Businesses across all industries are using information technology, and the companies with the largest market capitalizations are in tech. These trends are only accelerating in light of the pandemic as hybrid and remote working force the embedding of technology within processes and strategies, which in turn has propelled the market for tech products and digital services.
As companies become wedded to tech and software as key productivity drivers, M&A activity has advanced in kind. The global number and size of deals was stable in 2019 and down in 2020 due to the pandemic, yet activity in the tech sector is thriving. Putting technology at the core of a business is key to building a responsive organization that can thrive in uncertainty.
In Datasite’s Deal Drivers: EMEA Q1-Q3 2020 report, tech companies led EMEA M&A activity in terms of both deal value and volume, and in all but two regions, tech companies were most likely to be put up for sale. What’s more, large tech companies have by far performed best during the pandemic as the rest of the economy has gone into reverse.
All this positive activity is not without its drawbacks, however, as technology and IT are becoming a significant source of risk in M&A deals. In an analysis of over 1,500 due diligence contracts performed by BearingPoint Capital and West Monroe Partners:
To manage these significant IT and technology risks and safeguard future M&A activity from devaluations – or the complete failure of the deals themselves – businesses must reduce, and investors must understand, tech risk.
No M&A activity should take place without establishing specific workstreams for different aspects of tech-related due diligence. This way, you can identify sources of risk, then remedy issues or purchase with confidence.
Does a company have tech and IT strategies and roadmaps that are aligned with wider company strategies and designed to support business growth? If IT initiatives are planned for the next 1-5 years, what are they, why are they taking place and what is their perceived benefit?
Tech companies are reliant on talent, but a balance must be struck if staff are not to have an impact on M&A. Skills gaps must be identified and eliminated so teams are as capable as possible. And if specific knowledge of software development and architecture is only understood by a few key people, their insights must be made more transparent. This might involve the business doing more to earn staff loyalty, gain application knowledge, and use this to secure the M&A transaction.
If a company is built around software applications – production or usage – these must be optimized. Technical debt must be estimated, and solutions devised; spending should be analyzed, and its evolution projected; architecture must be seen to support commercial growth through scalability, extensibility, and integration potential; and applications must be analyzed in terms of their health and potential to support ongoing business growth.
A poor approach to security will impact M&A valuations. To reduce security risks, a company must conduct yearly penetration tests, develop and test disaster recovery and mitigation plans, and thoroughly identify and learn from any security breaches.
If an organization deals in technology services or production, control of intellectual property is paramount. For example, if software is built on source code featuring open-source components, but the license requirements of those components have not been adhered to, then there is a risk the entire piece of software – and the business’ value – could become open-source.
Does a business understand and adhere to GDPR, US sector and medium-specific law, or the many other robust pieces of legislation used across the globe?
Tech and M&A activity is now closely interconnected. The prospects are immense – companies will benefit from a pivot towards tech and enjoy growth accordingly, but it is crucial you act smart. With an encompassing approach to tech due diligence, risks can be mitigated to prepare for M&A transactions and guard against post-sale risks.
Take advantage of the tech-focused future of M&A – contact our experts and understand your exposure.