Why proper IT due diligence is critical (and why it fails)
Have you ever purchased a big ticket item – a home, vacation property or maybe a classic car – only to get a big surprise afterward?
Not the nice kind of surprise. The kind where you find out the foundation is cracked, the structure’s riddled with termites, or the “original” paint isn’t quite original after all.
That’s why it always pays to get an expert – a building inspector or a trusty mechanic – to certify what you’re buying is legitimate and sound, before you sign the deal.
Why, then, wouldn’t you do the same when you size up a company for acquisition, especially where IT assets are concerned?
Determining if it’s a wise buy
When you look at acquiring or merging with another company, you have a plan for how it fits with your growth plans. Sometimes the other company has something you don’t – like a broader sales channel or better brand recognition. Sometimes they own facilities, plants or even patents you’d like to own. Or maybe they’ve developed technology you need, technology it would take years to develop on your own.
Whatever the reason, the end goal is to improve your bottom line, either by beating the competition or by joining them.
Mergers and acquisitions don’t just happen on a handshake. You have to make sure the target company is financially solid and structurally sound. Just like that house or used car – you need to identify potential problems “under the hood” before you move forward.
Sometimes those problems are manageable. Sometimes they can be deal-breakers. But you won’t know if you don’t spot them early.
That’s where due diligence comes in – an in-depth review of the target company from top to bottom.
There’s more to the eye than financials
If you’re acquiring a company for its technology, you’d examine that technology for its viability, right? After all, that’s the main reason for your purchase.
Due diligence for most M&As, though, center around financials and organizational structure. Are you adding to the bottom line or taking on a mountain of debt? Will you merge all the human capital, or will you have to eliminate redundancies?
But today’s companies are swimming in data, even those that don’t appear hi-tech on the surface. So if you’re going to integrate another company with your own, you can’t be blind when it comes to its information technology.
Who’ll look beyond the window dressing?
Many acquisition targets have chaotic IT infrastructure. This can result from lack of strategy and expertise, or simply from rapid growth. To hide or downplay this chaos, they’ll often put up IT “window dressing.” For example, they may produce a glowing infrastructure document, hoping you won’t look close enough to see the “duct tape and baling wire.”
Companies often engage accounting firms to conduct the M&A due diligence. Accountants are great with financial statements, but they aren’t so good at evaluating information infrastructure. That means Powerpoint presentations with pretty network diagrams, tables and charts are taken at face value.
To the buyer’s detriment…
Digging under the hood
To get a real picture, you have to cut through the clutter.
Proper IT due diligence looks further than the house’s front door. It rummages through the closets and the attics, too. If you don’t dig around under the hood, how can you know the engine will run – or for how long?
Of course, you can try to assess the IT state on your own, separate from the accounting team. If you have a knowledgeable IT staff, get them involved!
If not, your acquisition may have a hidden price tag and could lead to a serious case of buyer’s remorse.
Next week we’ll look at three keys areas central to IT due diligence. Until then, remember that information assets are just as important as financial statements when it comes to making the final decision.