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How IT impacts the value of M&A transactions

4 mins  06.12.2018 Anthony Borgese, Mark Teys, Alexander Horder

Realising maximum value is critical to the success of an M&A transaction – but information technology (IT) is an often overlooked, yet critical aspect of such transactions.


Key takeouts


Involve IT early in M&A deal planning and assessment

Ensure IT is considered at every stage of the deal life cycle

Give IT a seat at the board table

IT plays a critical role in organisations: it links and underpins all business functions, supports day-to-day operations, and can be used to deliver operational efficiencies, monitor and support regulatory compliance and reduce costs.

By considering IT infrastructure and systems in M&A deal planning, due diligence and stakeholder engagement, you can ensure your transaction delivers maximum value. Our team discusses where and how IT needs to be factored in.

Bringing IT to the deal table

Vendors and purchasers need to consider IT in the formative stage of a transaction by connecting IT to the transaction's strategic drivers. As IT underpins all business functions, whether seeking to enter new markets, win new customers or diversify market share, all will rely to some extent on IT. For example a buyer may realise too late that the IT systems of the target require a significant investment to upgrade that is much greater than initially factored into the purchase price. Early understanding of appropriate IT strategies will assist in building IT costs into a transaction business case. This minimises the risk of overlooking critical future IT needs such as information sharing, invoicing or customer relationship management across jurisdictions or merging entities. These could result in cost and time overruns. Clients need to understand their own IT challenges and identify where any changes can be made to unlock value or savings – all of which can impact the purchase price.

Pre-deal assessment

M&A transaction issues, such as knowledge sharing deficiencies or incompatible systems, often stem from a lack of information about a target's IT environment. These kind of issues can have serious implications on the cost or success of a deal. Transaction teams need to understand the effectiveness of a target's IT environment before the deal goes ahead, and whether that IT environment will facilitate the desired results, such as the growth into new markets or scalability of existing operations. Deal value can be added in various ways, such as through the creation of a template for IT systems, maximising efficiency of the target's operations and ensuring that dependency on the vendor's systems post-completion is minimal. Leveraging emerging technologies may also enhance processes going forward.

Due diligence

Due diligence on a target's IT environment identifies inefficiencies and gaps that, if ignored, could have serious implications on the effectiveness of a business. This assists in developing a long-term view of IT costs by identifying systems that need upgrading or replacing, or where emerging technologies can be leveraged to streamline operational processes. IT due diligence helps a prospective purchaser understand aspects of a target's IT landscape, which can directly affect the valuation of the target. More broadly, due diligence also uncovers inefficiencies in a target's IT systems, which can ultimately point to an inefficient business. Conversely, the vendor's team needs to ensure that the target has up-to-date information on its IT assets, costs and initiatives to pre-empt IT being used by the purchaser to make inaccurate assumptions about IT costs. This may impact on the sale price.

Transition

When divesting assets, vendors and their divested assets may rely on each other's IT environments for a period post-completion to minimise business disruption. A transitional services agreement (that allows the entities to continue to depend on the other's IT for a negotiated period of time post-completion) is key to an asset sale, yet is often relegated in priority. Early in a transaction, all parties must understand these dependencies to understand the transitional services each party requires. These legal risks and operational constraints, if not resolved, result in deal timeline and budget blow-outs. For example, if a vendor's software licence rights doesn't permit such dependence by a divested asset, then the consent of those software providers is needed to allow for such dependence. It's important to assess early whether consent would be required, and whether such consents need to be negotiated.

Post-deal operations

Transaction teams must understand, pre-transaction, the consolidated IT environment of the purchaser and target. This involves assessing whether to build a new IT platform, how to leverage new and innovative technologies, or how to integrate the legacy systems of the target and purchaser. Clients need to consider the most effective approach, incorporating how to facilitate knowledge sharing about both parties' IT environments. Businesses can only integrate systems when parties understand how existing environments act, are designed, and how compatible and interoperable they are. All workstreams involved in an integration (finance, HR, IT, operations, sales) need to come together to help identify interdependencies that affect multiple business functions.

MinterEllison’s IT legal team, in conjunction with its consulting arm, ITNewcom, can assist a purchaser restructure and streamline IT operations of a target, or help a vendor minimise a divested asset's reliance on a vendor's IT infrastructure.

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