IT Due Diligence - the analysis of IT before M&A deals

Recognizing opportunities and risks of an M&A deal - before the purchase

The role of IT in M&A deals is often underestimated. Yet it is IT that can prove to be the spoilsport in transactions.

Two companies merge but have completely different software systems, data is incompatible, interfaces are missing or licenses are not transferred - potential problems that are often discovered too late and can then only be resolved at considerable expense.

To avoid such difficulties, companies should conduct an "IT due diligence". Due diligence (in German: sorgfältige Prüfung) is basically a procedure that is carried out in the run-up to M&A transactions, real estate purchases or IPOs.

IT due diligence is used to identify opportunities and risks in IT at an early stage and to draw attention to potential challenges posed by IT. This concerns opportunities through synergies, higher efficiency or strategic potentials, among others. Financial risks (e.g., through necessary investments in hardware) can also be better identified.

Where do you stand now?

• You have already identified your purchase target?
• You want to have the IT of the targeted company put through its paces and ensure trouble-free operation after the transfer of ownership?
• You need a realistic assessment of the IT-based transaction risks?

IT Due Diligence with GAMBIT

Through the experience gained from numerous IT due diligence programs, we know how to prevent

• consequences arise from a lack of integration of IT in the due diligence process,
• IT changes from a potential multiplier to a risk factor, or
• IT even becomes a dealbreaker in M&A transactions.

Contact us and take advantage of our know-how from 25 years of successfully completed projects in the SAP environment.

We have already conducted a large number of IT due diligence programs for companies of all sizes - from 10-man start-ups to companies worth billions with an IT landscape that has grown over decades.

Your benefits of our IT due diligence programs:

• Lower M&A transaction risks
• Realistic assessment of synergies and required investments
• Ideal basis for the right TSAs
• Increased chances of closing a W&A deal
• Safer productive start on Day 1
• Better negotiation and contract position

IT Due Diligence - Validate Synergies and Risks

The purchase or sale of a company is a drastic event. This also and especially applies to the IT departments involved. The top priority for the IT department is undoubtedly to ensure trouble-free IT operations after the transfer of ownership (Day 1).

In the time-pressured M&A transaction planning (M&A for Mergers & Acquisitions), it is not always taken into account that many other value and success-relevant topics are also anchored in IT, which should be included in the IT due diligence scope.

Studies prove the high importance of IT for the success or failure of M&A transactions:

• A recent study by McKinsey shows that 50 percent of planned M&A synergies are directly or indirectly enabled by IT.
• In a study by Ernst & Young, 26 percent of respondents said that acquisition targets were not realized because of IT.

These findings are consistent with our experience in the M&A environment.

It showed that insufficient consideration of IT can have serious negative consequences for the implementation of M&A processes.

These include missing licenses and usage rights as well as problems caused by the continued operation of environment systems, for example access systems or systems for time recording. The effort required to provide integrated IT is also often underestimated. Finally, there is often a lack of know-how carriers for own applications.

The possible consequences are manifold and range from renegotiations to operational shutdowns and supply interruptions. In the worst case, the deal as such is at risk.

Risk analysis before the transaction with IT due diligence

The purpose of conducting an IT due diligence for the buyer is to obtain valuation-relevant insights into the object of purchase.

An IT due diligence is specifically dedicated to the infrastructure and organization of IT in the target company. The following objectives are to be realized:

• Assessment and review of opportunities and risks for operations
• Guidance for the drafting of contracts for the acquisition of a company
• Initial estimate of costs and design of a possible integration into the new IT environment

The basis for a due diligence is the seller's records, documents and analyses. The often tight time frame and the costs for a due diligence make it all the more important to use available resources skillfully and to proceed strategically.

IT due diligence on the buy side

On the buyer side (buy-side), a carefully conducted IT due diligence ensures that risks and opportunities from IT and IT-supported processes are identified at an early stage.

In this way, the buyer avoids unpleasant consequences such as

• Unplanned additional expenses, e.g. to ensure Day 1 readiness,
• Unresolved liability issues, e.g., if licenses are suddenly not part of the contract, or
• calculated synergies (e.g. in purchasing or IT operations) are unexpectedly not realized.

All in all, this can go so far that in retrospect the whole acquisition would have to be questioned.

Through a GAMBIT IT due diligence you benefit from a realistic assessment of the opportunities as well as risks associated with an acquisition and thus the future security of your investment.

Your special advantage: We offer you the entire IT M&A process chain from one source, from due diligence to planning and implementation of the carve-out or even post-merger integration. Leave nothing to chance and thus increase the effective return on your investment.

IT Due Diligence - in search of deal breakers.

The results of IT due diligence not only provide information on the complexity of a possible post-merger integration, but also indicate whether the technical IT requirements for leveraging the planned synergies are met.

This gives the buyer more certainty when drafting the contract and determining the price, and also provides initial indications of how complex the integration of the IT of the acquired company into the IT of the new parent company will be. In many complex cases Transition Service Agreements have to be concluded because a complete detachment of the processes from the seller's area of responsibility is not reasonable.

Thus, a GAMBIT IT due diligence provides additional information about the costs associated with the integration of the IT.

This is another important indication whether your investment will pay off in the long and short term and helps you with the calculation. This means that you can enter into price negotiations with complete peace of mind and achieve well-founded results. At the same time, you will not experience any unpleasant surprises on day 1.

Contents of a GAMBIT IT Due Diligence

With a GAMBIT IT due diligence we pursue the claim to enable you to handle an M&A transaction without any surprises. In this sense we take a look at potential deal breakers as well as synergy potentials and financial as well as time requirements of an integration.

This includes in detail:

• Comprehensive analysis of the IT organization of the company to be purchased
• Evaluation of the IT strategy of both companies and its synergy potential
• Assessment of employee-related special knowledge (key man risk)
• Examination of the application landscape for potential risks in the event of subsequent integration (e.g., release statuses, in-house developments)
• Inventory of the existing IT infrastructure
• Assessment of risks and recommendations on price-reducing clauses in purchase contracts
• Assessment of financial requirements (CAPEX/OPEX)
• Achieving a smooth transition transfer on Day 1 without operational disruptions (Day1 readiness)
• Recommendation for Transition Service Agreements (TSA)

IT due diligence on the vendor side (Vendor Due Diligence)

Not only buyers but also sellers benefit from a Gambit IT due diligence (vendor due diligence). It helps to eliminate potential weaknesses through careful examination in advance.

This sometimes has an effect on price negotiations and also simplifies the entire process. We pay particular attention to deal breakers that can jeopardize the sale as a whole.

Vendor Due Diligence - So that IT does not become a spoiler

On the buyer side, the potential of IT for the success of the M&A transaction is usually perceived more strongly than on the seller side.

However, there is also untapped potential there: a well-planned vendor due diligence can secure the potential sales proceeds of the planned divestment by identifying risks and eliminating weaknesses, thereby simplifying and accelerating the carve-out.

Vendor due diligence often reveals weaknesses that the seller is not yet aware of. This is essential, especially in the run-up to a planned IPO of the company.

By becoming familiar with these in good time, you improve your starting position for the upcoming negotiations, not least the price negotiations. But these tactical advantages are not the only ones of vendor due diligence. In addition, this examination often even gives you the opportunity to eliminate weak points in good time.

Finally, vendor due diligence often has a positive effect on the M&A process itself. This is because the extensive data material we provide through our analyses enables you to ensure a smooth transition, as well as smooth business processes afterwards.

This benefits both buyer and seller - even in the event of a planned IPO of the company. Thus, vendor due diligence by GAMBIT is basically an insurance policy for buyer and seller.

Identify risks before the buyer does

On the seller's side, it has often proven useful to identify any value or legal or tax-relevant problem points in a vendor due diligence prior to marketing the sale and to subject them to a careful review. This is usually done for the entire transaction and consequently also for IT issues.

This allows potential deal breakers, weaknesses or gaps to be eliminated at an early stage. The seller thus avoids that these open issues, which the buyer side will assess as a risk, burden the negotiations or lead to an erosion of value.

If you as a seller decide in favor of a GAMBIT IT Due Diligence, you will get the opportunity to reduce risks in a targeted way and thus develop a better starting position for negotiations. This includes identifying and strengthening synergy potentials.

Even if you do not succeed in eliminating all risks or weak points in time before the sale: It has a positive effect on the basis of trust between you and the buyer if you have already taken the first steps to do so. This gives you the opportunity to be proactive and avoid unpleasant surprises later on.

The advantages of a vendor due diligence in summary:

• Identification of possible legally or fiscally relevant problem points
• Possibility to eliminate weak points, gaps and deal breakers in time
• Creation of a positive basis of trust with the buyer
• Avoidance of unnecessary burdens and erosion of value
• Acceleration of the M&A process and ensuring smooth business processes

Vendor Due Diligence: The Death of the Dealbreaker

Depending on the divestment strategy and the buyer target group, vendor due diligence can go so far as to logically separate the IT unit. This significantly simplifies at least the IT-related carve-out.

GAMBIT differentiates itself in its Vendor Due Diligence by the fact that experiences from many IT carve-outs are included. Thus, GAMBIT knows exactly which potential pain points have to be considered and eliminated.

These can look like this in particular:

• Future viability of IT in the company: What is the technical status of IT? Can the systems be expanded as the company continues to grow, or is development reaching its limits?
• Integration capability of the IT systems: Can the IT be integrated without serious risk of error for the buyer? What is the compatibility with known software solutions (e.g. SAP)?
• Synergy potential: Will synergies result from the merger and what do they look like? Are there any problems with the IT architecture that could prevent the use of synergies?

In addition to potential deal breakers in the IT sector, we naturally also focus our attention on other problem areas during vendor due diligence.

For example, we can identify potential dealbreakers such as serious legal risks arising from contracts, patent disputes or the expiry of intellectual property rights, as well as financial risks associated with specific projects. By knowing about such weak points at an early stage, you can often eliminate potential dealbreakers before things get serious.

Contents of a GAMBIT Vendor Due Diligence

The GAMBIT vendor due diligence addresses potential weaknesses as well as the company's own potential with regard to the company acquisition. Special attention is paid to possible deal breakers. Furthermore, a vendor due diligence contributes to a smooth Day 1 process.

The aspects in the summary:

• Detailed elaboration of own strengths
• Investigation and elimination of deal breakers and legal loopholes
• Objective assessment of separation potential
• Overall IT analysis to be passed on to potential interested parties
• Risk assessment to strengthen the position in purchase price negotiations
• Smooth Day 1

Any other questions?

Would you like to talk to us about IT due diligence or vendor due diligence? Do you have questions regarding a specific M&A deal? Give us a call or write to us - we are happy to be there for you!