How to mitigate risk of M&A with Due Diligence?

The mergers and acquisitions (M&A) market is red-hot today despite the crisis that looms on the horizon. Nearly 1000 buying transactions have been carried out around the world in the last 30 days alone (Crunchbase data). Many of these involve tech companies. It is especially ahead of such investments that a Due Diligence analysis may help identify and mitigate risks and improve strategy planning. 

According to a new M&A market report published by Deloitte, at the beginning of 2022, 92% of respondents expected the number of M&A transactions to rise or remain constant in the next 12 months. And even though the last Gartner’s report, out in July 2022, shows that CEOs are now planning to implement M&A savings (41%) due the record-high global inflation and expected recession, a crisis always creates opportunities for investors. 

This is why it is so important to prepare for possible future sales and buying ventures at an early date. 

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Performing a Due Diligence analysis is like giving a used car a check-up before buying it. If you inspect the car at a reliable repair shop, you are less likely to buy a pig in a poke. To do so may require extra time and investment, but these are negligible compared to the cost of a new car (hence worth it), and the decision is definitely going to spare us any serious problems further down the line. 

Technology Due Diligence (IT Due Diligence, IT DD) is a thorough audit and analysis of the organization’s IT operations, such as, to mention but a few, its team, processes, management, infrastructure, and architecture. The analysis allows to identify risks that may have an impact on the transaction itself or later integrations, draft a risk mitigation or reduction strategy, reduce the time necessary for an informed decision on measures, and avoid technology pitfalls. 

DD tools include document analysis and interviews with company representatives. Once we have signed an agreement and decided on the scope of analysis with the client, we will prepare and send a request for data, i.e., documents that describe our areas of interest. These may include papers that outline the activity of the company, its policies & procedures, diagrams, and figures, such as the mean salary at the IT department or other information. In the framework of a DD analysis, depending on its specific scope, we may also use additional tools, e.g., for automated code testing and architecture analysis, or code security testing (Checkmarx – SAST, SCA). 

Due Diligence is particularly useful in large M&A transactions carried out by investment banks and funds with the participation of law firms that act as M&A advisors, as well as all smaller business ventures. In the latter case, the procedure may prove especially advantageous in the start-up market, at all scaling stages, e.g., in all subsequent funding rounds (the analysis should be able to identify the risk taken by the funding entity), as well as whenever developed start-ups are acquired by larger businesses.  

What types of Due Diligence can we distinguish?

Sell Side Due Diligence

A company put up for sale undergoes IT DD analysis requested by its current owner (seller). The added value, in this case, is that any outstanding issues can be identified in advance, and a remedial strategy can be developed before the buyer gets involved, which lowers the risk of transaction failure. 

At the same time, the procedure may allow the seller to secure a higher bid later on. The procedure results in a professional description of the current state of the company, which may then be used in the bidding process (e.g., IPO documents). An added value to the buyer comes from the streamlined and optimized transaction process.

Buy Side Due Diligence

This describes a situation in which the DD analysis is requested by a potential buyer.  

In this case, the added value comes from a comprehensive understanding of the IT capabilities and target operations. The procedure involves an IT transaction risk assessment, including an analysis of current and future risks and their business impact. Transaction price can also be verified. 

Opening State Assessment

A DD analysis of this kind is carried out whenever we want to know the current/actual state of the company, e.g., when it is requested by an individual who has taken on a high-profile role in the business and wants to have a detailed and accurate picture of its current shape. This usually applies to CTOs, IT directors, and IT managers. The added value is that we can get a full picture of the current IT operations, and identify problems, threats, and challenges that need to be addressed. This diagnosis also allows us to draw up a roadmap for new IT initiatives. 

What is subject to Due Diligence analysis?

All IT DD analyses various elements of technology that have an impact on the functioning of the organization as a whole; these may include, e.g., the software development process and project teams, IT process management. Infrastructure, IT architecture, tools, performance, documentation, plans and procedures, e.g., Business Continuity Plans, and the compliance of procedures and documentation with relevant legal regulations. 

It is essential to keep in mind that for businesses that sell tech products or services (e.g., tech start-ups), IT DD should cover not only the technologies that support the functioning of the company (as discussed above) but also its products in terms of innovation, market trends and customer needs, competition, architecture, and technologies used, IT assets and debt and R&D potential. 

Which elements will be analysed, and to what extent, is laid down in an agreement signed by the client and the independent IT DD contractor; the scope of analysis is always adjusted to the nature of the transaction, and the business goals and expectations and goals of the interested party. The end products must also be defined ahead of time; they may include a final report with conclusions and a roadmap for future initiatives in the organization.

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Altkom Software and Consulting has nearly 20 years of experience in software development and analysis in the field of new technologies. Our approach is wide-ranging and multidisciplinary; we have cut our teeth working for various sectors in the field of finance, insurance, the automotive industry, manufacturing, start-ups, and more. Our team consists of business and technology experts, which gives us a unique perspective and enables us to perform a thorough diagnosis of your business in all its aspects. This can considerably reduce the risks you will face in your M&A transaction, but also in your daily business. 

Rafał Früboes  
Head of Consulting Unit

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