Why is IT Due Diligence an Indispensable Factor in the MA Process?

In the MA field, the technical sales process can be divided into three phases, from IT Due Diligence through IT Carve-Out to stand-alone operation or, in the case of platform acquisitions, to Carve-In:

• Phase 1: Analysis of the Current State: Current Mode of Operation (CMO)
• Phase 2: Definition of the Transition State Until the End of the TSA Period: Intermediate Mode of Operation (IMO)
• Phase 3: Implementation of the Target State: Future Mode of Operation (FMO)

As a sub-area of the first phase “Current Mode of Operation”, IT Due Diligence plays a crucial role.
In a company acquisition, Due Diligence involves the precise examination and evaluation of the target company. In the past, the focus of buyers was mainly on the sub-areas of Commercial, Tax, and Legal Due Diligence. In the age of digitalization, however, IT Due Diligence is continually gaining importance. This is primarily due to the enormous costs incurred by separating, setting up, operating, and renewing an IT landscape. In addition, there is the high dependence on supporting processes for daily business.

IT Due Diligence is intended to provide the buyer with information on strategic, operational, and financial opportunities and risks within IT, which significantly influence price negotiations and the final purchase decision. To make reliable statements here, conducting IT Due Diligence requires in-depth expertise and years of experience.

How Can the Approach to IT Due Diligence Be Standardized?

Our goal is to conduct a comprehensive examination using a standardized approach, thus providing support in negotiations and subsequent IT Carve-Out. We use our years of experience, which extends across the overarching deal flow from IT Due Diligence to Standalone or Post Merger Integration, to derive appropriate measures.

Our insights gained from numerous successful projects have been summarized in a process that maps the various IT workstreams and corresponding work packages. This includes a standardized approach from clear task allocation and accompanying documents to cost estimation based on our experiences and a comprehensive database of reference costs.

The following sections describe the individual process steps in more detail and explain the resulting benefits.

Our Standardized Approach During IT Due Diligence

Determining the Scope

An IT Due Diligence begins with an initial discussion with the client. In this, the framework conditions for the joint project are discussed in more detail and initial information about the target company is exchanged. Additionally, the timeline for a possible takeover is defined in order to create a plan based on this and provide an initial effort estimation for conducting the IT Due Diligence.

The exact scope of work cannot be estimated at this point, as there are many dependencies within the Due Diligence examination. To still be able to provide an initial effort estimation, we use benchmarks. These are based on factors such as the target’s revenue, number of employees, and IT complexity based on typical industry experiences. Furthermore, our consultants have the appropriate qualifications in the form of project experience and can demonstrate specific expertise.

Based on this, a clear structure is developed and tasks are distributed within the project team, aligned with the experience and competencies of each project member.

Data Room Screening

To gain an overview and create a big picture of the entire IT landscape, the existing documentation is first reviewed. These documents are usually provided in a virtual data room.

However, since this is often unstructured and much of the information is not relevant to the IT area, we work with a comprehensive checklist at this point. This is structured in such a way that all critical topic areas and cost drivers for creating the big picture can be identified. The data room analysis examines both IT topics (e.g., number of PCs, applications, ERP systems) and general information about the target, such as number of locations, number of employees, or legal corporate structure. Another important point is the analysis of current and past IT costs. These ultimately serve as a reference value for estimating future ongoing IT costs.

First Impression of IT

Once the data room screening is completed, the findings are evaluated and prepared within the project team.
The results are then presented to the potential buyer to provide an initial rough assessment. Based on the data foundation, an initial cost estimate can be provided at this point. However, this is based solely on given factors such as company size, complexity of IT infrastructure, number of applications, etc. From experience, it is still imprecise and is only meant to provide a first approximate guideline.

QA Sessions IT Expert Calls

Following the analysis preparation of the data room, all open questions need to be discussed with the seller and the initial cost estimate needs to be validated through targeted questions. The questionnaire continues to serve as the basis here. The open topics are evaluated at this point in a QA session by the entire project team.

Any further open topics are either addressed directly to the seller as part of an IT Expert Call or placed in the virtual data room, where the seller can provide their answers. Based on experience, at least one IT Expert Call should be conducted in every due diligence.

IT Findings

Once the questions have been answered in the QA sessions and optionally in the IT Expert Call, a cost estimate for a subsequent IT Carve-Out project is provided. For this, we rely on many years of experience from a multitude of completed due diligences and on an extensive database with reference costs from past projects.

In our final IT Due Diligence Report, we provide a comprehensive insight into the IT environment of the target. The big picture IT, independence and costs, as well as potential risks are examined in detail and clearly presented to serve as a basis for negotiation.

As described at the beginning, the efforts for IT separation are a strong cost driver in carve-out projects. Therefore, it is important to consider them already during the purchase negotiations. Our IT Due Diligence Report provides valuable support in these negotiations. Furthermore, the IT Due Diligence Report forms a solid data basis for the subsequent carve-out project.