Mergers and Acquisitions IT due diligence
The value of IT due diligence
Although many business professionals understand the importance to perform due diligence in areas of finance and accounting, many do not see the value of IT due diligence. This is changing. As IT assets have started to consume between 20% and 40% of most companies’ budgets, the importance of auditing those investments is also rising. Not only are the assets important, so is the customer, financial and market data. With many companies running different ERP systems the cost of integration can make a deal untenable.
Not to fear, the more traditional Elements of Merger and Acquisition due diligence can be applied to IT Due Diligence, although a different set of skills and employees will be needed. The typical Wharton MBA working and PwC or KMGP is not going to be much help here. However, these firms are building their IT audit capabilities to compete with more boutique consulting companies.
Due Diligence Framework
When an investor or group of investors looks at acquiring or merging their companies they perform Due diligence to minimize risk, allocate risk, and maximize shareholder value. A broad due diligence process framework includes nine areas.
Nine areas of Audit
- Compatibility Audit
- Financial Audit
- Macro-environment Audit
- Legal Audit
- Marketing Audit
- Production Audit
- Management Audit
- Information Technology Audit
- Reconciliation Audit
Mergers and Acquisitions IT due diligence
Due diligence as a “future-oriented” process similar to a “super audit” of a target company that an acquiring company would like to acquire.
“Future-oriented” means that due diligence considerations are more concerned with a company’s future prospects than with how it has performed in the past. “Super-auditing” of a target company includes investigation of the company’s assets, liabilities, and operating system.
The IT Due Diligence Audit
During a due diligence audit, the acquiring company wants information about what the target company that they seek to acquire, both its assets and liabilities, what is inside a company and outside of it. Particular to IT, the acquiring company seeks to discover the target’s critical information assets, its data; where the assets reside, its systems; and how the information is protected. An IT due diligence consultant will include examination of the interior workings of the target, including its inventories, diagrams, standards, and technical implementations; its applications and databases, including business criticality and supportability; assessment of its IT service delivery and service support functions; and its organizational structure and support of critical business processes.
Additionally, examination of the “outside” of a company will generally include examination of the company’s customers and vendors, as well as the specific and general industry in which the target operates. The effects of current and prospective government regulation might also be part of the process. Overall, the IT due diligence procedure in a merger or acquisition will consider the target’s strengths, weaknesses, and hidden deficiencies, as well as a roadmap of its future investments and valuations.
IT Due Diligence Strategy for Mergers and Acquisitions
Essential to any due diligence process is a clear acquisition strategy and a clear understanding of the particular value drivers in the deal. Additionally, the essential goal of any due diligence procedure is the minimization of risk and the maximization of shareholder value. Moreover, IT due diligence itself is essential in order to mitigate the risk of an acquisition failure.
It is safe to say that if an M&A transaction fails, then either the M&A strategy was defective, or defectively executed, or else due diligence has failed (that is, if the world has not changed materially and unforeseeably during the transaction). If all was properly prepared, if due diligence is properly performed, the investments risk will be minimized.
