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The art of technology due diligence

Conducting thorough due diligence can make the difference between a successful merger and a company's collapse. A seasoned CIO maps out technology assimilation in the merger environment, beginning with understanding the due diligence process.


As a CIO, I’ve been on the acquiring side of more than 35 companies, and every acquisition was unique. But in every case, it was my responsibility to assess the technologies of the new companies and develop the transition strategies for each.

In a series of seven articles, I will outline the process, and explain the tools, I developed for conducting the technology due diligence and assimilation required in the acquisition environment.

In this first article, I’ll discuss the need for due diligence objectives and review the process I developed for acquisition, discovery, and transition of technology resources.

Acquisition objectives
Executing an effective due diligence and transition plan is somewhat of an art because each acquisition is unique. There are similarities, however, especially when acquiring companies that boast a similar business model. It is extremely important to approach each situation objectively and rely on the discovery experience and instinct to know where to look and when to dig deeper.

A company acquires another company for any number of reasons, from eliminating competition to product diversification. It is important to know what the acquisition goal is before starting due diligence efforts in order to determine if the acquired technology organization can support your company's goals.

If the company’s goal is acquiring new technology, due diligence becomes critical for assessing the stability and validity of the acquired company’s technology capabilities.

With every acquisition, a company should have a set of objectives as well as assumptions that are pertinent to the new company. Those assumptions may deal with the state of the company’s client base, capabilities of its management team, or its growth expectations. Before due diligence, tech leaders need to understand all of these assumptions to fully prepare. Failure at this point likely means failure in the future.

Due diligence objectives
I begin every due diligence with a mission to verify that the goals and assumptions my company has attached to the acquired company are valid. I must make it clear that I’ve never seen all assumptions be totally accurate—and that’s why you conduct due diligence. The objective is not to find reasons to abort the acquisition but to determine the issues and implications that exist when the purchase is made. There are exceptions, of course, where walking away is the right answer. In my experience, I can only recall one instance in which that occurred.

Key objectives in conducting a technology due diligence include:
  1. An understanding of the following key technology aspects of the new company:
  • Capability
  • Stability
  • Expandability
  • Costs to operate and support
  • Support methods and stability
  • Company dependency on the technology
  • Risks
  • Planned initiatives
  1. Clear assessment of the following aspects of the technology organization and staff:
  • Management team capabilities
  • Staff capabilities
  • Strengths and weaknesses
  • Depth
  • Key players
  • Individual “flight risks”
  1. Vendor agreements
  2. Financial cost trends and plans
  3. Software licensing and ownership of all technologies
  4. Capital investments needed
  5. Business continuity issues
  6. Leverage opportunities

Where due diligence leads
In addition to understanding the new company’s technology, due diligence also creates the framework by which to develop transition plans.

I break these plans into several parts with focus on the people side and the systems side. While each side affects the other, each one requires a specific plan as you move from the discovery to merger level.

This is where assimilation objectives come into play—and I don’t necessarily mean consolidation. Assimilation relates to how the company transitions the new company into a merged entity. That transition may be to leave the new company’s technology fully intact and to operate the entire company as a separate subsidiary.

Each new company requires a unique perspective, although tech leaders can use the same basic process for the transition. My objectives for transitioning a new company’s technologies include:
  • Reduce risk to the company.
  • Achieve acquisition goals and objectives.
  • Leverage technology spend.
  • Conduct a smooth transition that minimizes service issues for employees.
  • Improve the IT organization’s focus, strength, and depth.

The journey to come
Stayed tuned for the next article in this series, in which I’ll explore how to prepare to conduct a technology due diligence.

I will focus on what to look for during the on-site visit, and I’ll also include a technology due diligence request list and guide for preparing the primary technology contact for an organized and productive on-site discovery session.

What’s coming up…
Due diligence, by its very nature, requires time and planning. Here’s what Mike Sisco’s series on conducting due diligence will be examining:
Part 3: The on-site discovery process: As no two due diligence projects are the same, it’s important to have a plan for the visit. Sisco will explain how to formulate a plan of action for the due diligence on-site visit to make sure your investigation is complete.
Part 4: Writing the due diligence report: Creating a concise report that summarizes findings for the CEO and board while including enough detail for future reference is not easy. This installment will provide a report template to help you organize the details.
Part 5: Assimilation (the people side): This installment will cover the importance of handling staffing changes and concerns with great care, and how organizational transitions can create significant risk.
Part 6: Assimilation (the systems side): There is value in being able to eliminate redundant technologies, but it’s not as simple as converting everything to one technology. This article focuses on systems strategy and leverage opportunities.
Part 7: Measurements that make sense: How do you know if the technology organization is focused on leveraging the value of the new company after a merger is complete? This installment covers a few key measurements worth tracking.

Mike Sisco is the president of MDE Enterprises, an Atlanta-based IT management training and consulting company. For more management insight, take a look at his IT Manager Development Series.

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