Boost Value Creation Through Tech Due Diligence
Having a clear understanding of technology is critical to the success of any private equity deal. It allows investors to understand a company’s operational efficiency and potential. This can be especially important in an era of digital disruption. It can also help identify growth opportunities. A thorough digital assessment can uncover additional value as well as address any risks.
Tech due diligence may include many factors depending on the industry and deal. It can also be a standalone activity or an integral part of a larger evaluation of the target’s prospects. A comprehensive cybersecurity assessment, for example, includes a full scan of the target’s cyber posture and a recommended improvement plan. It may also involve penetration testing and vulnerability scanning. A breach response plan and incident response plan are also important considerations. If not addressed, a data breach or network failure could be catastrophic.
A thesis-driven approach to digital due diligence private equity can reveal surprising insights. For example, in one transaction, a private equity firm made an over $2 billion investment to purchase a small operating system software developer. It had built a secure architecture, but the code was bloated and the architecture lacked a single source of truth. This led to leaky security protocols, resulting in a ransomware attack and a breach of customer contracts. Fortunately, the buyers walked away feeling fortunate they had dodged a bullet.
Private Equity Firms Can Boost Value Creation Through Tech Due Diligence
Another case involves a company that had already migrated much of its back-end infrastructure to the cloud. It was a leader in its market segment, and it was growing at a 15% annual rate. However, it was aging platforms and services that were slow to adapt. The new owners wanted to accelerate product development and increase revenues. They hoped to capitalize on its technological advantages to accelerate growth and price aggressively. It competed with industry stalwarts like IBM and VMware.
Despite its importance, it is still common for private equity firms to not adequately assess the value of tech in a merger or acquisition. Traditionally, it has been viewed as a cost line item in an M&A transaction. However, it has evolved to become a key driver of value creation and a crucial component of an overall strategy.
In the current economic environment, it can be harder for PE investors to find value in technology investments. But the most effective way to evaluate a target’s technology capabilities has to change. Instead of viewing technology as a source of risk, it can be used as a competitive edge to reduce risk, improve product quality, and boost revenue. It can also help a company grow faster, better manage its costs, and price more aggressively.
Getting it right is a multi-step process. The first step is to develop a robust and comprehensive checklist. The second step is to develop a plan to integrate the findings of the checklist into a broader evaluation of the target’s prospects. The third step is to create a value-creation plan that identifies the most relevant areas for improvement. The fourth step is to execute the plan.
