“It wasn’t so many years ago that pre-acquisition assessments of a company’s technology were limited to check-the-box activities”, reflected Patrick Moroney, Chief Information Officer (CIO) of Central States Funds and previously CIO of several private equity-backed industrial and healthcare companies. “Meantime, the level of connected-ness among a company’s operations, financial results, and its information systems has completely changed that. Acquirers must consider the increasing dependency of all organizational functions on technology as digitization and a globally-pervasive internet raising competitive standards. The thoughtfulness of a target’s technology strategy (or its absence) can provide leading indicators of post-closing surprises that could make-or-break a deal’s success, such as: supply chain vulnerabilities and data breach risks.”
CFOs are advised to attach appropriately high priority to an acquisition’s evaluation of information technology, with the following value and risk considerations in mind:
- A target company’s use (or not) of integrated management systems for sourcing, production, distribution, and customer service is informative for success of an acquisition;
- Integration planning and resourcing vis-à-vis information technology are among the most challenging for acquisitions;
- Sophisticated analytics vis-à-vis customers, supply chain, and market conditions have become increasingly important as a source of competitive differentiation. Assessing the use (or non-use) of analytics can inform valuation, integration challenges, and post-closing customer relationships;
- Notable differences between the information technology capabilities of the buyer and target are another potential source of value and area of operational/transitional risk;
- Instances of deferred and delayed investments in information technology by the target company are better known earlier; and
- Data security has become a core risk for companies of all sizes and industries.
Recent interviews with CIOs and information technology advisors reveal valuable “best practices” for how information technology analyses, due diligence and integration planning can provide out-sized benefits towards success with acquisitions, as summarized below
Performance reporting, information flows, and integration planning
The inter-connectedness of a company’s information technology to its operations, processes and decisions provide clear views regarding culture and integration planning.
“A close look at the technology investments a company has made (or has deferred) can provide important insights into operational and organizational realities,” advises the CIO of a publicly-traded human resources services firm. “I try to approach technology due diligence with the expectation of gaining insights into a company’s processes and relationships. The ‘science’ of reviewing a company’s ERP platform, reporting tools and other IT specifics can reveal plenty of the ‘art’ of a firm’s culture and preparedness for the challenges of deal integration.”
Data analytics and synergy opportunities
For industry-leading acquirers, ongoing investments in analytics and technology have normalized remarkable capabilities simply not always found in mid-sized firms.
“This disparity in the power of analytics between an acquirer and a target presents a challenge for CIOs accountable for delivering acquisition synergies and value,” observes the partner in a global technology and management consulting firm. “Every CIO’s integration playbook should anticipate multiple possible paths to realizing value. Believing that effective cultural and process integration will follow a straight, predictable path is a formula for disappointment. And after-the-fact re-allocations of capex and operating budgets are remedies that please no one.”
Value potential enabled by the buyer’s more advanced capabilities
Acquisitions may anticipate the potential value of new capabilities to be leveraged across a buyer’s operation, especially new technology and analytics capabilities.
“During pre-closing diligence and analysis, CIOs may be pressed for more confidence in realizing technology value than can be validated on a deal timetable,” reflects Adam Stanley, Global Chief Digital and Information Officer for Cushman & Wakefield, real estate services leader. “Technology deployments done concurrently with acquisition integration are unpredictable on many levels. As such, best practice should be to manage under a rolling validation process. Build a strong, scenario-tested, business case based on known variables during the deal due-diligence. Then, after close, continuously validate those variables against reality as you integrate. In any case, prepare for variations vs. pre-deal assumptions and be ready to adjust as necessary.”
Deferred and delayed investments in information technology
Sean Lyons, consultant with fifteen years’ experience advising companies on information technology strategies and acquisition diligence, observed, ”While a financial statement review will identify a company’s investments in technology, of utmost importance is a look beyond the financial statements, that is, deferred maintenance and delayed investments in information technology. Old habits die hard and too many companies short-change investment in information technology, which puts acquirers ‘behind the eight ball’ right from the close.”
Identifying these instances of deferred maintenance during diligence can mitigate surprises during integration, including:
- Back maintenance on critical software;
- Unsupported versions of critical software versions and associated data and network security vulnerabilities;
- Information technology assets acquired 5+ years ago that are still supporting key business processes;
- Insufficient technology personnel resources (either internal or external)
Data security has become a core risk for companies of all sizes and industries
Cybersecurity may capture increasing attention for ongoing businesses, though it’s obviously also crucial to devote attention to data security, access, and management as part of pre-closing due diligence. Understanding how a company handles even the basics of information security can provide insight into areas of potential risk. Such “basics” include the following:
- Extent of network security, including firewalls, intrusion detection, penetration testing
- Network access practices, including password management, account provisioning, employee training, third-party support roles
- Compliance management, including evolving/new standards such as GDPR (General Data Protection Regulations)
- Integration implications for data security.
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The lifeblood of any company is predicated on its ability to determine the optimal prices to sell its products, reduce revenue leakage in the sales cycle, identify profitable / unprofitable customers and address accordingly, minimize cost of supplies, etc. The quality of information technology supports these decisions and a company’s competitiveness like never before, especially so ahead of an acquisition.
About The Author
Joseph Feldman is President of Joseph Feldman Associates (www.josephfeldman.com), a Chicago-based corporate development consulting firm founded in 2003. The firm provides acquisition and other strategic transaction consulting for growing companies and their investors.
Recent Articles also written by Joe Feldman
OPENING THE DOOR TO ACQUISITIONS – IDENTIFYING AND ENGAGING WITH SELLERS
ACQUISITION STRATEGY: 3 QUESTIONS YOU NEED TO PREPARE FOR
TEAM FORMATION: PART II IN THE ACQUISITION STRATEGY SERIES
KEY SUCCESS DRIVERS IN DEAL NEGOTIATIONS: PART III IN ACQUISITION STRATEGY SERIES
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