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

Have you discovered that achieving cost related synergies in mergers and acquisitions (M&A) is like looking for the Lost Dutchman’s gold mine? Most companies looking for them never realize their sought-after treasure:

• 39% of companies entering into merger and acquisition activity indicate at the outset that they are attempting to reduce the combined direct operating costs through the merger of the two companies. Of that 39%, only 35% of them achieve their goal.
• 9% of companies entering into merger and acquisition activities indicate at the outset that they are attempting to reduce indirect and overhead costs for the combined enterprise. Of that 9%, only 39% achieve their goal.

However, the fact that most fail doesn’t mean the task is impossible; it means the task is difficult, and most are not adequately prepared.

Today’s companies have the greatest opportunity in history to achieve cost-related synergies. The advents of computers, telecommunications, and the Internet have made businesses incredibly transparent. Three of the most discretely quantifiable and controllable cost synergy elements in today’s companies are:

• Moving to a shared service model and reducing staffing redundancies. This is especially true in areas such as Human Resources, Finance, Customer Service, and Information Technology
• Achieving procurement leverage through greater volume in purchases and consolidation of suppliers to produce discounts, lowering material costs
• Rationalization of facilities and capital equipment following the closing of the deal. This boosts the utilization of fewer resources, and eliminating those which are less capable and/or less well suited to the long term strategy of the company

These, and many more areas of opportunity, should be clearly identified and evaluated during the Due Diligence phase of the M&A process. If there are so many clear opportunities for today’s companies to achieve cost-related synergies when they merge or do an acquisition, why do so few of them materialize? Successful C-level executives from some of the biggest companies in the world, with extensive backgrounds in M&A activity, cite these reasons:

• 1. Lack of clarity around the reasons for the merger or acquisition
  2. Lack of effective metrics for the success of M&A transactions
  3. Poor governance; a general lack of accountability among executives over three to five years following the transaction
  4. Insufficient time and attention to detail in due diligence and integration
  5. The dynamics of the business environment; some business strategies simply don’t hold up over time.

In order to capture the expected cost-related synergies in merging companies (whether the merging results from company mergers or company acquisition), management must do these things:

1. Address all thee areas of the business – leadership, processes and systems. Failing to address leadership aspects such as organization structure, performance measures, and alignment of goals can be deadly. Equally debilitating to profitability is failing to understand the fundamental business processes of the companies involved. Without that insight, consolidation efforts don’t yield expected results. In addition, companies who do not focus on getting commonality in their data and information systems find that things like consolidating purchases are far more challenging than expected.
2. Move as quickly as possible toward commonality between the companies involved. Those who are most successful in M&A are those who bring acquired businesses quickly and effectively onto a common platform of fundamental business processes and information systems. Use that action to retain and more fully utilize the most capable processes. At the same time, use the broader information and skills of the combined enterprise to seize additional opportunities without growing infrastructure. When you fail to do so, it allows acquired business units to remain more autonomous for longer, stretching out the time to break-even from their M&A transactions. It will take your company longer to do everything from closing the financial books to redistributing work among business units.
3. Be willing to make the tough calls - especially related to leadership, staffing, and facilities consolidations. The inability of management to make tough calls on consolidation was reported to be “significant-to-severe” by more than 75% of senior M&A managers. Another “top five” response was management hubris / unwillingness to recognize problems. C-level M&A executive interviews also show that “double-boxing” (the practice of putting two people in a single “box” on the organization chart) following M&A transactions is disastrous. It is important to understand which executives will be in leadership positions following the transaction. Do not take the path of least resistance in these situations in order to avoid offending someone.
4. Communicate! One C-level executive I interviewed recently said: “You can’t over-communicate.” Effective communication stems the flow of rumors. It gets a consistent message out to the troops. It keeps everyone focused on the appropriate sources of information. It reinforces the newly merged management structure, and eases the concerns of all stakeholders – from the management team to customers and shareholders. It also helps to reduce the attrition rates among key management and staff members. Another executive said: “We always had a motto that went: ‘8 times, 8 ways.’ We felt that a message wasn’t communicated effectively unless the employees heard it eight different times through eight different channels.” Those channels included e-Mail, direct one-on-one communications, newsletters, press releases, and so on. Topics surrounding cost reduction, such as the consolidation of facilities, staff reductions, and reorganizations always bring about an extraordinary of unrest and uncertainty. The work force and the customer base are both affected. Quelling rumors and getting everyone on the same page requires continuous, accurate communications
5. Plan the integration activity in detail ahead of the announcement. Then execute the plan. The level of detail in planning around integration activity is rarely adequate in M&A transactions. Companies fail to delve deeply enough into the business processes and supporting information systems of targeted acquisitions. They never really understand how to align them. If your company follows that path, the integration team will encounter nasty surprises. Those surprises will occur when the time comes to share information and move into shared service operations to reduce overhead costs. When the announcement is made, companies should already understand four things: 1) Their business strategies, 2) the initiatives that will be implemented to achieve combined financial operating targets, 3) the specific actions that will be taken at what times, and 4) which executives are accountable for the completion of each of these actions.

Capturing cost related synergies in M&A transactions isn’t rocket science, but it is hard work. It involves paying close attention to detail in processes and systems. It entails making tough consolidation related calls. It requires resolute leadership to adherence to company-wide process and system standards. M&A management, like any other form of leadership, is not for the faint of heart. However, the benefits of getting it right are enormous.

Redaction has been traditionally practiced on paper documents, with black markers or correction tape.  In electronic documents, specific words may be deleted or blocked by changing fonts or background colors.   In the case of email redaction, complete emails may be removed from the divested employees’ email files.  A sound policy with clear objectives must be defined by business leaders and legal counsel prior to engaging the technology staff. Ideally, this will be defined during the due diligence

One objective may be to remove specific emails related to any legal or compliance topic, This objective may be difficult to achieve in organizations that have large number of employees involved in the transaction and/or large email files.  To address this complexity, often the objective is broadened in scope and emails that include specific people are removed in their entirety.  Examples of employees’ correspondence that may be removed are compliance officers, attorneys, supply chain managers, and other key employees that have participated in activities whose correspondence, if disclosed, may provide a competitive advantage to the acquiring company unrelated to the business unit being purchased.  The divesting company typically creates a policy that is conservative in nature to protect their interests.

Once a redaction policy has been created, technology teams must plan their execution strategy by performing investigation of all possible email sources. Divested employee emails exist on active email servers but also in other locations such as on user desktops or laptops, file shares, and third-party archival services.  The scope of the redaction should exclude third-party archival services as those emails typically are not included as part of the divested assets and are only made available to the acquirer in the event of future legal inquiries.  The other locations require extensive inventory scanning of file shares and desktops prior to beginning the redaction process.  Investigation of these sources may result in the discovery that terabytes of storage has been dedicated to email files depending on the number of divested employees and the strictness of the divesting company’s email policies on size and retention.  Sufficient storage is required to make copies of the original email files to process the redaction policy.  The technical execution of the redaction may focus on the removal of any email with a specified list of people in the “To”, “From”, or “cc” fields.  Embedded emails within an email must also be redacted.

Timing of the redaction is critical.  Assuming the acquirer provides email services to the divested employees on Legal Day 1, redaction of an email must occur at that time or shortly thereafter.  Redaction of the current server-based email is usually the fastest and processing this source first allows immediate transfer of current email to the acquirer.  If email files on file shares and desktops are too large to redact immediately, they must be restricted such that employees may not modify them, or remove employee access completely.  Once redaction has occurred, the newly redacted email files may be transferred to the acquirer for employees to have access at the new company.  Original email files may be retained by the seller if required per a  (TSA). 

The divesting company must inform the acquiring company of the redaction and the high level strategy applied.  However, it is strongly recommended that the redaction is kept confidential among those who are negotiating the terms of the transaction or TSA.  Confidentiality is required to assure that employees that are part of the transaction do not make attempts to print or save the emails to an unknown destination (e.g. outside of the company).  Redaction may have implications on a TSA which would require the divesting company to provide redacted emails upon request.  These requests are legitimate if they include information which maintains the best interest of divesting company and are relevant to the divested business unit.  However, fulfilling the request to provide the redacted email may be time-consuming and manual process.

Email redaction is a complex solution but acceptable for any company that is divesting of a business unit.  However, companies involved in a divestiture considering this solution to protect their proprietary information  must be aware of the potential longer term responsibilities related to the redaction as well as the significant time and resources to perform the redaction itself.

 JB

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.

.

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