Acquisitions: IT has become an essential element in
M&A deals. And the onus is increasingly on the company up for
sale to prove that its IT will be an asset for the
buyer.
Recent changes in UK legislation demand that anyone wishing to
sell a house must provide a homeowner's report on its provenance
and state of repair. While not a legal requirement for the sale of
a company, a similar report on its financial and operational state
is fast becoming a prerequisite.
A vendor due diligence (VDD) report is an increasingly important
element in attracting potential buyers. Not only does it cut the
cost of the buyer's due diligence exercise, but it also provides a
clear picture of what is on sale. Both factors will inevitably
affect any potential deal.
IT systems and processes are central to most businesses and are
therefore a key component in any VDD report. The state of IT could
easily tip the balance in a deal. If the report shows, for example,
that the company up for sale is in the throes of a major IT system
roll-out, it might be a reason for backing out of the deal. A
long-term obligation to an outsourcing contract could also put a
potential buyer off.
The IT element of a VDD process is usually carried out alongside
the traditional due diligence examination of financial, operational
and market factors. But it is essential that IT systems are looked
at in the context of the sale because there are no hard and fast
rules.
The impact of IT in a deal varies enormously. If, for example,
the sale is likely to attract commercial trade buyers, issues such
as integration with the buyer's IT systems will be high on the
agenda because although this involves additional one-off costs,
there should also be considerable operational and back-office
savings following the integration.
But if the buyer is more interested in grooming the company for
future sale, integration is less likely to be important. In this
case, working, self-contained IT operations could be more
attractive.
Where there is to be a "carve out" from a business, which
involves separating the IT from the remaining business, there are
issues involved with separating the infrastructure, applications,
data and support.
Well-developed IT separation plans go a long way to alleviating
the concerns of potential buyers, and should provide the buyer with
a view of both the separation costs and the potential ongoing costs
post-separation.
Costs post-separation can include estimates of a standalone IT
infrastructure, hardware, applications and supporting IT function;
outsourced services; ASPs; or a combination of all these.
While the impact of IT will depend on specific circumstances,
the VDD process provides an opportunity to define the current
technology infrastructure and its role in supporting the business.
This gives prospective buyers a picture of where IT sits in the
context of any future deal.
The first phase of IT VDD is to catalogue the current IT
inventory. It is essential to look at the complete package of
hardware, software and services. Factors such as the age of the
hardware and the software platforms, the extent of outsourced
services and available human support skills are key elements.
If the hardware needs replacing or software support for key
systems is no longer available, this will add to the post-deal
costs. Similarly, ongoing outsourcing contracts could increase
long-term financial liability.
Starting with hardware, the VDD report must provide an
assessment of current equipment and its projected lifespan. If it
is nearing the end of its life, the buyer will have to spend money
on technology renewal. Even if the hardware technology is up to
date, the VDD assessment must take account of the business plans.
If the company is growing so fast that it will exceed the current
capacity quickly, buyers need to understand the scalability options
and associated costs.
The resilience and reliability of current systems, together with
business continuity plans, must also be examined closely. At
Deloitte we have come across examples of companies where the
business units' understanding of acceptable downtime was
significantly out of step with the IT department's view.
The same criteria apply to software. Companies that have lagged
behind the technology cycle and hung on to obsolete software past
its support date will face increasing difficulties, a factor that
will, again, raise questions in a buyer's mind.
The VDD report should also show the impact of outsourced
services on IT provision. These can range from simple hardware
maintenance and software support arrangements to complex facilities
management contracts. Many will be straightforward standard
contracts. But some may involve long-term contracts with small,
unreliable suppliers.
Although not central to the IT section of a VDD report, it is
important to examine human resources - both from the skills point
of view and current staff morale. It is essential to identify the
key skills available to support the IT systems and understand their
future role. If staff morale is low, it is likely key skills will
be lost after the deal is completed. Buyers must therefore be able
to see what impact this might have.
The IT team's criticality is exacerbated by in-house bespoke
developments that limit the provision of sourcing external support.
Comprehensive documentation is imperative, although a rarity, and
is the key step that many projects fail to conclude. A lack of
adequate documentation creates undue reliance on the IT team and
this can worry potential buyers.
Another potential area for concern is an ongoing large scale IT
project. There are no hard and fast rules - but generally,
unfinished IT systems ring alarm bells in the minds of potential
buyers.
There are exceptions. We recently worked with a large global
business in the process of rolling out a new bespoke IT system. The
system was designed and built internally - usually a cause for
concern. But the company had a pilot project running and had done
its job well. After examination, the successful pilot project
showed that the new system, far from being a liability, would be an
important asset.
It might sound like a clich‚, but most VDD is common sense. It
seems quite obvious to check that the IT systems are up to date and
support the business properly. Clearly, any ongoing contract
liabilities must be flagged. And the effect of the sale on key
staff is an important factor.
The impact of these factors will vary, but the important thing
in vendor due diligence is to produce an objective and independent
assessment of a company putting itself up for sale. The central
role that IT plays in most businesses today means it is bound to be
high on the agenda.
The equivalent of a homeowner's report, it therefore clearly
identifies the costs and liabilities associated with IT support and
what impact they may have on a successful deal.
The key questions to answer
Is the technology current?
- How well does the technology support the business?
- Is the functionality fit for purpose?
- Is the technology robust, stable and resilient?
- Are effective business continuity plans in place?
- What are the significant risks and how can they be
mitigated?
- What are the short/medium-term capital requirements?
- Are the operational costs sustainable and where can savings be
made?
- What effect will this transaction have on the technology, ie
separation?
- Who are the suppliers and what long-term commitments will the
buyer have to meet?
Chris Digby is a partner in consulting and Sunil Harji is a
senior manager at Deloitte
Leader: IT due diligence can be a clincher