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Today, a company's business value is deeply impacted by its Information Technology (IT) operations. For that reason, a professional bullet-proof examination of the target company's IT health is essential to an informed diagnosis of the health of the entire enterprise. At the recent ACG Technology M & A conference, the keynote speaker cited the increased need—in light of the current economic climate—for intensive due diligence. In the subsequent Q&A session, he even likened the process to a distasteful medical procedure. Yet, an incomplete due diligence process still seems to be the norm—one in which prospective investors overlook the critical importance of IT to business. Some IT issues can be serious enough to be deal—breakers. Others can impact the valuation. But whether or not IT due diligence triggers a reevaluation of the terms of the transaction, it is an essential component of the entire due diligence process, especially in a turnaround situation. And it is one that needs to be initiated as soon as the Letter of Intent is signed. In fact, this is of critical importance if it has been determined that the IT operations of the target company are strategic to the viability of the venture or merger. The urgency of the need combined with the complexity of the task makes this a project for experienced IT professionals. People, processes, and products must all be put under the microscope. The caliber of IT people, adherence to standard IT management practices, timeliness and quality of the delivery of products and services, level of customer satisfaction—all are indicators of the state of IT health. Compounding the difficulty of diagnosis is the fact that many IT assets are intangible ones. For example, IT is a rich repository of a company's intellectual capital, especially in technology-related companies. Further, if a merger or acquisition requires the integration of two IT departments, their potential for compatibility needs to be thoroughly assessed. Cost-saving opportunities and one-time conversion costs must also be identified. The technology due diligence team is in the best position to make these determinations, for key to success in this process is the know-how it takes to ask the right IT questions and to evaluate the answers. Virtually all businesses today have become dependent on IT, especially on mission-critical systems and software and on the knowledge bases that house vital marketing information. It is unfortunate, then, that many investors underestimate the risk associated with ignoring the dependence of business on IT. Should IT due diligence be overlooked or ignored, the consequences can be dire. For example, in a merger, severe platform and processing differences can be irreconcilable, and the cost of building a new system, rather than integrating two existing systems, can be prohibitive. Or an undetected under-investment in IT can result in operations that collapse under the weight of business growth. Unlike a patient, investors cannot rely on due diligence malpractice insurance for compensation should a merger, acquisition, or investment go south because of damaging, but undetected, IT issues. They must demand that the target company undergo a complete physical, including a probe of its IT architecture and operations. Such a procedure may be dreaded by some, but it can well save the life of a potentially flawed investment—and save the investor from disaster. © Copyright 2002 – 2003 by Charles C. Francis |
