The importance of a technical due diligence

Digital transformation will affect every industry and in the future, every company will be a software company. Marc Andreesens saying, software is eating the world should be top of mind if you are considering a merger or an acquisition in the future. After a dry spell for M&A activity following the financial crisis, M&A is back in fashion and it is fueled by mega transactions and technology is one of the hottest areas.

M&A is risky business and KPMG claims that 83% of all mergers and acquisitions fails to deliver expected value. BCG supports this by stating that more than half of the transactions destroy value in the longer term. On the bright side, research show that tech-M&A’s are considered more successful than their non-tech counterparts are. However, when tech is a central component of the transaction this also introduce another layer of complexity to the deal.

This is why emphasis on a tech due diligence is crucial to increase the probability for M&A success. One of my control questions when considering a transaction where technology is one of the perceived value objects is whether the value lies in the code and technical platform, or the value is the know-how of one or more lead architects or star developers that can walk out the door at any time. If you are unprepared for the latter, you should brace for trouble as soon as the hangover from the signing dinner is over. In order to prevent this, you should dig deep into the technical platform before formalizing the transaction.

• How is the coding standard, and is the code well documented?
• Do hard-coded variables and a lot of fixing scripts characterize the code?
• How are the disaster recovery routines?
• Are automated testing routines in place?
• Are there suitable environments for production, test and QA?
• How are the software testing routines?
• Is the platform architecture scalable?
• How are the hand-over routines to application managements?

These are just some examples of control questions that should be covered in a tech due diligence. In order to answer these correctly you should bring in someone with an extensive technical background to have a close look at the code and conduct in-depth interviews with developers and software engineers.

In my opinion, the in-depth tech due diligence is crucial when considering any kind of structural deal where tech is part of the value object and should be treated equally to the legal and financial audit.