The McKinsey Quarterly has an interesting article on IT due diligence in an acquisition--Understanding the Strategic Value of IT in M&A. Due diligence is an overall review of a company prior to an acquisition, in part to validate valuation. McKinsey's key points are:
- Due diligence on IT is not yet a widely accepted part of M&A due diligence
- Integrating IT is not a standard part of post merger planning
- As shown in the McKinsey chart below, more than half the synergies in an acquisition come from IT
I think that a big part of the problem with due diligence is the excessive concern with valuation, a prejudice that even McKinsey's chart above supports. The first purpose of due diligence is to understand what you are buying. The second purpose of due diligence is to come to a conclusion about valuation. Pre-maturely focusing on synergies and their effect on valuation is to overlook the opportunity to take a deep dive into operations at the day to day operating level, which always involves a detailed understanding of all the key parts of IT--software, hardware, network, backup and one hundred other things.
One technique that I learned in the telecom industry that I use whenever I do due diligence for a client is to trace a sales transaction in detail--from sales funnel management to entering the client purchase order, and then ordering the unit in manufacturing, shipping the product to the customer and getting paid. I want to understand every step in the process, every software application and computer hardware involved and any accounting entry related to each step. At each step you delve into related areas such as workflow, headcount, IT network, legal issues and every element of risk that you can conceive of. You would do such an analysis for every line of business, division and subsidiary that was significant. With this level of detail one is much better able to accurately forecast synergies and equally important identify the hidden costs in integrating an acquisition. This level of detail also makes post merger planning much easier to do because you have already developed a detailed understanding of what you are buying--the operations.
In summary, develop a detailed understanding of the operations as the means to structure due diligence and understand IT, accounting, risks, headcount and almost everything important about a company. It's not the only part of due diligence but it is a very comprehensive way to start.
