M&A and improving due diligence in interesting times
October 2, 2020
The first half of 2020 was exceptional in M&A markets. When market fundamentals are unclear, thorough and strategic due diligence is especially important before committing to a transaction. Based on a research report that professor Angwin, the Dean of Nottingham University Business School, prepared for Midagon on M&A success factors, there are specific opportunities to improve due diligence.
I would also like to add one more improvement opportunity to professor Angwin’s list, from practical experience.
When gaps in due diligence are revealed later during implementation, the area where we often face disproportionate gaps is ICT. It seems ICT due diligence is often done relatively lightly.
A common real-life gap in due diligence is that the target may seem to have well-functioning core ICT solutions, and the initial due diligence recommendation is to keep and maintain the current solutions, avoiding the cost of a major ICT project. However, the current solution may only work effectively on the scale of a small independent company in one country, but not interface well as part of an international corporation – and this is only found out when the deal is closed. The only way to achieve the planned synergies may be to push through an emergency core solution change at a fast pace and high cost.
Another gap can be created by an outdated custom solution that is used to run the target’s core processes. The solution may seem to run reasonably well at the moment, but if it’s very different to anything available on the current market, replacing it in a few years’ time will be a costly exercise that impacts both core processes, data and systems. Identifying this kind of major ICT transformation programs just below the horizon is the key in effective ICT due diligence.
Moreover, significant deal synergies are usually enabled by ICT, while most of the implementation costs are related to it. ICT implementation also often drives the schedule of the whole implementation. Therefore, ICT implementation is critical on the path to benefit realization, and now more than ever, ICT deserves serious attention and proper expert contribution during due diligence.
Technology will also have an increasing role to play in due diligence itself. Virtual site visits and factory tours will become more common when physical access is restricted (if you are very lucky, you might get to fly a drone and call it due diligence). Collaborative integration management tools as well as virtual communication and training solutions help overcome physical distance, although some learning curve can be expected. We believe virtual and digital tools in due diligence are worth the investment and will continue to add value in future.