Operations and Technology Due Diligence in Mergers & Acquisitions
This article discusses the critical role of operations and technology in the success of mergers and acquisitions (M&A) transactions. It emphasizes the importance of conducting thorough due diligence in these areas to identify challenges, opportunities, and potential synergies that can impact the outcome of the deal. The content covers the landscape of operations and technology due diligence throughout the M&A process, offering insights into pre-transaction analysis and post-transaction success factors.
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Presentation Transcript
Information Technology M&A Due Diligence
Introduction This year is viewed as being a banner year for mergers and acquisitions activity The M&A focus for for the foreseeable future is on value creation Savvy buyers increasingly focus on what will happen after the transaction closes in addition to setting a fair purchase price when planning due diligence Operations and technology can tip the balance of the outcome of virtually any M&A transaction. Getting it wrong can lead to millions of dollars in losses whether through realized risk or missed opportunities. Getting it right can make a good deal great and a great deal one for the history books. Operations and Technology 2
Agenda Why operations and technology are critical to the outcome of mergers and acquisitions The operations and technology due diligence landscape in every stage of the mergers and acquisitions due diligence process How to identify operations and technology challenges and opportunities through pre-transaction due diligence Keys to operations and technology due diligence success pre- and post-transaction Operations and Technology 4
Operations and Technology Impact on Mergers & Acquisitions Direct synergies Indirect synergies Time to value Image (c) 2011 McKinsey and Company. Operations and Technology 5
The Operations and Technology Due Diligence Landscape Operations and Technology 6
Get Operations and Technology Involved Early and Often Pre-Letter of Intent Pre-Signing Pre-Closing Operations and Technology 7
Get Operations and Technology Involved Early and Often Operations and Technology Involvement Key Operations and Technology Outputs Transaction Phase Pre-Letter of Intent Due Diligence (Opportunity Analysis) Development and defense of investment thesis Operations and technology synergy identification and quantification Subject-matter input into non-operations and technology focus areas Development of due diligence focus areas Realistic and achievable synergies resulting from integration of operations and technology departments Potential synergies (or roadblocks to synergies) elsewhere in the business that are dependent upon operations and technology Straw-case estimates of labor and capital required to realize the synergies outlines in the investment thesis Key assumptions with regard to potential synergies and cost estimates Operations and Technology 8
Get Operations and Technology Involved Early and Often Operations and Technology Involvement Key Operations and Technology Outputs Transaction Phase Pre-Signing Due Diligence (Purchase Price and Transaction Value) Validation of operations and technology-dependent assumptions in the investment thesis Preliminary design of the combined operations and technology function (people, process and technology) Refinement of labor and capital estimates Preliminary definition of transitional operations and technology services, including timetable and costs (if applicable) Refined estimates of synergies and integration costs Changes to integration assumptions developed prior to due diligence Preliminary integration plan identifying key changes in people, process and technology within operations and technology functions Key activities to take place prior to or on Day 1 Preliminary service definitions, service levels, durations and costs for an operations and technology transition services agreement (if applicable) Operations and Technology 9
Get Operations and Technology Involved Early and Often Operations and Technology Involvement Key Operations and Technology Outputs Transaction Phase Pre-Closing Due Diligence (Carve-Out and Integration Planning, Other Day 1 Planning) Development of final synergy estimates and associated operations and technology costs Detailed operations and technology carve-out and integration planning and subject-matter input into other departments carve- out or integration plans Development of transitional and long-term shared operations and technology functions (if applicable) Drafting of operations and technology transition services agreements in conjunction with legal counsel Committed carve-out and integration costs (if applicable) and synergy targets within or driven by operations and technology Carve-out and integration plans (if applicable) Day 1 action plans, teams and roles/responsibilities (including carve-out and integration activities if applicable) Operations and Technology 10
Leverage the investment thesis to create due diligence focus Investment thesis Key measures and indicators Operations and Technology 11
Leverage other deal characteristics to increase due diligence focus Structure Industry Geography Operations and Technology 11
Identify key deal considerations related to operations and technology What has to go right? What could go wrong? What don t we know? Operations and Technology 13
Example key deal considerations The carve-out will involve the replacement of significant business and information technology services provided by the parent that may not be completely understood at time of closing. While the seller has provided some indication of costs for shared services, such costs may not accurately reflect the full range of services to be replaced or the required levels of service. As part of carve-out planning, we should ensure we have a complete understanding of historical shared services costs and develop an independent model of all services required following carve-out to operate standalone. Transition Services Agreements requirements and costs often are undetermined or understated at time closing. Along with identifying carve-out efforts and cost, we should at the same time evaluate the potential scope, duration, service levels and fair market pricing associated with transition business and information technology services. This evaluation should then be used as a basis to finalize, ratify or re-work a transition services agreement that provides necessary services until the carve-out to standalone is complete. Operations and Technology 14
Objectives/differentiators to due diligence focus areas map Deal Objectives/ Differentiators Due Diligence Focus Areas Operations: Due Diligence Action Plan Priority Technology: Operations and Technology 15
Objectives/differentiators to due diligence focus area map example Deal Objectives/ Differentiators The carve-out will involve the replacement of significant business and information technology services provided by the parent. Due Diligence Focus Areas Operations: Identify inventory of shared services Understand unique needs, required capacities, and historical costs for shared operations services Due Diligence Action Plan Validate seller- provided list of shared services through process walkthroughs and reviews of allocation and chargeback records for shared operations services Priority HIGH Operations and Technology 16
Objectives/differentiators to due diligence focus area map example (continued) Deal Objectives/ Differentiators The carve-out will involve the replacement of significant business and information technology services provided by the parent. Due Diligence Focus Areas Technology: Identify inventory of shared services Understand unique requirements and historical costs Due Diligence Action Plan Validate seller- provided list of applications Obtain accurate user counts and technology service needs by role Validate transition use of seller s systems will be allowed Priority HIGH Operations and Technology 17
Keys to success Stay on target Manage expectations Operations and Technology 18
Stay on target Maintain focus Ask the right questions Remain objective Operations and Technology 19
Manage expectations Pace of synergy realization Pace of operational integration Quality and timeliness of sponsor reporting Retention Cultural change Operations and Technology 20
Taking the First Step Please sit with others from your company Use the worksheet provided Take five minutes Volunteers will be solicited to share examples Operations and Technology 20
Deal Objectives/ Differentiators Due Diligence Focus Areas Due Diligence Action Plan Priority Operations: Technology: Operations and Technology 22
