M&a 101 - Part two
Introduction to Due Diligence
In any deal, the Buyer is usually parting with a significant amount of money and as such, must confirm that everything is in order with the Target business and everything the Seller has said is true.
The simplest parallel might be a structural survey when you are buying a house. You’re not an expert on the structure of a building, so it is a good investment, an insurance policy, to use experts to check that everything is sound, or (more likely) outline clearly what the problems are, how urgent they are and what it will cost to fix them.
This investigation and process of confirmation is called a due diligence (“DD”). A DD is conducted by the Buyer and it is the “let’s take a proper look under the hood” phase of any deal where the Seller reveals detailed information about inter alia, the target’s financials, IT landscape, operations, sales, contracts, legal, etc. The ultimate goal of the DD is to allay concerns the Buyer may have and ensure that the Buyer is comfortable to proceed to close the deal.
A DD should commence as soon as the Letter of Intent is signed (“LOI”) and certainly before any sale agreement has been reached. DD timeframes can range from anywhere between a week or few months depending on the size of the deal and are more often than not carried out by professional service firms (Legal, Accounting and Consultants) on behalf the parties. However, Buyers and Sellers do also conduct their own internal DD’s on certain deals depending on their size and complexity. In each instance, each party is responsible for their own costs of conducting a DD whether or not the deal goes ahead.
What Is Included in a General Due Diligence?
In M&A 101: Intro to M&A I mentioned an ‘Offering Document’. An offering document or ‘sales pack’ is set of non-confidential information complied by the Seller which is sent out to a number of potential buyers. The level of detail is usually only just enough for the potential Buyer to make a reasonably accurate offer. A DD report will differ substantially in that it should provide the Buyer with enough information to close the deal and will contain a lot of confidential information about every aspect of the Seller’s business including but not limited to the following:
As you will glean from the above, there are a lot of considerations that go into a DD. At Waterstons we touch on a lot of them while focusing on the IT Landscape as IT underpins pretty much every modern business.
The IT Due Diligence
Previously, DD’s used to focus on commercials, financials and legal with little consideration for IT. However, an IT DD is now of vital importance to modern deals and should not be treated as an optional exercise. When done properly, an IT DD has the potential to not only identify risks in the deal but also opportunities to reduce costs, make better use of existing resources, improving IT and business flexibility and resilience. IT DD’s also inform later stages of landscape and architecture planning while being the main driver of synergy enablement and capture.
IT DD’s usually focus on these 4 main areas:
While there is a lot to get through on an IT DD and each deal will have its own constraints and circumstances the key objectives can generally be summarised as follows:
- Identify unknown or undisclosed risks and how to mitigate them;
- Identify unknown or undisclosed opportunities and how to capitalise on them;
- Estimate the one-off IT costs of the acquisition and its integration;
- Calculate the reoccurring IT costs like maintenance and licencing;
- Evaluate IT enabled synergies such as App, System or IT staff rationalisation;
- Collection of as much relevant information that will inform the target operating models, future system architecture and accelerate post-transaction activities, should the deal go ahead.
The M&A world and its varying processes can seem daunting. Hopefully, this short guide has eliminated some of the mystery and answered some of the questions you have had. If not, and you would like to find out more, don’t hesitate to contact me, I would be more than happy to talk you through the processes or answer any questions you may have.