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A company with robust IT business continuity plans and processes could stand a better chance for M&As. (Photo: Bloomberg)
A company with robust IT business continuity plans and processes could stand a better chance for M&As. (Photo: Bloomberg)

Tech due diligence will be top priority for firms eyeing M&As

CIOs now need to give priority to upgrading IT security requirements, with constraints on IT budgets

Covid-19 is changing how businesses function and, going forward, due diligence on information technology (IT) requirements will be increasingly important for striking mergers and acquisitions (M&As), fund-raising and strategic deals, said experts.

Since the lockdown, companies have used technology to enable businesses to operate, increasing the workload on tech teams. The topmost priority for chief information officers (CIOs) now is to upgrade IT security requirements, including hardware, with constraints on overall IT budgets.

This also means that even traditional businesses across manufacturing and consumer retail, among others, need to have their digital tools in place on a par with the new-age businesses such as e-commerce, financial services and IT.

Normally, investors value companies based on their revenue, earnings before interest, tax, depreciation and amortization (Ebitda), market reach and growth potential.

But, in a report released in May, Deloitte said for M&A and fund raising deals, which so far overlooked or delayed IT due diligence, investors will be required to critically examine a target’s technology needs and assess the investment requirements, fairly early in the process. Going forward, a company with robust IT business continuity plans and processes could stand a better chance for M&As, depending on the industry.

“Any small interruption in technology may lead to huge financial, commercial and reputational losses, which none of the businesses will have appetite to absorb, and stakeholders recognise the concern. As regards IT investment, a typical benchmark used to be in the range of 2-5% of turnover, depending on the industry segment. In light of the new ways of doing business brought about by the covid-19 crisis, we estimate an incremental investment of around 0.5-1% of turnover for beefing up IT infrastructure, IT security, collaboration tools and tweaked business processes for continued operations," said Dilip Dusija, partner, Deloitte India.

Dusija said the huge interruption caused by covid-19 in the initial few weeks, caught a lot of technology teams and CIOs off-guard. While they haven’t seen any deal breakers yet, not meeting the desired thresholds on IT processes, has an impact on the 100-day plans in post-merger/investment integration, in case of strategic transactions and platform deals by PE investors. Exit readiness of a PE portfolio company may also get impacted and delayed for insufficient preparedness on the IT BCP and processes front.

Naveen Tiwari, IT due diligence partner, EY, said it is definitely evolving from being just one of the boxes to be ticked to being integral to business resilience review due to the pandemic. “While sectors, such as fintech, e-commerce and IT, were already tech-heavy, old economy sectors, including manufacturing, also need to demonstrate technology resilience in supporting (customer) demand and supply chain."

Besides core technology requirements, investors are now also evaluating remote collaboration tools, cloud migration and cyber security as part of IT due diligence. Digital readiness and investment requirements in technology will impact post-covid valuations across sectors, as it impacts both revenue growth potential and future cost structures of companies, said Tiwari.

CIOs will look for due diligence and standard operating procedures in institutionalizing work-from-home culture, making incremental changes to IT infrastructure, including connectivity set up, and arranging covid-19 response teams to facilitate 100% work-from-home arrangements.

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