Before making a major investment, you have to know exactly what you’re getting for your money. Does your M&A target have unlocked potential? Or hidden traps? Standard due diligence is vital, including independent analysis of the target’s financial situation, its legal position, and any regulatory issues. But is that enough or have you forgotten something?
Every modern, competitive company is an IT company
If your target is a tech company – let’s say it makes software – it would be natural to perform due diligence on its IT functions. But what if we said that these days every company is an IT company? In modern business, all core processes and operational practices are dependent on IT – including human resources, customer relations, warehousing, fleet tracking, planning, internal communications, and knowledge management – so the state of IT systems also determines a company’s efficiency in executing its processes and its ability to compete.
We need a new standard
Today, staying competitive requires more information and insight than ever before. Digitalization and connectivity have changed the entire industrial landscape. And “datafication” – the process of capturing, aggregating, and analyzing data – has transformed what were once static records into essential, valuable operational assets. In every industry, any company that has not yet transformed its business models will soon be forced to do so in the face of more efficient alternatives. IT is no longer about only admin and backend functions – it’s rapidly becoming more customer facing, as sales reps, field technicians, and others rely on real time customer data, apps, or IoT technologies.
If we created a new standard today for M&A due diligence, investors in all industries would give IT its due – analyzing how their target’s IT supports their investment thesis (or not!) or, even better, how their potential acquisition could digitally transform and disrupt its industry.
IT and the informed investor
The quality, capacity, and use of deployed IT systems says a lot about the true state of any company and its potential to respond to a changing market. Yet too often, IT due diligence – if done at all – is tacked on as an afterthought, a couple of slides in a general due diligence report. Thankfully, that is changing as more smart investors develop a better understanding of the benefits of conducting a thorough IT due diligence process – and the risks of not doing so. The modern, informed investor turns to specialists, so at BearingPoint, together with our strategic alliance partner West Monroe in the US, an essential part of our unique IT DD methodology is to team IT professionals with experienced industry-specific consultants who can audit not only the hardware, software, and infrastructure, but also the quality of the processes in place and the effectiveness of their current deployment, all benchmarked against competitors’ best practices.
Treasure chests and horror stories
IT due diligence reveals things about the true value of a company that a standard due diligence could never uncover – both good and bad. In recent years, BearingPoint and West Monroe have worked with more than 100 private equity firms and advised on 800+ deals of all sizes. And we’ve seen it all. Here are some examples where BearingPoint consultants have found issues that could have had a significant impact on a transaction:
- In a manufacturing company with two sites and EUR 60 million revenue, but low margins, BearingPoint uncovered major deficiencies in the warehouse management system. Inefficient inbound and outbound logistics and inventory management with limited control and many manual routines meant high working capital and other problems. Just getting those operations up to par with their competitors would have required EUR 1 million and about a year of work to redesign processes.
- In an international electronics company seeking to acquire and consolidate multiple companies, IT due diligence revealed that the expected synergies in supply chain and operations would require a shared, interoperable ERP system worth EUR 5-10 million and five years of work to get up to date.
- On the other hand, a BearingPoint-led review of a dairy plant turned up some good news in the form of an excellent – but unused – planning module in a recently deployed Material Resource Planning system. That meant minimal time and investment was required to boost the company’s efficiency, replacing Excel-based routines with a best practice process.
IT or not IT? It’s no longer a question
But to gain insights like these, investors can’t rely on the old standard of due diligence. They need support from someone who understands what efficient processes look like in their industry, someone who can see the value in the well documented, fully redundant, virtualized cloud-based system, or the danger of the servers shoved in an unventilated closet under the fire sprinklers (yes, we’ve seen that too). Now that every company is an IT company, today’s private equity investors need a new standard of specialist IT due diligence services. BearingPoint offers an industrialized approach for IT Due Diligence so within a short time we can reveal major risks and hidden investment needs or highlight exciting opportunities. Ultimately, it can be the difference between hitting the ground running or simply running for the hills.