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

With increasing focus on individual privacy, and threats from malicious sources to gain access to individual’s information or corporate proprietary information, the importance of planning technology isolation during the TSA period has increased exponentially. This isolation is equally important to the organization that is selling the business unit as to the organization that is acquiring the unit to protect the interests of both parties and is required in regulated industries.

The most important, yet often challenging, step to a successful divestiture and impending acquisition of a business unit is to have a clear understanding of what encompasses the transaction. It is critical to have the application disposition defined, detailed inventory of the technology assets included sale, and the physical locations of the employees affected by the sale to develop an isolation strategy. Once the environment that is proposed to be sold has been defined, a crucial next step is to assess the applications and computing environment to garner an understanding of their dependencies on the selling organization, and the larger organization’s dependencies on them.

Technology organizations must work closely with real estate management divisions to develop a human resource strategy to isolate both physically and logically those employees that will be sold to the acquirer. Often this strategy involves the consolidation of employees and applications to designated sites, and the implementation of dedicated network and security infrastructure. Such isolation will assure that post-Legal Day 1, the individuals that became employees of the purchasing organization no longer have access to seller’s network and proprietary information. This task becomes more complex when seconded individuals exist which require access to both companies.

Investment by the seller is required to support the isolation of the business unit prior to its being sold. The IT component which potentially includes the purchase of new equipment and resource hours may be significant and should be considered prior to agreement on the deal. The amount of consolidation and number of employee affected may reduce costs, however, the seller needs to expect a minimal amount of activity to perform the isolation regardless of the size of the business unit, particularly if the industry is highly regulated. Aggressive timelines to complete the transaction may also significantly increase costs and need to be considered. A Forward Looking Due Diligence® assessment prior to finalizing the deal by an experienced team can uncover additional costs and provide the selling organization an accurate estimation of the cost involved to achieve the isolation thus providing the appropriate environment to assure their business is protected from malicious or unintentional damage from a business unit no longer part of their company.

For organizations that that don’t have the internal expertise to work through technology disentanglement, a professional M&A due diligence technology assessment consultancy such as Beacon Integration LLC, http://beaconintegration.com, can be engaged to orchestrate technology aspects of the transaction.

J. B.  is a seasoned technology executive with over 10 years of planning the technology aspects of mergers, acquisitions, and divestitures for Fortune 100 companies.

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.