IT Due Diligence for Distressed Acquisitions

For many deals, IT Due Diligence resembles a home inspection. The goals are to identify and mitigate risks prior to closing and to develop cost estimates for addressing risks.  The IT Due Diligence Team looks to see if disaster recovery plans are in order, the com­pany is in compliance with software licenses, and whether internal controls exist.  With a distressed acquisition, there are larger risks that must be addressed.  Acquirers don’t want to be saddled with an IT organization that dooms the corporate turnaround before it starts. Before moving forward, the deal team needs answers to questions such as:

  • Where do opportunities exist to streamline, consolidate, and optimize IT operations?
  • Which IT expenditures are aligned and which are not aligned with business objectives?
  • Which pending projects and expenditures are of questionable value?
  • What’s the order of priority of pending projects and expenditures?
  • How do IT costs benchmark against industry standards and how can they be driven below benchmarks to spending levels more appropriate for the turnaround period
  • Are investors paying too much for IT assets?
  • Are non-tangibles (like data repositories) properly valued — can they be monetized?
  • Are service level agreements and contracts with vendors adequate and enforced?

After the deal closes, there will be new opportunities to improve the effectiveness and alignment of IT operations — improvements any future buyer will likely view as table stakes in evaluating corporate value.  One example is management dash­boards for better performance visibility and fact-based decision-making.  Just the sheer presence of such tools says much about the quality of the management.  But what they enable management to do has an even greater bearing on corporate value — monitoring key performance indicators that show how well management’s turnaround initiatives are actually succeeding day-to-day.  Moving forward without such tools puts the turnaround at risk, because there are no tools in place for fact-based decision making within short timeframes.

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