The merger and acquisitions (M&A) market has been slowed recently due to the same economic factors that affect nearly all of business. However, regardless of economic times and uncertainties, there is always an underlying level of M&A activity occurring. With the effectiveness of M&A activity often being a contested subject, improving your chances of success is relative to the thoroughness of the due diligence effort.
According to a technology M&A advisor, M&A activity can take many different forms and be brought upon shareholders for many different reasons. Organizations that use M&A as a method to eliminate competition will view assets differently from an organization looking to extend market share or diversify its portfolio of services and products.
The focus of this review will be on the M&A actions intended to extend market share or to diversify product and services of the acquiring organization.
Maintaining momentum
Momentum is the distance into the future that businesses can move with little or no action while still maintaining continuity. The acquirer in any M&A action requires a level of confidence that it can, at a minimum, maintain continuity. The most successful M&A actions push the limits to extract more performance from the business than the preceding management.
Due diligence is the term used to describe how to develop the organizational intelligence necessary to maintain momentum. When reviewing technology assets, knowledge capital can be very difficult to define and seek out. Especially given that the organization being acquired will attempt to maximize its value by shielding from view less positive matters. Some of those matters include:
— “Poison pills” of various kinds. This could mean that certain valuable assets revert to a third party as a result of a predatory bid. Technology and inventions are frequently subject to such reversions. Mitigate this risk by identifying the top-value information technology (IT) assets, and spend the necessary effort to establish that the assets are free and clear from any third-party rights or restrictions.
— Restrictive clauses in technology licenses. Software transfer is not always a guarantee. Review all significant software licenses that are required to maintain business continuity or will be integrated into existing systems. Hosted solutions that involve an application service provider are a good example of potential vulnerability. Be certain that all ownership rights are transferable, not just the customized pieces of any third-party software.
— Intellectual property rights of software are not always apparent. Don’t assume that custom software being acquired is free and clear, especially in cases where you are acquiring software assets and will be redistributing the software. Unless the company being acquired has non-disclosure and non-use agreements, software engineers that contributed to the development of the software could potentially claim rights to the software.
— Service contracts that create heavy commitments for the acquiring organization most likely will require the retention of key personnel to carry out the execution of those contracts. Be sure to account for the cost of retention or redirection of the responsibilities to new personnel as part of your due diligence effort.
— Typically not found in a healthy organization being acquired is the concept of financed software and hardware support. Paying for one year of support over two years is an indication of much deeper problems, possibly yet uncovered. Support should never be financed; look closely and uncover the rational for the financing before determining the value or costs associated with support service contracts.
— Don’t assume that you’ll be able to retain key personnel. This can be a fatal and problematic strategy. Key personnel can often times be the key benefactors of the acquisition, get ready for them to jettison mentally or physically regardless of terms. If they’re not benefactors, understand the risk factor associated with the assimilation of these personnel into your organization and culture.
These are some of the “gotcha” factors associated with the knowledge capital of an acquisition. Understanding the technology you will be acquiring is an important component of any M&A activity. Cutting corners during this process can produce pitfalls in the future and decidedly affect future momentum.
The due diligence team
Be sure to bring to bear the proper resources during the due-diligence process. Along with the obligatory group of bankers and attorney’s, involve as many of your key IT personnel as possible.
If you have a large organization with an aggressive M&A strategy, consider the concept of a technology SWAT team. The makeup of this team can range dependent upon the size of the acquisition target. As the team grows in size so does your cost to maintain that team. Generally, a team of two to five people with expertise in system evaluation, network infrastructure, IT staffing and budgets can accomplish the task. If you’re not in the business of constant M&A activity, consider outsourcing this task to a specialized service organization. Reduction and mitigation of risk can only be successful by involving all the experts your organization can bring to bear.
There are many reasons that companies acquire other companies. In any M&A action, understanding the assets of the organization being acquired (whether they are technology, equipment, processes or inventions and patents) involves considerable effort. Be certain when undertaking an M&A action that you understand your purpose for the acquisition. Having a clear business strategy defined when acquiring or merging with another company is a key component to success.
Involve your IT expertise in the process as early as possible. For the most part, technology today is outpacing change in business processes. The functions of business (supply chain management, customer relationship management, etc.) fundamentally haven’t changed. Instead, those processes are being integrated more and more within the enterprise through technology. That tighter integration combines technology with fundamental business processes creating a level of complexity that must be understood and carefully analyzed by technologists as well as business analysts.
Whether the technology you’re acquiring is the latest and greatest or legacy technology, if you don’t understand the asset, you put the success of the M&A action at risk. Technology integration issues, if not appropriately addressed, can create exponential costs not just on the IT side but, also, on lost efficiencies in your existing business momentum. You may not always get the answers you want, but delaying the bad news can become an exponential cost to the M&A action.
Dave Glyzewski is president of the Centare Group, Ltd., a customer software application development and system integration consulting company based in Brookfield, www.centare.com. He can be reached via e-mail at dave.glyzewski@centare.com, or at 262-827-1010.
Jan. 10, 2003 Small Business Times, Milwaukee
