Name: BA 5223 – Professor Dr. Kim

By February 24, 2019 February 25th, 2019 Architecture

Name: Naishadh Sambrani
Date: October 1, 2018
Title of the report: A proposal to help you perform IT due-diligence when buying or selling a company
BA 5223 – Professor Dr. Kim Barnett-Johnson
All notes are provided as per the sequence of slides. Please refer to the slide number in PowerPoint and cross-reference with slide numbers below.

Slide 3
According to Deloitte, “Technology acquisition is the new No. 1 driver of M&A pursuits and dealmakers report using non-spreadsheet based M&A technology tools to help reduce conflicts, costs, and time.”
IT due-diligence is performed as part of a merger or acquisition analysis i.e. when an investor is interested in buying or selling a company. As technology is a primary driver for M&A, IT due diligence is extremely important for investors to help gain better understanding of the opportunities, costs, and risks involved in the IT function of the target company.
According to PWC, “in today’s world, information technology (IT) plays a key role in business operations, managing information and financial reporting. This makes IT a priority consideration during a transaction.”
We are a specialized and independent third party, who can help you improve your decision making when buying a target company by performing IT due-diligence.

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Slide 4
Considering IT due diligence is key during a transaction. The following questions should be asked while acquiring another company:
Does IT support the investment strategy?
Are there any key transactional risks associated with IT?
What is the impact of IT to EBITDA and capital spending?
What are the one-time and recurring IT costs?
Are there any upside potential and margin improvement opportunities?
Is IT scalable and flexible to meet growth needs?
If there are no clear answers to these question, there can be severe financial losses post-acquisition.
Key Industry Trends according to EY:
PE tech deal value nearly doubles from 1Q17 to $14.6 billion
PE firms take advantage of valuation fluctuations due to equity market volatility and seize strategic technology opportunities
Non – tech deal value more than doubles from 4Q16 to $14.7 billion
Non-tech companies undergoing digital transformations acquire strategic technologies following global technology megatrends
As we acknowledge that the M&A activity has increased with a focus on technology, IT due-diligence is a key. We have created a transaction focused approach for IT and have the most extensive service offerings covering the entire transaction lifecycle — from investment to exit.

Slide 5
We help across all stages of the acquisition, including pre-sign and post close. Detailed scope discussion will follow. However, our offerings, include the following:
Digital diligence
Product development strategy
Product portfolio
Architecture review
Product organization
SDLC methods and toolsets
Cybersecurity
Corporate IT diligence
IT strategy
IT systems
Data analytics
IT organization
IT processes
IT projects
IT spending
IT infrastructure
IT security
IT risk management
Functional IT diligence
ERP suitability assessment
Program health check
Organization right sizing
IT spend analysis
IT contracts and SPA assessment
Indicators of compromise assessment
IT value creation
Social, mobile and digital transformation
Data analytics and reporting
Application rationalization
Infrastructure modernization
Cybersecurity enhancements
Cloud transformation
Merger Integration
Integration readiness
Integration diligence
Synergy assessment
Day one readiness
Integration planning
Integration execution
Synergy realization
Carve-out
Carve-out diligence
TSA planning
Day One readiness
Separation(TSA exit) planning
Separation execution
Stabilization
Complete Sale
Exit planning
Data room preparation
Due diligence support
Divestiture
Data room preparation
Standalone operating model
Onetime cost analysis
Recurring cost analysis
Stranded cost analysis
TSA preparation
IPO readiness
Slide 6
We have a robust process to help deliver value to our clients. A typical buy-side IT due-diligence would range from 3 to 4 weeks and a sell-side IT due-diligence could range from 3 to 12 weeks.

Below are the various steps performed during each phase:
Get the project started
Develop proposal
Develop scope and fee estimates
Perform project engagement economics
Develop initial hypothesis
Review CIM and management presentation
Understand Target business model
Understand Client strategy and investment thesis
Validate and refine hypothesis
Review data room and update request list
Understand Target’s business operations
Understand key business processes
Develop IT brief and management meeting agenda
Develop initial hypothesis
Ask for clarifications from management
Walkthrough IT focus areas including IT strategy, systems, organization processes, spending, projects, risk management etc.

Discuss business process and workflow
Attend system demos
Tour data centers
De-brief with team on initial observations
Validate key findings and align with other streams
De-brief with other teams, if any
Develop initial observations
Share initial observations with the Client
Conduct follow-up calls with Management
Conduct benchmarking
Develop final deliverable and conduct readouts
Develop final IT deliverable (report, IT spend model, etc.)
Share final IT deliverable with the Client
Participate in read-out with the client and lenders
Slide 8
We have a robust set of offerings (as shown on slide 8). Our primary sequence of events during a deal for our offerings are as follows:
Corporate IT diligence
Understand the corporate IT strategy and how it aligns with business goals
Understanding the currency and scalability of systems supporting corporate functions such as Finance and HR
Identify potential gaps in systems, infrastructure and organization that could prevent target growth
Identifying opportunities to automate back-office processes and enable efficiencies
IT spending benchmarking to understand potential under-investment in back-office IT
Understand IT back-office projects and the level of investment required
Functional diligence
Understanding business value chain and underlying IT that enables core processes such as order to cash, procure to pay, etc.

Comparison with industry standard capability models to identify potential IT gaps
Identifying opportunities to automate operational processes, enable efficiencies and realize cost optimization
IT spending benchmarking to understand potential under-investment in IT supporting core operations
Understand IT projects needed to enable or optimize operations and the level of investment required
Digital diligence
Understand the currency of the architecture and technology stack to assess the scalability, flexibility and high availability of proprietary systems
Understand the product development roadmap and the level of investment required
Understand the usage of open source code
Understand the capability of the software engineering organization to support and enhance the proprietary platform.

Understand the maturity of software development lifecycle (SDLC) methodology and IT support processes
IT merger integration diligence
Development of a high-level target state integrated IT operating model and landscape
Identification of run-rate IT synergies
Estimation of one-time IT integration costs and recurring costs for the combined organization
Development of an IT integration roadmap to prepare for legal close and achieve the target state operating model.

Understanding transitional service agreements (TSA) requirements, duration and costs.

Assessing IT contracts and third-party agreements
IT carve-out diligence
Understanding IT dependencies with the Parent
Development of a high-level target state IT operating model, IT landscape and separation roadmap
Estimation of one-time IT separation costs and standalone recurring costs
Understanding transitional service agreements (TSA) requirements, duration and costs.

Assessing IT contracts and third-party agreements
Slide 9
The Corporate IT due-diligence includes the following procedures:
IT Strategy
Understand the Target’s IT strategy and how it aligns with business goals
Understand the Target’s strategy to deal with increasing competition from other established players
Corporate systems
Understand the systems that support business capabilities and back office functions
Understand and assess the Target’s data management capabilities including collecting, storing, transforming data and presenting business insights
Understand revenue recognition, invoicing triggers, billing and revenue management, case management, and software entitlement management
IT organization
Understanding technology organization characteristics, including:
Employee skills and experience profiles
Extent of reliance on key staff and third party
Details of any current contracting agreements to provide technical, operational or applications staff
IT spend
Understand IT operating and capital expenditures for the two prior year historical periods, current fiscal year and budget for next fiscal year
Compare IT spending levels to peer industry benchmarks
IT infrastructure
Understand the Target’s technology infrastructure comprising of data centers, servers, networks, telephony and end-user computing devices
Understand the Target’s IT risk management capabilities including disaster recovery, data back-up, and offsite storage provisions
Slide 10
The Functional IT due-diligence includes the following procedures:
IT support for business capabilities
Understand IT systems supporting each business capability and the extent to which they meet business needs
Compare the Target’s business capability map to industry sector reference models
Understand functional leadership’s feedback on IT systems and support
IT projects
Understand in-flight and planned projects to assess budget, cost and delivery capability
Understand IT processes for software development and IT service management
Assess project and program solution delivery
Compare the Target’s project methodology against peers in the industry
Third party agreements
Analyze list of technology services provided by third parties, including any outsourcing arrangements
Analyze ongoing costs of technology contract commitments by type (e.g. – operating systems, applications, hardware), including termination fee and yearly maintenance cost
Regulatory compliance
Understand support for regulatory and compliance requirements
Understand region specific legal, compliance and security considerations, organizations and regulatory bodies
IT cost optimization
Assess functional budget and resource allocation to understand costs opportunities that can be realized leveraging IT
Understand cost optimization levers to realize the business cost saving opportunities
Develop business case , benefit management and key performance indicators (KPI)
Develop a high level roadmap to drive executive decisions, benefits tracking and realization
Slide 11
The Digital IT due-diligence includes the following procedures:
Digital strategy & governance
Understand the Target’s digital capabilities and its alignment with the overall business strategy
Understand technology oversight and strategic decision making processes relative to product development
Digital product portfolio
Understand software portfolio, development history and roadmap for new digital product development
Understand the technology stack and architecture of proprietary software
Assess connectivity or application programming interfaces (APIs) with third-party data sources
Digital product organization
Assess the adequacy of the digital product organization including internal staff and third-party relationships
Assess the level of innovation on the digital projects and compare it against the target’s peers in the industry
Digital (technology) spending
Understand the product development spend for the past two years, current fiscal year and budget for next fiscal year
SDLC methodology
Understand software development life cycle (SDLC) methods and governance including procedures and toolsets for development, testing, quality assurance, deployment, configuration and ongoing support
Understand software support and release management process and tools
Digital (software) infrastructure
Understand the Buyer’s product hosting infrastructure comprising of data centers and servers architecture
Slide 12
The IT merger integration diligence includes the following procedures:
Target’s IT environment
Understand the strength and weaknesses of the Target’s IT environment including systems, infrastructure, organization, information security and regulatory compliance
Assess the Target’s IT spending and compare it against benchmarks
Understand the Target’s approach or strategy for IT integration
Assess key considerations for IT integration (timing, cost, synergy realization)
Understand the IT capabilities needed to enable the combined business
Integration assessment
Understand the commonalities and differences between the Buyer’s and the Target’s IT environment
Assess potential integration and rationalization opportunities across systems, infrastructure, organization, information security and regulatory compliance
Understand the future state IT operating model scenarios including IT assets that will be retained, eliminated or modified
Assess the constraints (e.g., contractual obligations) to realizing IT integration
Synergy identification and planning
Understand the areas of efficiencies and inefficiencies between the Buyer and the Target’s IT
Understand the effectiveness, cost structure, and capacity of overlapping IT capabilities compare between the Buyer and the Target
Understand the potential IT cost structure for the combined business based on the future operating model scenarios
Understand the prioritization and sequencing of IT synergy realization initiatives
Integration risks and mitigation
Understand whether the future state combined IT model provide the business capabilities that support the deal thesis and the Buyer’s vision
Understand if IT assets needed to appropriately run the combined business is available in the future operating model
Understand if the future operating model can overcome current deficiencies in IT
Assess if the IT integration roadmap factor the complexity in the Buyer’s and Target’s IT, resource needs and competing contractual limitations
Slide 13
The IT carve-out diligence includes the following procedures:
Dependency analysis
Understand the dependencies that the Buyer has on the Parent for IT including shared systems and data
Understand the IT resources that are dedicated vs shared with the Parent
Assess the extent of dependencies on the Parent for networks, information security, back-up and disaster recovery
Transferability analysis
Understand the major systems and infrastructure components that will not transfer with the deal and will need to be replicated by the Buyer
Assess the change in control restrictions or penalties for transferring IT contracts
Understand the skills and experience levels of the resources that will transition
Assess the challenges in extracting and transferring data belonging to the Target
Future state operating model
Assess the overall strategy and operating model for the stand-alone business including critical IT capabilities that are required to support the business
Understand the opportunities to eliminate inefficiencies and ineffectiveness of IT
Understand the operating model considerations that need to be assessed – insource vs. outsource, on premise vs. cloud, custom built vs. commercial off the shelf
Stand-alone cost analysis
Understand the direct and allocated IT costs and basis of allocation for capabilities including IT personnel, software, hardware, and professional services
Prepare a schedule of one-time and recurring IT costs based on the analysis of Buyer’s existing IT expenditure and estimated costs based on the list price information from software and hardware vendors
TSA analysis
Understand the mission-critical IT services that cannot be stood-up autonomously before separation and assess if these are covered in the TSAs
Assess if the duration of IT TSAs sufficient for the Buyer to establish stand-alone IT
Assess whether the Parent have appropriate resources to provide TSA support
Understand the basis and governance around tracking TSA performance, pricing and issue resolution
Slide 15
We have a team lead by Naishadh Sambrani. He has a strong M&A skill-set and is currently pursuing an MBA from Trine University. His work experiences include the following:
Performed due diligence on technology businesses including software and infrastructure providers, to understand issues such as capacity constraints, scalability, revenue recognition and entitlement management
Assessed end to end IT function including IT organization, business systems, data center operations, network operations, IT spending, and information security
Conducted benchmark analysis to develop standalone IT costs including systems, infrastructure and people costs.

Assisted top private equity firms in pre-acquisition due diligence by developing IT cost models, showing one-time and recurring IT investment on more than 10 transactions
Advised private equity and strategic buyers with pre-acquisition due diligence and integration synergy assessment
Assisted strategic buyers in pre-acquisition due diligence by estimating revenue growth based on Clean Room data analysis on target company
Sources and citations
P. (n.d.). IT due diligence. Retrieved from https://www.pwc.be/en/services/mergers-acquisitions/executing-transaction/it-due-diligence.html
Strativa. (n.d.). Retrieved from https://strativa.com/services/it-due-diligence/
S. (n.d.). Information Technology Sector Rating: Marketperform. Retrieved from https://www.schwab.com/resource-center/insights/content/information-technology-sector Image
AI drives first quarter value. (2017, March). Retrieved September 22, 2018, from https://www.ey.com/Publication/vwLUAssets/EY-technology-manda-january-march-2017-first-look/$FILE/EY-technology-manda-january-march-2017-first-look.pdf
IT risk management. (2018, July 30). Retrieved from https://en.wikipedia.org/wiki/IT_risk_managementThomson, R., & R. (2018, June 20). M&A trends report 2018 | Deloitte US. Retrieved from https://www2.deloitte.com/us/en/pages/mergers-and-acquisitions/articles/ma-trends-report.htmlEverything You Need to Know About Value Chain Analysis. (2017, September 18). Retrieved from https://www.smartsheet.com/everything-you-need-to-know-about-value-chain-analysis

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