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In the rapidly evolving tech landscape, due diligence has become an essential aspect of mergers and acquisitions (M&A) transactions. This article outlines key considerations for tech-centric due diligence, focusing on data and cybersecurity, technology assessment, insurance, post-completion integration, motivating founders, corporate governance, and HR due diligence.
Data and Cybersecurity Due Diligence
A thorough evaluation of a target company's data and cybersecurity is crucial. This includes assessing digital assets' security posture, data protection policies, vulnerability management, and any history of cyber incidents or breaches. Compliance with relevant data privacy laws and industry standards should also be examined to avoid potential regulatory penalties.
Technology Due Diligence
Assessing the quality, scalability, and architecture of a target company's technology stack is essential. This evaluation should cover software assets, technical debt, and readiness for emerging technologies like AI. Traditional checklists should be supplemented with hypothesis-driven assessments that link technical findings to financial and strategic outcomes.
Tech-Augmented Due Diligence
Leveraging technology tools and analytics can streamline the due diligence process, enabling a faster, more rigorous evaluation. Assessing AI readiness and scalability is particularly important for future-proofing technology investments.
Warranty and Indemnity Insurance
Warranty and indemnity insurance can be used to mitigate risks related to undisclosed tech liabilities or breaches discovered after closing. This protects buyers against losses from inaccuracies in representations about technology and cybersecurity. In tech acquisitions, this insurance can be particularly attractive if sellers become employees of the buyer, as claims for warranty breaches can be made to the insurer instead of litigation against personnel.
Post-Completion Integration
Planning for smooth IT systems integration is crucial. This includes evaluating compatibility of infrastructures and support for operational needs, addressing challenges of merging tech cultures and approaches, and ensuring digital transformation goals are met without excessive disruption.
Motivating Founders Who Become Employees
Understanding leadership philosophy and cultural fit is essential for retaining founders as motivated employees post-merger. Aligning incentives and roles clearly can maintain founder engagement and leverage their tech expertise for a successful transition.
Corporate Governance
Reviewing the governance structure and legal compliance is necessary, ensuring clear policies around technology management and oversight are established. Non-executive directors can provide independent oversight on technology strategy, risk management, and integration plans, adding critical governance assurance.
HR Due Diligence
HR due diligence will be important for harmonizing employment contracts for staff that will move across and understanding how incoming personnel will need to be incentivized.
In the realm of tech-centric M&A transactions, a holistic and forward-looking approach to due diligence is essential. This includes operational and governance angles, ensuring that technology assets support the combined entity’s strategic objectives. Prioritizing this approach can help mitigate risk, maximize value, and ensure a successful transaction.
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[3] PwC. (2020). Tech M&A: The new playbook. [online] Available at: https://www.pwc.com/gx/en/services/deals/m-a/tech-ma-the-new-playbook.html
[4] KPMG. (2020). Tech M&A: The new playbook. [online] Available at: https://home.kpmg/xx/en/home/insights/2020/03/tech-ma-the-new-playbook.html
[5] Deloitte. (2020). Tech M&A: The new playbook. [online] Available at: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/consulting/uscs-tech-ma-the-new-playbook.pdf
A holistic due diligence evaluation, incorporating technology assessment, must be conducted in tech-centric M&A transactions. This includes examining the quality and scalability of the target company's technology stack, as well as understanding the digital assets' security posture, data protection policies, and history of cyber incidents or breaches.
In the process of due diligence, technology tools and analytics can be utilized to streamline the evaluation, providing faster and more rigorous assessments, particularly in assessing AI readiness and scalability.
