"Every company is now a tech company." This phrase is heard more and more in the business community, from commentators to CEOs of multinational corporations. With few exceptions, every business today relies on information technology to survive. In every sector of the economy, from banks to retailers to energy companies, businesses depend on IT to manage their most important assets: their information and their customers.
If every company is a tech company, then every M&A deal is a tech deal―and to ensure the success of an M&A deal, companies must recognize that solving the IT puzzle should be a central pillar of their M&A strategy. While this has been true for the better part of two decades, the way in which IT has evolved has made defining what is being bought or sold more difficult than ever in recent years.
Enter the Cloud
The emergence of cloud computing as a preferred model of IT is largely responsible for this shift. The term "cloud computing" has been used to describe a variety of service models, but here we use it to refer to IT services that, broadly speaking, are:
- distributed (i.e., not centralized); and/or
- shared, whether with other companies (public cloud) or other internal businesses or functions—which may or may not be part of an M&A deal (private cloud).
Advances in software development and the proliferation of high-speed telecommunications networks have allowed servers and data centres to be "virtualized" across the globe, replacing more traditional IT models that rely more heavily on local, customized infrastructure.
Cloud computing is appealing to businesses because, among other reasons, it requires little capital investment by the service recipient and is adaptable to changing business needs while promising a stable common platform across numerous user groups. As a result, cloud-based platforms are increasingly favoured by CIOs seeking cost-savings and more agile resources. But it is called "cloud" computing for a reason: it is not easy to define what and where, exactly, your company's systems are.
M&A in the Cloud
Solving the IT puzzle and determining which pieces are being purchased (or sold), and which pieces will have to be purchased separately to fill the gaps, are critical to realizing value from the M&A deal. This issue goes directly to the heart of an M&A transaction where the target's IT is central to its value. If the target is a heavy user of cloud-based technology provided by third-party service providers or affiliates, then what, exactly, is being sold and how is it to be valued? And once identified, how do you ensure that technology is seamlessly transitioned to the buyer?
The success of a deal will depend now more than ever on successfully untangling and integrating buyer and seller IT systems.
The negotiation of the transition services agreement (TSA) for acquisitions becomes critical, but perhaps more critical is technology due diligence that must be performed before a TSA can be drafted. The acquiror will need to identify and untangle the target's IT, which may be spread across multiple shared systems, and potentially across the globe. The success of the M&A deal will depend now more than ever on the success of this untangling and integration of the target's IT with the acquiror's IT (or on the acquiror learning to run the target's IT)―essential steps for the buyer to effectively run the acquired business.
Planning Ahead for Success
- Start the tech due diligence process early and enlist the assistance of your integration team to plan the integration well before signing. Seek their input on the cost and timeline, which could greatly affect the overall economics of the deal.
- Study the target's IT, not just as a supporting asset, but as part of the value proposition of the company. Has the target developed systems and processes that enhance the value of the company, or has the target simply made use of a standard cloud computing service in a way that fits its business needs?
- Have an IT procurement strategy that anticipates M&A scenarios. Make sure your IT service providers are obligated to assist you in tech due diligence, and that there is a mechanism in your service agreements to support the operations of the target.
- Ensure your cloud pricing model allows spin-offs without triggering minimum commitments that will burden you or the buyer after the sale.
- Protect your IP. Check that your cloud provider cannot claim to own your patentable systems or processes that were incorporated into the cloud platform.
- Plan early. Understand what will be sold as part of the M&A deal and what transition assistance you are willing to prioritize, taking into consideration confidentiality issues and your resourcing requirements.
Anticipating tech-related issues and establishing good strategies early on to address them can work to ensure the success of M&A opportunities when they arise. Cloud computing, too, will inevitably evolve, but the days of M&A deals without a meaningful tech component are over.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.