The digital component is becoming increasingly important in corporate acquisitions: a growing percentage of transactions involve IT companies directly, or companies in which technology platforms are fundamental to value creation. In fact, with the migration to digital in recent years, it is challenging for a company today to be attractive – much less disruptive – if it is not supported in some way by innovation. The PitchBook quantifies this phenomenon: in just five years, deals involving tech-enabled businesses have increased threefold.
In this context, conducting digital due diligence processes is critical to evaluate the product’s performance, identify how technology is being leveraged, discover opportunities, minimize risks, and corroborate that the digital and the business strategy are closely aligned.
In business models based on SaaS-type proposals, in-depth due diligence is essential to understand the customer base and churn, their growth potential, and the capitalization of available technologies to deliver a differential product.
Stop sweeping under the rug
Here are some everyday examples: a fintech that is growing but has weak cybersecurity policies; a company that serves its customers through an app that attracts new users day-in day-out but has never undergone a stress test; a company that is opening its digital channels but presents an outdated on-premise technological infrastructure; an organization that is betting on data analytics but never wanted to debug those data.
All that glitters is not gold: what a priori looks like a safe investment can turn into a real headache. Even so, comprehensive due diligence involving technology is standard only when it comes to companies that are formally in the sector (software developers, for example, a segment that, according to Dealogic, accounted for 31% of all deals closed in 2021), but are conspicuously absent in all other cases.
What does due diligence entail in a highly digitalized world, where software is at the core of the business? Historically, this procedure was quite straightforward. A technology expert visits the facilities with the CIO and the CTO of the company (or with just one of them). He makes sure that there are no major issues involving the the data center, and checks that the applications perform as expected: the HR application handles payroll and the management application, stock control and invoicing.
Under the tip of the iceberg
However, there is a long way to go. Today it is essential to understand how technology is used in the company, how it adds value to the business, to what extent the available data is capitalized, and what are the opportunities to improve performance. Is technology used to launch products and services that enhance customer experience? Is it used to predict scenarios, learn about consumer behavior and anticipate the competition? Are disruptive proposals really being generated from it? Is everything adequately protected against cyber-attacks?
For this reason, digital due diligence should look into current products and their evolution, the technology, the architecture, the cybersecurity status, data, and process quality, and the company’s position in the market. In addition, it must ensure that the IT landscape is aligned with both the objectives of the deal being pursued and the current and future needs of the business, understanding what are the future growth possibilities which technology can offer.
An experienced technology partner can be essential in providing in-depth analysis. A well-crafted and integrated digital due diligence plan provides the necessary information to obtain the best possible answer to the most critical question a PE fund should ask itself: “Do we want to invest in this company?