IT Due Diligence for M&A: Checklist and Tips
IT due diligence is essential in mergers and acquisitions (M&A). During the information technology due diligence, both parties of the deal process assess the IT infrastructure of the target company and its security state to identify potential risks and opportunities for acquisition.
In fact, this type of due diligence is more than a tech audit. As M&A requires significant investment, no area should be left unexplored. IT due diligence helps buyers better understand the value and risks of the target company’s technology stack.
Here, we will take a look at the role of technology due diligence in mergers and acquisitions and share a comprehensive due diligence checklist to help you better evaluate competitive advantages and potential risks when acquiring a company.
Why is IT due diligence crucial in M&A?
Both buyers and sellers will benefit from IT due diligence. Buyers will mitigate risks such as hidden technical debt, cybersecurity vulnerabilities, or compliance gaps. Sellers should consider IT due diligence as an opportunity to showcase their robust IT environment and justify a higher valuation.
Since modern businesses rely heavily on technology, IT due diligence becomes a cornerstone of M&A success. A thorough tech due diligence process can:
- Identify cost-saving opportunities
- Ensure regulatory compliance
- Highlight synergies between merging entities
- Prevent post-deal integration headaches
Without proper IT due diligence services, companies risk overpaying for outdated systems or even inheriting costly technical problems. This is what happened with Marriott International and Starwood Hotels in 2016.
Marriott acquired Starwood Hotels for $13.6 billion, aiming to create the biggest hotel chain in the world. The deal went smoothly, at least it seemed so. Then, not so long ago after the acquisition, Marriott experienced a huge data breach. Personal data of 500 million guests was exposed.
The breach was partially caused by poor IT due diligence during the acquisition of Starwood Hotels. As it happened, Starwood’s systems were outdated and vulnerable, but these risks were not identified or addressed before the deal closed. As a result, Marriott was fined $72 million from GDPR regulators, add to this a significant reputation damage, and you will get the real price of neglecting IT due diligence during M&A.
How & when conduct IT due diligence
The best time to conduct IT due diligence is before closing the M&A deal. The process consists of planning, investigation, analysis, reporting, and negotiation stages. Let’s explore them further.
During the planning stage, the sides of the deal assemble a due diligence team: IT experts, cyber security professionals, legal advisors, and financial analysts. These specialists define the scope of the due diligence process. It should include thorough checks of software, hardware, infrastructure, cybersecurity, and governance policies. For better collaboration, it is important to develop methodologies for reviewing documents and assessing risks.
Then, roll out the investigation. Examine the IT systems of the target company (software applications, hardware infrastructure, and technology roadmaps). Make sure you assess key risks in cybersecurity policies, data protection measures, and potential vulnerabilities. Conduct interviews with key personnel to understand IT operations and integration challenges.
Once that is done, move on to the analysis stage. Validate findings from documentation reviews and inspections. Assess the compatibility of IT systems with the buyer’s infrastructure. Identify risks such as outdated systems or insufficient cybersecurity measures.
Create a detailed report based on the data you have gathered during previous stages. Consider providing details on strengths and weaknesses of the IT system of the target company and potential risks that could impact post-acquisition integration. If possible, provide risk mitigation strategies.
Then, when it is time to negotiate the deal, you can use your findings to review the terms if necessary. You may even ask to adjust the purchase price or require specific upgrades before closing the deal.
The IT due diligence process is complex and demanding. Depending on the intricacy of the agreement and the IT setup, it can take anywhere from a few weeks to several months. To make it more structured and easy to conduct, use technology due diligence checklists that cover all IT areas. We provide one in the next section.
IT due diligence checklist for M&A
This is a comprehensive tech due diligence checklist that helps companies better understand the technical aspects when buying a company. Thorough evaluation of these key areas is critical for a successful and risk-free M&A.
- Conduct an inventory of the target company’s IT systems
- Create a schedule of all physical assets and equipment owned, held, or used by the company and its subsidiaries, including a description of the ownership and nature of such equipment
- Compile a list of IT resources, including hardware and software
- Determine the financial cost of technology, maintenance, and upgrades
- Undertake cybersecurity testing and compliance reviews
- Provide IT security information, including policies and disaster recovery plans
- Summarize issues such as malware, ransomware, or phishing incidents that took place
- Summarize any data breaches that occurred (if any) and how they were handled
- Evaluate the company’s data security protocols to ensure sensitive information is adequately protected
- Ensure that both parties meet the stringent requirements of GDPR, NIS-2, DORA, ISO 27001, and other relevant standards
- Evaluate operational risk, including intellectual property, financial and personal data
- Determine how sensitive data is managed and protected
- List IT personnel
- Provide copies of all IT policies
- Detail technology policies, including data storage policies, data encryption policies, and bring your device (BYOD) policies
- Provide information on employment practices
- Review organizational structure and technology team setup
- Assess the expertise and experience of the management team and key employees
- Collate technology vendor contracts
- Check renewal terms, service-level agreements, and third-party risks
- Provide copies of vendor contracts and contractor agreements associated with technology and IT
- Review joint venture, partnership, teaming, subcontract, and alliance agreements to which the company or any subsidiary is a party
- Review service level agreements (SLAs) and renewal terms
- Identify outdated technologies and integration challenges
- Evaluate the cost and complexity of modernizing legacy systems
- Evaluate interoperability with new platforms and tools
Common IT due diligence challenges & solutions
Missing flaws, things like security, compliance gaps, and poor IT documentation during mergers and acquisitions can lead to big headaches later on, decrease the final deal cost, or even ruin the deal. When Verizon was acquiring Yahoo, they discovered massive data breaches during IT due diligence. This led to a $350 million drop in price. This is a huge price for flaws that could have been prevented. The lesson learned here: it is important to identify the potential risks before the deal. Let’s explore that.
Compliance blind spots
Compliance with data protection laws (e.g., GDPR, HIPAA) is critical for the healthcare, insurance, finance, tech industry, and many other business areas. Failing to meet these standards can lead to fines, legal disputes, and reputation damage. Compliance audit can help to avoid this:
- Review all relevant regulations and standards
- Verify the target company’s compliance status through documentation and interviews
- Identify gaps and create a remediation plan
The regulatory landscape is tricky, and the laws are updated pretty often. To avoid pitfalls, consider reaching out for specialists who understand the regulations in your industry. You can also use tools like OneTrust or LogicGate for compliance tracking and reporting.
Cyber security vulnerabilities
Mergers and acquisitions are a significant investment for any company. Dealing with data breaches and phishing attacks right after the acquisition is not the best strategy. To avoid this, companies should:
- Perform penetration testing
- Implement robust firewalls, encryption, and access controls
- Ensure multi-factor authentication (MFA) is in place
- Educate staff on recognizing phishing attempts and other common threats
- Partner with experts like CrowdStrike or Palo Alto Networks for advanced threat detection and response
Lack of clear documentation for IT processes
Documentation is the pain point of many companies. The lack of clear documentation might happen due to the rapid growth without proper documentation practices, inconsistent or outdated standards, or reliance on tribal knowledge when all the wisdom is held by a few key employees.
Inconsistent, outdated documentation or, what is worse, lack of it, makes it difficult to understand how systems operate, troubleshoot issues, or train new employees. Here is how to mitigate risks connected with poor documentation:
- Use tools like Confluence or SharePoint to create a centralized knowledge repository
- Develop templates for system architecture, workflows, and troubleshooting guides
- Create knowledge transfer practices. Key employees should document their processes and share them with the acquiring team
For more complex cases, when these practices are hard to implement, consider reaching out for technology due diligence consulting companies to navigate those challenges effectively. Companies like Ansarada, Liberty Advisor Group, or PwC provide comprehensive IT audits, develop a modernization and integration roadmap, help to identify and mitigate vulnerabilities, and much more. Explore the most trusted technology consulting companies on G2.
The role of virtual data rooms in the IT due diligence process
VDR platforms play a crucial role in technical due diligence. They provide a secure and organized space for document sharing, user access control, and quick communication.
When it comes to security, data rooms are great solutions to protect sensitive documents from accidental exposure, malicious activities, and internal errors. Nowadays, VDRs should be equipped with ISO 27001 certification, SOC 2 compliance, advanced encryption, 2FA, dynamic watermarking, and configurable access rights. These are must-have features that will keep your documents safe.
On top of that, virtual data rooms should enhance communication and collaboration between parties during IT due diligence M&A. They do so by built-in Q&A modules that allow buyers and sellers to communicate directly within the platform. No more back-and-forth emails, and all the communication is documented, promoting comprehensive understanding from both sides.
Another prominent feature of a due diligence data room is efficiency and around-the-clock availability. Since VDRs are accessible from anywhere, at any time, teams can work across time zones without delays. This speeds up the technical due diligence and enhances collaboration.
| Compare leading data room providers carefully to identify the optimal solution for distinct operational requirements. |
Key considerations when choosing a VDR for tech mergers and acquisitions
When you choose a data room provider for technical due diligence, pay attention to the following aspects:
- Security features: ISO 27001 and SOC 2 compliance, encryption, 2FA, granular user permissions, dynamic watermarking, etc.
- Usability: intuitive interface and mobile accessibility.
- Customer support: 24/7 customer support and dedicated account managers.
- Pricing: compare pricing models (per-page, per-user, or flat-rate) to find the best fit for your budget.
- Advanced functionalities: Q&A modules, AI tools, and integration capabilities.
Many VDRs in the market can meet those criteria, and it can take you weeks to look through all of them.
Here is a table with the top VDR providers for technology due diligence in mergers and acquisitions and their features.
Buy-side vs. sell-side nuances
One of the most popular technology due diligence questions is whether buyers and sellers have the same priorities when it comes to tech due diligence? No, they don’t. Buyers see this as an opportunity to evaluate the technology landscape of a target company, identify possible risks, and uncover opportunities for value creation. Their primary goals are:
- Mitigation of potential IT risks that could impact the deal or post-merger integration
- Evaluating how the target’s technology can integrate with their systems to create efficiencies
- Calculation of ROI to determine whether the investment in the target’s technology will deliver a strong return
Sellers, in their turn, conduct IT due diligence reports to prepare their technology for scrutiny, address potential red flags, and present their technology infrastructure in the best possible light. They are focused on:
- Delivering clear and accurate information to build trust with potential buyers
- Identifying and resolving IT issues before they become deal-breakers
- Highlighting the strengths of their technology to justify a higher valuation
To fully utilize IT due diligence, purchasers should employ a thorough IT due diligence checklist, consult third-party specialists (if necessary), and emphasize both future growth prospects and potential risks to make well-informed choices. Sellers need to concentrate on performing a pre-due diligence IT audit to detect and fix problems early, arrange all IT documentation, and emphasize the main advantages of their IT system to enhance their negotiation stance. In this manner, both sides will reduce risks, reveal opportunities, and reach a favorable result.
FAQs
Which documents should I prepare first?
Start with IT inventories, security policies, vendor agreements, and compliance reports.
What if I find major IT red flags?
Assess mitigation costs and potential deal renegotiation strategies.
How long does technology due diligence in mergers and acquisitions typically take?
It varies, but a thorough technical due diligence can take 4-8 weeks.
Who should be involved in the process?
IT executives, security specialists, legal teams, and M&A consultants.
Final thoughts
IT due diligence is a vital component of any M&A strategy. Whether you are on the buyers’ or the sellers’ side, a well-executed technology due diligence will help you uncover opportunities, and achieve your strategic goals.
An organized method, along with appropriate tools — such as virtual data rooms for safe document sharing — can enhance the efficiency of the process. Having a precise checklist of technology due diligence inquiries is also beneficial to ensure no important detail is missed.
If you are getting ready for an M&A transaction, this is the moment to investigate data room options or seek advice from a specialist to assist you. The more prepared you are, the firmer your stance — whether you’re brokering a deal or implementing new technology after an acquisition.
