Successful Tech M&A Starts with Great Due Diligence

[Contributed by David Wong, Managing Director | Bulger Partners] Given the accelerating pace of change, and the challenge many organizations face driving organic growth, it isn’t surprising that acquisitions activity is at historic pace in the tech sector.  However, the success rate of acquisitions has been much lower than what organizations need or expect.  In fact, across several recent surveys the typical acquisition success rates ranged between a high of 50% and low of 20%.Some percentage of these “failed” acquisitions are attributed to post deal factors such as integration challenges or market change.  However, the majority of the failures are attributable to factors that could have been identified and understood through best practice diligence, prior to closing.  Every deal includes “due diligence” as part of the acquisition process – so why are there “surprises” frequently cited as the cause of failed acquisitions?Conventional due diligence processes are well understood and practiced by many expert service providers.  They are designed to uncover many of the usual potential issues, including those related to the financials, management team, customers and partners.  Most of these experts are generalists – they have honed their skills working across many types of companies.While this approach works for a range of “old economy” acquisitions, it doesn’t address the critical success factors that tech sector companies face.  For example, the pace of change in underlying technologies continues to accelerate, and the disruptive potential of these technology shifts on a given tech organization’s business models is unabated.  In addition, the tech sector is a very dynamic market, with new direct and adjacent competitors emerging constantly, and entirely new segments being defined with remarkable regularity.In the face of these dynamics, a modified approach is required.  In addition to the assessments done as part of a “conventional” approach, a technology due diligence needs to include a broad, forward-looking business assessment.  This business-centric approach will help assess the potential disruptions that the business may face – disruptions that may be driven by emerging technologies, changing competitive dynamics, evolving ecosystems and/or shifting customer behavior and needs.  Given the “known-unknown” (to quote an infamous member of a recent administration) nature of these potential disruptions, this type of business due diligence will require an uncommon combination of deep technology industry expertise, diverse business experience, and insightful analytical skills.Organizations taking this approach to technology due diligence are increasing the likelihood of successful acquisitions.  By conducting this type of assessment on an ongoing basis – even outside the context of a specific acquisition – these organizations are building stronger positions in the dynamic technology segments within which they compete.

Posted on March 5, 2014 in Capital Markets, Insights, Technology Industry