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Hidden Profits Author:

Lynda J. Roth

As the president and founding partner of Woodland Hills-based LJR Consulting Services, Lynda advises clients on ways to improve profitability and productivity through both technology and business processes. She also works with companies and private equity firms on the role of information technology in mergers and acquisitions.



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M&A Understanding Strategic Value of IT Part 3

Filed under: IT in M&A Transaction, M&A transaction — Lynda Roth at 9:00 am on Wednesday, January 19, 2011

This is the third post in the series based on the McKinsey Quarterly article - ‘Understanding the Strategic Value of IT in M&A’  The authors list 3 IT components as critical in an M&A transaction.

  • Getting your own IT house in order
  • Performing IT Due Diligence on the aquisition target
  • Creating an IT transition and consolidation plan prior to completion of the transaction

In this post I will discuss IT Due Diligence in the review of the acquisition target.  Why is it important for you to evaluate the Information Techonology of the acquisition.  First, if you are a financial buyer it is critically important because you are going to rely on the IT infrastructure, systems and processes to support the planned growth of the company after your purchase. You need to know what investments are needed in IT and how quickly the investments need to be made.   If you are a strategic buyer you need to evaluate their infrastructure and applications to determine the accuracy of the data and the ability to merge the data in their systems into your systems.  The IT Due Diligence will provide the basis for your transition plan. 

So what should you include in IT Due Diligence process for an acquisition?  It is very much like the evaluation you made on your own IT on getting your house in order. 

First, you want to know details of the infrastructure.  What servers, mainframes, printers etc.  do they have, how old are they, how much life do they have and are they compatible with your environment and usable in your environment.  What PCs, laptops, mobile devices do they have and are they compatible with your environment, how old are they, how much life and when will they need to be replaced.  If you are a PC shop and the acquisition is primarily a MAC shop will you convert them to PC or integrate the environments. Are they hosting all or part of their infrastructure and if so what are the agreements in case of an acquisition. 

Next, you need to know what software and systems they are using.  First, are they using the same desktop software and versions.  For example, are both companies using MS Office and if so are they compatible versions or are you using different office applications software.  What investment will be required to make the environments compatible.  What ERP, CRM, reporting, operational systems are they using.  What are the liscensing agreements in case of an acquistion. Are key systems custom developed or highly customized products and if so who supports them.   What will be required to convert their systems to your systems. 

Third you need to evaluate who supports their IT infrastructure and software systems.  Do they have an in-house department that provides all the support, do they have outsource agreements and consultants that provide the primary support for systems.  What packages will you need to offer tp ensure that support is continued during the transition.  Who from their support team will you transfer to your team and who will not. 

Finally you need to review the hardware, software and support agreements and intellectual property issues.  Are the licenses for their software transferrable to you and is their a cost associated with that transfer. Do they have licenses for all their software.  Will you need to purchase additional licenses.  If they are using SaaS systems what is the agreement for continuing the service after an acquisition and what is required to convert the data to your system.  Often in a conversion, historical data is not converted, what are the requirements to maintain history on the systems they currently have.  Who owns the IP rights to the software they use especially if it has been custom developed. 

All of these areas can have a major impact on investment requirements in addition to purchase price not mention your ability to consolidate operational areas of the 2 companies and achieve expected savings and synergies from the merger.  While all of the components of IT are important to the success of an M&A transaction, I believe this is the single most important for 2 reasons.  First, if you are financial buyer the IT infrastructure, systems and personnel will need to support and grow your investment.  If this area is weak, which it is in many mid-market companies, you may have a potentially significant investment required in IT.  If you are strategic buyer, the current IT environment will greatly impact the cost, time and effort required to consolidate the companies.  Converting an acquisition to your systems and processes is often much easier said than done and without IT consolidation, consolidation of the rest of the company is much more difficult if not impossible.

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