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IT Due Diligence

Sound IT analyses as the basis for secure M&A decisions

IT Due Diligence – the foundation for successful business integration

IT due diligence is far more than an inventory of servers and applications. 

It's an attempt to understand how a company truly functions. How stable are systems and processes? How resilient is the technological foundation? Where do risks arise that later cost money, delay integration, or destroy trust?

In many M&A projects, a lack of IT transparency already leads to purchase price adjustments or new integration strategies during the due diligence phase. Not infrequently, this is the moment when it is decided whether and how to proceed.

Detailed and neutral IT due diligence is essential before a company transaction. 

A superficial risk analysis is not sufficient for a business transaction

While IT due diligence is already an integral part of Mergers & Acquisitions (M&A) in the USA, its importance is often still underestimated in Europe. This can involve significant risks for investors.

Cost traps, such as weaknesses in the ERP system or inadequate software licensing, can significantly influence the purchase price. Likewise, a lack of scalability in the IT infrastructure can make it harder to achieve business objectives.

IT has taken on an increasingly central role within companies in recent years. The digitalisation of business processes requires that IT systems are not only efficient but also strategically aligned. 

A superficial risk analysis (Red Flag Due Diligence) is no longer sufficient in a corporate transaction. Instead, a comprehensive approach is required that deeply analyses IT strategy, personnel, applications, and infrastructure, in addition to IT processes. This must take into account both potential savings and necessary investments.

Conducting an independent IT due diligence prior to a transaction is therefore strongly recommended.

When carried out correctly, it creates transparency and forms the basis for informed decisions. Investors benefit from improved risk minimisation, the identification of synergy potential and accelerated integration of the target company's IT.

Key Areas of IT Due Diligence

  1. IT StrategyAlignment with business strategy, IT roadmap and future development plans.
  2. Employees and OrganisationStructure, management, internal and external IT service providers.
  3. ApplicationsAssessment of the key applications regarding their ability to efficiently support business processes.
  4. IT InfrastructureServer landscape, networks, IT security and cloud usage.
  5. IT processesAnalysis of development, operational and support processes.
  6. IT FinancialsComparison of IT costs with industry benchmarks and identification of potential savings.

At its core, it's about strategy:

  • Is there an IT roadmap with traceable objectives and clear responsibilities?  
  • Is it compatible with the potential buyer's corporate strategy?
  • Where are adjustments necessary, where are they possible?

An essential and often missing component of IT strategy is a transparent overview of ongoing contracts, recurring costs, and planned project expenditures: the IT budget. While IT-related expenses are generally recorded in cost accounting and the balance sheet, they are often distributed across various cost centres in specialist departments or booked as a lump sum under „other costs“.

For many companies, it is therefore barely possible to clearly state their actual IT expenditure or to create a reliable forecast for the coming years. The consequence is a creeping investment backlog that harbours considerable risks – especially for potential buyers.

These risks often only become apparent after the closing: a necessary and costly CRM system upgrade has not been budgeted for, the minimum terms of existing IT contracts are longer than anticipated, or under-licensed software needs to be re-licensed at short notice and unexpectedly.

This investment backlog is not only impacting functionality and scalability, but increasingly also infrastructure and IT security. Stability, resilience, and future viability depend directly on whether systems are regularly reviewed, modernised, and operated with sound organisational practices.

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MAX GIESSLER

Managing Director of bitformer GmbH