Redefining IT due diligence for better value creation

January 25, 2022

Digitalisation is changing the dynamics of merger and acquisition transactions. Investors insist on due diligence when reviewing a company for investment, merger, or acquisition. However, due diligence processes focus on financial, legal, HR, and commercial issues to the exclusion of IT, even though IT is something that companies in every industry now rely on heavily; sometimes (or most of the times) technology maybe the actual asset in focus.

It’s no easy task to conduct a comprehensive, thorough assessment of a system that contains hundreds of thousands (sometimes even millions) of lines of code. Add to that the intense time pressure required by investors, and it’s no wonder these processes typically just scratch the surface, which results that investors buy a “black box” of software, and only later find out that it can’t support strategic goals for efficient execution or scalable growth.

To identify the hidden IT-related risks and opportunities for an investment, organizations must understand what’s going on in the source code itself and for that they need to combine experts and the right tooling in order to carry out IT due diligence engagements that can give them insights in an efficient and effective way.

Based on our experience, conducting interviews, and reviewing documentation isn’t enough for a proper IT due diligence. In order to identify the hidden IT-related risks and opportunities for an investment, organizations have to understand what’s going on in the source code and the system’s software architecture. Software and source code deep-dives can help answering questions like:

• Does the target company’s software support future growth plans?

• Are there IP-related issues hiding in the source code?

• What’s the value of the software portfolio and what future costs must be factored in?

• How strong is the IT team of the target company?

 

In our view PE firms and strategic buyers should seek for:

• Fast and focused analysis that fits within the (typically) tight two- to-three-week timelines of M&As

• Actionable insights based on technical findings combined with monetary values assigned — and always based on measurements against the industry’s benchmarks.

• Comprehensive reports containing not only qualitative information, but also important quantitative components that highlight:

o The biggest risks and opportunities around an investment such as, technology risk profile, rebuild effort estimation, technical debt, reconstructed architecture of the IT portfolio,

o Situational analysis that clarifies future adaptability, scalability, and integration ability of the target company’s software,

o IT investment to be considered in the context of the overall business plan and life-expectancy estimate of IT assets, based on technical analysis and contextual factors.

 

At Code4Thought (member of SIG) and Software Improvement Group we’ve been performing this kind of software analysis for more than 15 years and we would be more than happy to help you in your strategic M&A project. Contact us to find out more.

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