2021 is a record year for private equity actors worldwide, with intense M&A activity expected to continue into 2022. Tech is front and center, with valuations signaling high investor confidence in the sector. At the same time, a growing appetite for tech-related risk reinforces the importance of including technology in due diligence processes as this often finds issues with a high impact on the valuation.

The CTO of “Square” – a company that underwent a BearingPoint vendor due diligence – remarked that “M&A and preparation for integration must be a part of the DNA if you want to be market-driven.” In this article, we will briefly touch on strategic rationales of private equity-driven M&A and dimensions with which to determine preparedness for integration and M&A readiness. Finally, we will provide two examples of initiatives used to improve in these dimensions.

The strategic rationale

BearingPoint has worked extensively with LBO and Growth Equity funds where strategies to quickly create value through multiple acquisitions are common, typically by building tech platforms with synergetic products. Such strategies quickly run into trouble if the tech is not up-to-par, and as a result technological factors are critical to the investment thesis. Two factors that are fundamental to both productivity and strategic flexibility are listed below.

Integration capability through modularity

To create a platform of synergetic products, investors will often seek ways to extend inorganically. A prospective portfolio company is evaluated with potential future integrations in mind, which makes any sign of non-extensibility a major issue. The integrability of software will inevitably depend on the style with which the codebase is written, which is why architectural design is central.

Modularity is a key parameter for best-practice coding and a central vector for differentiating architectures, with abstraction by internal APIs being the gold standard. The use of APIs is key to improving integrability as it creates clear endpoints for new services to connect with. Apart from gains in integrability, modular code is easier to overview and enables developers to work in parallel within the same project. Having clear layers of separation between services also promotes maintainability, as specific sections of code become easier and less risky to replace.

This means that a modular codebase is likely to be more productive and unlikely to require disruptive maintenance projects, while also greatly facilitating integration projects.

Software development life cycle excellence

The Software Development Life Cycle (SDLC) practices determine how employees in a tech organization work and collaborate, which makes them central to the workplace culture. SDLC is therefore important to consider when assessing cultural fit – a critical factor to the overall success of an M&A process. SDLC practices also help determine an organization’s ability to maintain code, validate and deploy new functionality, and automate processes. The influence of these vital processes makes the analysis of SDLC valuable for estimating future productivity and likely operational risks and costs.

With both cultural and operational implications, SDLC is an area private equity investors should investigate diligently before making an investment.

Prepared and ready for the future

“Square” was a software company with multiple international offices. After years of growth acquiring companies with complementary products, Square and its private equity owners decided to prepare the consolidated firm for sale. They did this with two key initiatives.

  1. Starting with three products built separately and with varied architecture, Square sought to harmonize their tech. The company first unified the user experience through a single sign-on portal for all products. Then, it created a common data layer where master data resided and modularized the architecture – effectively creating one platform. Hard dependencies were replaced by APIs ­­­­­for internal communication, and the company took additional steps toward a modular design by adopting a service-oriented architectural style.

    This initiative was a major step to enable further integrations, but it also demonstrated managerial foresight and technical competence that would make prospective investors feel easier about future acquisitions.
  2. Square had multiple developer teams for each product which made coordination and adherence to architectural style difficult. Square’s solution was to consolidate user interface, data engineering, and analytics teams into single global units. Importantly, product development was also made a separate team which meant that the other teams could focus on their specific services.

    Through this reorganization, Square created the necessary preconditions for building a true platform solution, where teams could work in parallel while adopting the best of each other's practices. The global sourcing of developers also helped further cement SDLC practices and minimized regional differences, which laid a foundation for future improvements.

Both measures demonstrated an understanding of the investment thesis of potential buyers and were important steps in preparing the company for future growth, whether it would be organic or inorganic.

Want to know more?

BearingPoint Capital has a solid track record of conducting Technology Due Diligence for international top-tier clients on the capital markets. Contact Karl Malmström for more information regarding our Technology Due Diligence offerings.

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  • Karl Malmström
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