When companies set out to acquire or merge with another company, the due diligence checklist that directs the acquiring company’s analysis of benefits and risks runs the gamut, from cash flow to debt, receivables, assets, equipment, and so on.
Too often, though, M&A activity checklists fail to include one important element: Technology and Systems.
Stories of mergers messed up by poor or non-existent systems and technology compatibility are legion. You never hear most of them because the companies involved are too small. A few, especially those involving service companies with tons of exposure to consumers, are noteworthy. Take, for example, the failure of Texas Air Corp., which for a brief time was once the world’s largest airline company.
In the 1980s, airline mogul Frank Lorenzo assembled a huge stable of carriers under the TAC banner: Eastern, Continental, Frontier, New York Air and PeoplExpress. (All are gone now except Continental, which merged with United in 2010.)
That crazy quilt of an airline company failed for many reasons. But a central factor in TAC’s undoing was the company’s failure to assess – let alone fix – the problem of too many, often incompatible, operating systems and applications. That made it impossible for the company to capitalize on the economies of scale such a huge service network should have provided. None of the airlines could effectively share customer data or market their services jointly.
1980s Failed Merger Shows the Danger of Failing to Account for Technology
Granted, that was in the 1980s, but the TAC calamity demonstrates the point: Properly assessing the strengths, weaknesses and compatibilities of two or more companies’ systems, technologies and technology staffs is paramount.
It’s surprising how often businesses forget that. According to a global survey by law firm Freshfields Bruckaus Deringer, 90 percent of dealmakers said they recognize security breaches by an acquired company could significantly reduce the value of their deals. And yet, 78 percent of respondents said cyber security isn’t given much thought in their due diligence process.
If they’re giving so little time to an issue as weighty as IT security, chances are they’re also giving short shrift to basic technology questions such as the compatibility of the basic operating systems and applications. That, in part, is why so many mergers these days fail to deliver – or deliver on time – the promised financial synergies predicted by dealmakers.
How Companies Can Avoid Acquiring Old or Incompatible Technology
So, what can companies, including small and midsize firms, involved in M&A discussions do to avoid having their grand deal crash on the rocks of incompatible, outdated or divergent technology?
For starters, they can enlist the help of technology experts in the same way they hire forensic accountants and M&A attorneys to examine the company’s books and legal risks. Even if the acquiring company is a technology company itself, it’s critical to get outside advisors who can spot potential problems – or opportunities – that a CEO or other dealmaker might overlook.
Their due diligence checklist should include questions such as:
- Who will “own” or control the technology?
- What technology must be replaced?
- What data, transactional info and intellectual property are really important?
- Where and how is data stored?
- Is there any “key employee risk;” i.e. will the deal fail or be crippled if one or more key employees leave after the merger?
- Will there be a technologies skills gap created by this merger?
- Are the two companies systems compatible? Where they are not, what will be the cost and time frame of making them compatible in the short run?
- What will be the cost and time frame of moving the merged company to a single operating system and set of applications in the long run?
- Are there reliability and reputational risks?
- Are there any risks related to online presence, transactions, marketing, or management systems?
- Are there any licensing issues related to proprietary technology?
- Is either company’s existing technology scalable, and can it serve as the base technology for the combined company going forward?
Maybe you feel you and your management team are capable of answering these questions and issuing a dispassionate statement on the state of technology in the target company. If not, your best bet is to let a team of experts take a look.
More than one company has been saved from a bad investment – or conversely, realized the deal contained a technology goldmine – just because they were wise enough to conduct a thorough IT due diligence examination.