product sales and their cost to the company and help evaluate the value of assets being sold by the company.

What Intellectual Property rights does the Company have? Does the company own or use any trademarks, trade names, hold patents or own copyrights? Or does it have any liens against it or is it party to any restrictions that affect any of the aforementioned trademarks, trade names, patents or copyrights?

Are their any reports relating to the company? Has the company furnished copies of reports, studies, appraisals or memorandums about competition, pricing, product development or any other related issue?

Complies with the laws The company should comply with all applicable laws and have copies of licenses, permits, certificates, authorizations, approvals and exemptions etc.

Not a polluter or other environmental hazard Does it own, lease or operate any property or facilities and has it obtained clearance certificates from environmental authorities that have inspected these facilities and/or premises?

Is it involved in court cases or other legal problems? Has it provided lists pertaining to litigations, arbitrations or government proceedings that relate to the company? Has it furnished details regarding adjudications or settlements over the preceding ten years to which it was a party?

What are the completed works and contracts the company is engaged in? Does the company provide information regarding projects it has completed in the past ten years or has the company, in the recent past, changed its organizational structure? Has it merged or acquired or bought significant assets?

What details does it furnish regarding employees, benefits and contracts? Has the company furnished copies of its plans regarding employee benefits and does it reveal what are the guidelines governing termination of employees and how does it compensate them?

Tax return documents Detailed documentation pertaining to tax returns filed for the past three closed tax years as well as all pending taxes should be reviewed.

Wade Anderson is a CPA and operates DigitalWorkTools.com Legal Forms and Business Documents.   Click to view a Due Diligence Checklist ]]> http://www.beaconintegration.com/resources/merger-blog/2009/06/are-you-properly-executing-due-diligence-in-your-business-activities/feed/ 0 http://www.beaconintegration.com/resources/merger-blog/2009/06/due-diligence-it-leadership-assessment/ http://www.beaconintegration.com/resources/merger-blog/2009/06/due-diligence-it-leadership-assessment/#comments Mon, 01 Jun 2009 20:50:08 +0000 Alexander http://www.beaconintegration.com/resources/merger-blog/?p=148 An organization’s leadership is the leading indicator of overall staffing proficiency.  For technology divisions, this includes both the management team and technical leadership.  The measures used to perform this evaluation are job qualifications and depth of expertise.  These are assembled through interviews and professional biographies of the leadership and technical experts.  The premise here is pretty simple, at face value, is the IT leadership competent to hold the positions they have?

This exercise is similar to what a recruiter would do when matching candidates to open positions. It starts by evaluating prerequisite experience and credentials to hold the job. A CIO, CTO, or director should have so much experience in terms of time, relative industry certifications, and underlying academic credentials. If the CTO was selling mortgages 3-months ago and happens to be the CFO’s brother in-law, you have a problem – And, yes, it happens!!

Technical staff must also have the ‘appropriate’ technical aptitude.  Depth of expertise and division of functions should be proportional to organizational size and complexity.  The larger the organization, the more focused and greater depth technical expertise should be.  Conversely, for smaller organizations, technical staff’s abilities should lean more towards general experience and skills.

By evaluating both the management team and lead technical resources, conclusions about the IT origination can be drawn. If management and technical skills are appropriate for the size of the organization, it’s a pretty good indicator of a healthy organization.  Outliers are of course fine and to be expected, they turn up in every due diligence, but they shouldn’t be the norm.  If there is a large deviation from expectations, it may indicate organizational or staffing defects that require further investigation.

During a fast passed due diligence assessment, this technique can be done quickly, usually with the information readily available.  Further, by producing a matrix outlining expected and found leadership characteristics for the due diligence report, this assessment approach is also quantifiable and fact based.

Check back for future postings, as we continue to explore the IT Due Diligence Focus Areas

The Technology Due Diligence – Series Introduction is the first posting of an ongoing series on performing Information Technology (IT)  due diligence.  In this first section, we provide a brief commentary of the purposes and principles of conducting an IT due diligence, and layout the foundation and structure of the series.

Technology Due Diligence:

Information Technology due diligence efforts commonly fall into several traps.  The findings aren’t relative to the transaction strategy, or aren’t objective or thorough enough to be effective.  Worst of all, IT due diligence sometimes is not done at all, leaving dealmakers and corporate governance alike liable for unforeseen financial exposure, and stockholder retribution from any resulting negative impact to post-merger valuation.

Avoiding these traps requires following a basic due diligence success criteria. Fundamentally, any merger, acquisition, or divestiture due diligence is intended to reduce buyer exposure (or seller in the event of a divestiture), and contribute to the opportunity by providing a basis for business executives to make informed decisions.  For technology practitioners, meeting these criteria requires performing a rapid, fact-based analysis that is appropriately aligned to the business strategy behind the transaction.

Throughout this series, we demonstrate how to perform an analysis to support business transactions while avoiding common post-merger issues. The context is designed to straddle the line between technology analysis and business strategy, giving both business and technology professionals a holistic picture of technology’s impact on negotiations and post-merger valuation.

The series is initially structured around the 4 distinct Beacon Integration (BI) models of IT due diligence. There are 2 models for M&A, and 2 models for divestitures, all designed to produce transaction relevant results.  

BI Models:

• Current State Evaluation
• Forward Looking Due Diligence
• Buy-Side Divestiture Due Diligence
• Sell-Side Divestiture Due Diligence

In each section, we will outline how the principle of each BI model is based on producing objective/quantifiable results that can be provided quickly, without compromising valuable insight. The models leverage a combination of best practice tools ranging from ISO, through Six Sigma, to COBIT, adopting attributes from each that can fit within the tight working constraints of a due diligence. 

We continue the series by providing ongoing commentary on how to perform an IT due diligence under different circumstance, such as evaluating innovative technology and applying due diligence techniques in a turnaround situation. Both of which requires introducing different analysis and valuation methods.

Technology Due Diligence – Series Index:

Readers, be sure to bookmark this page, as it can be used as a menu to jump to major sections that they are interested in. We will activate the hyperlinks below of upcoming sections, as the posts become available, so stay tuned!

• Two Approaches to M&A IT Due Diligence
• Type I – the Current State Evaluation
• Type II – the Forward Looking Due Diligence
• Type III – Buy-Side Divestiture Due Diligence
• Type IV – Sell-Side Divestiture Due Diligence
• Innovative Technology Evaluation
• Distressed Analysis Techniques 
• Legal Requirements for Performing IT Due Diligence
• The Due Diligence Questioner (including a template download)
• Using the Due Diligence to Achieving Post-Merger Success

Please note: To gain the most value from each post, it is recommended to read the posts sequentially, as it is common for posts to reference earlier work. However, a reader will be able to grasp basic subject specific concepts if reading a post individually.

Continue to part 1 of our ongoing series on Technology Due Diligence, Two Approaches to M&A IT Due Diligence.

The Two Approaches to M&A IT Due Diligence posting is the first part of an ongoing series on performing M&A Technology Due Diligence.  Here, we draw distinctions between two different types of M&A IT due diligence and correlate their use to business strategy.  Additional postings will provide in-depth commentary on procedures and practices of each type of due diligence.

Before any IT Due Diligence can begin, the correct analysis approach must first be chosen.  Fundamentally, all due diligences are intended to reduce investment risk by removing uncertainty, and by providing the information investors needs to make informed decisions. The key for IT due diligence practitioners is selecting an approach that fits the M&A driver. 

There are two general types of M&A due diligence analyses that can be conducted when evaluating a target company’s IT.  A Current State Evaluation focuses on assessing a target company’s existing IT organization, processes, and deployed technology. A Forward-Looking Due Diligence focuses on the future state of a target organization based on deal objectives, such as how well distinct IT environments will mesh together in the post-merger phase, or how to transition to a completely new and distinct environment such as a sourcing provider. 

Deciding what approach to take often depends on the transaction premise, which also generally falls into one of two categories: an institutional investment, or an institutional merger. These classifications are not based on how a deal is financed, as is typically done, but rather on the business strategy behind the transaction.

Investors such as buyout sponsors, private equity groups, or turnaround specialists are likely conducting an institutional investment (sometimes referred to as a strategic investment). Achieving their post-merger objectives usually calls for leaving the company relatively intact and transforming it from within.  This type of transaction necessitates a Current State Evaluation due diligence approach.

Institutions, on the other hand, usually purchase companies with an objective that calls for merging the business to achieve synergies. The premise usually entails gaining market share, cutting operating costs, or acquiring a capability.  However, it’s often a combination of all three. Nevertheless, this type of transaction necessitates a Forward-Looking Due Diligence. 

Using the nature of the acquirer as a means to determine the business strategy behind the transaction does not always provide an accurate conclusion. Institutions sometimes conduct transactions as an investment or to create strategic synergies – no actual post-merger business or operational consolidation takes place.  The reasons for these types of transactions are varied, but liquidity factors often play into maintaining distinct business. Under these circumstances, a Current State Evaluation is the more appropriate approach to take.

It’s more infrequent, but the entities that usually partake in institutional investment can also throw a curve ball.  A private equity group may wish to consolidate two companies within its portfolio or to create shared services entities that span across its portfolio of companies. These types of activities would be better supported through a Forward-Looking Due Diligence.

Selecting the wrong due diligence approach will undermine the entire process and could lead to post-merger issues.  It is therefore imperative that technology due diligence practitioners start out on the right foot by clearly determining and understanding the business strategy of the acquirer. With the premise of the transaction fully understood, only then can the technology analysis process begin. 

Continue to posting-3 of our ongoing series on M&A Technology Due Diligence, Due Diligence Type I – the Current State Evaluation.

The objective of any M&A due diligence is to reduce buyer exposure by providing the basis to make informed M&A decisions. When post-merger plans call for maintaining an autonomous technical environment, meeting this objective necessitates using a Current State Evaluation due diligence approach.

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The focus of a Current State Evaluation is on understanding the target’s existing Information Technology (IT) proficiency and risks. The evaluation is comprised of four areas of concentrated discovery known as IT Due Diligence Focus Areas. These four areas represent a complete cross-section of a corporate IT environment.

Each area is evaluated using methods carefully selected to facilitate a rapid, yet accurate, assessment to meet the time demands of dealmakers. This requires using different methods for each.

IT Due Diligence Focus Areas:

Organizational Evaluation – During this evaluation, the organization’s IT management and senior most technical experts are evaluated as a leading indicator of the technology organization. The evaluation concentrates on job qualifications such as experience level and technical aptitude.

Processes & Routines – Here, extracts of the COBIT framework are used as a basis to analyze the 34 functions that define the activities performed by an IT organization. Each is evaluated on sophistication level and effectiveness.

Application Portfolio Evaluation – This focus area leverages software quality analysis guidelines outlined by the International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC). The emphasis is on determining an application portfolio’s “quality” using 25 pre-defined measurement criteria.

Infrastructure Evaluation – Spot-checks are used to examine the underlying nuts and bolts that support a company’s IT such as the network and servers. The evaluation is centered on areas that could represent buyer exposure or lead to post-merger issues.

The correlation between the focus areas ensures thoroughness and provides a critical congruency function. After conducting these evaluations, IT due diligence analysts will have discovered either positively or negatively:

1. If the IT management and technical experts are qualified for their positions.
2. If the IT organization’s talents are being properly applied through sound processes to deliver services, mitigate risk, and contain costs.
3. And, if the applied talent and processes are “resulting” in effectively deployed IT that is appropriately aligned to meet business objectives.

Throughout the evaluation, additional scrutiny is given to key risk factors such as information security, staff flight, and compliance adherence. Factors that have historically resulted in financial exposure and/or post-merger issues are also given additional scrutiny.

Armed with this quantifiable insight into a buyer’s technology risk factors, IT due diligence analysts are able to provide dealmakers actionable-intelligence that gives them an edge at the bargaining table. A valuable advantage that contributes to achieving a successful transaction and a positive post-merger valuation!

Continue to posting-4 of our ongoing series on M&A Technology Due Diligence, Technology Due Diligence – IT Leadership Assessment – Staffing Proficiency