A rigorous IT due diligence can be critical in a deal situation

Given that IT costs can be a considerable contributor to both capital and operational expenditure, it is essential when undertaking an acquisition that IT is given due consideration as with legal, finance, and operation matters. Whilst the rise in popularity of open source applications and cloud-based technologies may imply cost efficiencies, these can quickly become offset by security, maintenance, and integration requirements. By fully appreciating a target company’s IT environment it is possible to get truer picture of the total cost of IT ownership, which could affect decisions relating to the transaction. Additionally, by gaining a greater understanding of a target’s IT environment, an acquirer can mitigate key technology related risks, which otherwise may impact synergies with other businesses in its portfolio.

Obtaining a detailed understanding of a target company’s IT environment can be accomplished by conducting an IT due diligence, which will assess:

  • strengths and weaknesses of the IT environment in relation to the acquirer’s business strategy;
  • recommendations to mitigate acquisition related IT risks;
  • recommendations on change that could optimise IT operations post-acquisition; and
  • indication of costs to maintain or improve IT operations.

Such reviews can usually be completed in a relatively short period of time (ie one to three weeks) depending on the size of the deal. Furthermore, experienced IT due diligence practitioners such as RSM should be able to mobilise relatively quickly in order to support opportunistic acquisitions that may arise. IT due diligence is normally completed by means of document reviews including IT security policies and software development artefacts, interviews with the IT management and key IT personnel, analysis of upcoming IT projects and strategic IT plans, as well as physical inspection of data centres.

By taking into consideration all areas of the target’s IT environment, it's possible to get a better understanding of the total cost of ownership of IT. If some of these costs had not been considered previously, it could be an opportunity for negotiation with the vendor.

The proliferation of public and private clouds, customisations to enterprise applications, and use of unified communications make many IT environments complex to maintain. Partly because of this post-acquisition integration activities may be costly and time consuming. In order to manage costs of post-acquisition technology integration, investigations into software applications, hosting platforms, and support and maintenance arrangements need to be undertaken pre-acquisition so that commercial negotiations with the vendor can proceed in full possession of the facts. 

In summary

Transactions can fail to deliver value following an acquisition due to incompatible technologies or other unidentified IT risks. By taking the time to understand such issues before the acquisition, it is possible to address this risk. Therefore we strongly recommend:

  • undertake an IT due diligence as a part of your broader pre-acquisition diligence activities;
  • use this to obtain a firmer understanding of the total cost of IT ownership including any significant IT related risks; and
  • consider post-acquisition technology integration or upgrade costs when planning the deal and planning subsequent business expansion.

How RSM can help?

RSM has an experienced team who work closely with private equity and trade buyers to guide them through the potential risks and upsides of the IT aspects of a transaction. To find out more about how we can assist in identifying potential issues with acquisition targets, please get in touch with Chris Knowles.