Technology Due Diligence

Given that venture capital (VC) investments as well as mergers and acquisitions (M&A) continue to be a dominant corporate growth strategy worldwide, due diligence is an integral and critical part of the acquisition and startup process. Netspective can provide you with the handholding you need to do a thorough due diligence job, so you don’t end up straddled with an investment, acquisition or merger you shouldn’t have gone in for, or end up putting your money backing the wrong technology horse.

Netspective’s focus will be on understanding what is new and truly unique that the company under the microscope has in terms of technological capabilities. The core technologies underlying your target company’s technology stack, its current products, and products in the pipeline will be identified and analyzed. We will help you understand how the target company can add value to your organization and make it more competitive in the marketplace.

Focus on Integration

Technology assets can be the drivers behind an investment, merger or acquisition move. However, integrating systems post-merger often presents the biggest challenge to realizing the full value of a deal. Careful planning of pre- and post-merger activities, especially with regard to integration of the merging entities’ IT systems and processes is essential for an M&A program to deliver expected results. Netspective’s highly experienced cross-functional industry specialists will work closely with you in understanding the technological implications of the M&A initiative, leaving no room for error. We will perform a fact-based analysis that is appropriately aligned to the business strategy behind the transaction. We will help you in the post-merger technology integration process as well. Our proven methodology allows us to take on projects around large transaction and integration scenarios very diligently and very quickly.

Managing the Technology Stack

Our due diligence process is architected around the vision of supporting robust, reliable and scalable applications so as to achieve long-term business success. We assess system capabilities, scalability and flexibility in the light of the projected post-merger enterprise, with an eye toward generating the best long-term ROI. We meticulously evaluate legacy systems currently being used by the target company to ascertain their usefulness and usability over the long term, especially taking into consideration the increasing difficulty in finding people with the necessary skills and experience to continue developing, operating and maintaining such applications, and the cost benefit ratio of their continued use.

Our due diligence process pays special attention to requirements and scope definition, which will provide relevant, reliable and valuable information on additional development effort required to ensure proper integration; change management policies that need to be put in place post merger / acquisition; information related to configuration, data conversion, testing and deployment; and maintenance related information. In the post M&A scenario, the requirements analysis document will provide the design, architecture and development teams with detailed system and business process specifications to support the technical design, development, and system integration efforts.

If the target of the M&A initiative or the VC investment proposal is an IT product company, we study the company’s product architecture and the design concepts employed; the database architecture, software construction methodology, coding standards and the engineering tools used; the types of testing that the product has been put through; its compliance with regulatory requirements; and its amenability for deployment through the SaaS and mobile device delivery models.

Due Diligence for M&A in Healthcare

Soundly managed healthcare businesses that have performed well during the downturn are taking the M&A route to expand business, and making strategic acquisitions, some times at incredibly low valuations. However, such moves are fraught with risks. Many buyout targets may be on the verge of bankruptcy with inadequate funds to meet capital needs and pension liabilities, obsolete IT infrastructure, and severe labor shortages. Netspective has a healthcare due diligence team of seasoned industry professionals who will help uncover hidden risks and pitfalls in a healthcare related M&A initiative. They will not only assess such factors as financial performance, current liabilities, patient demographics, physician type and reputation, and market perception, but will also focus on such aspects as the type of clinical technology currently being used by the target entity; their ‘as is’ clinical workflows; the way they manage their electronic healthcare records (EHR) and the interoperability of the healthcare data; and measures that need to be taken to improve clinical safety. Netspective will minimize the risk involved in mergers and acquisitions in the healthcare sector.

Intellectual Property Implications

A critical part of any due diligence investigation is a review of the target company’s intellectual property assets and all agreements it has entered into that pertain to such IP assets. Some of the important issues that Netspective will address in the course of an IP due diligence investigation include:

• Ownership: Confirming that the target company owns, or has valid licenses for, all intellectual property and technology that it uses to run its business, as well as confirming whether the licenses it has in its possession are all that will be needed to run the business, or whether more licenses need to be acquired.
• Infringement: Ascertaining whether the target company has infringed on some other company’s IP rights and whether any litigation is underway, as well as ascertaining whether in the post-transaction scenario, the emerging entity will have the freedom to operate without fear of infringement lawsuits.
• IP Agreements: Ensuring that the third party technology license agreements that the target company has entered into are broad enough to meet current and anticipated requirements, as well as ensuring that the licenses that it has granted to other companies are legally enforceable.
• Restrictive Agreements: Ascertaining whether the target company has entered into any agreement that provides exclusive distributor or reseller rights for specific regions or products to third parties, as well as agreements not to compete in any specific technology area.
• Royalty Dues: Ascertaining whether the target company needs to pay any royalties or commissions to any other company to continue product development and sale on account of third-party technology components being used in the products, and determining the duration for which these need to be paid.
• Source Code: Ensuring that the target company is in possession of the source code for all software developed and sold by it, including the source code for software components sourced from third parties, as well as ascertaining whether product source code has been sold to other companies.
• Open Source Software: Eliciting full information on all open source applications and components used by the target company internally or as part of its products, and the terms and conditions governing their use.
• Registered IP Assets: Reviewing materials pertaining to target company's registered IP assets, including patents and patent applications, copyright registrations, trademarks and trademark applications, and internet domain names.
• Employee Issues: Ensuring all employees and contractors of the target company have executed written agreements assigning ownership of all intellectual property and technology developed by those parties to the target company.
• Opportunities: Netspective’s IP due diligence will also examine IP related synergies, the ability to co-build algorithms using various technologies, and opportunities for the emerging entity to benefit from metrics-driven process improvement initiatives such as the CMMI model.

Infrastructure Assessment

Netspective will pay special attention to assessing and evaluating the target company's existing IT infrastructure. Coming under close scrutiny will be the physical and systems-based security measures that the company has put in place; the disaster recovery plans and procedures that the company has adopted; the current status of systems and applications in terms of availability, performance, reliability and scalability, and the urgency for any need for improvements on these parameters; and the processes and methodologies adopted for systems administration, management and maintenance. Another due diligence focus area will be Internet connectivity, the number and types of connections in place, the bandwidth available, usage patterns, and documented data on downtimes and their root causes. If the M&A initiative involves a data center, our due diligence will also cover the cooling systems being used and the methods adopted to ensure optimal utilization of power.

Services Portfolio

One of our major areas of focus while doing due diligence for an M&A initiative will be the services portfolio that the target company currently offers to its clients, whether that complements the service offerings of the acquiring company, and whether the resulting synergies will lead to better customer satisfaction and greater market access post merger / acquisition. The extent of existing demand for the services offered by the target company, the scope for enhancing it through proper marketing initiatives, and the ability to scale service delivery in the post transaction scenario will be key elements of our due diligence study.

Process and Methodology Assessment

Netspective’s due diligence process includes a detailed analysis of the target company’s project management methodology, and whether that is in line with PMBOK guidelines and principles. Also coming under the scanner will be the design and development methodology that they follow in the software development life cycle; the coding standards used; the types of testing they do and the way they write the test cases; how they address scope creep and change management issues; and the type of ongoing maintenance support they provide to clients. Netspective will assess the maturity of various processes followed across the organization, and compare them against industry accepted models such as CMMI, ISO and Six Sigma.

Personnel

It’s people that make an organization, and the quality of the people on the rolls has a direct bearing on the success or failure of the organization. As such, employee assessment becomes an integral part of any M&A due diligence process. Netspective has proven capabilities in that area. Netspective will make a list of all employees and consultants on the company’s rolls and document the following:

• Their names, designations, rolls and responsibilities and current compensation package
• The technical capabilities of key personnel, their total experience and industry exposure
• The soft skills that the employees bring to the table individually and collectively
• Employees’ views about the proposed M&A proposal and indications of resistance
• Information about collective bargaining or other labor agreements the company has entered into
• Information about employee benefits, pension and retirement plans, healthcare provisions, bonus plans and profit-sharing plans
• Information regarding insurance coverage
• Whether or not the employees have entered into non-competition, confidentiality, non-solicitation or similar agreements with the Company
• Measures taken to ensure employee retention
• Scalability of teams to meet spurt in demand

Based on the above analysis, Netspective will submit a detailed report to the prospective buyer, clearly indicating problem areas to watch out for.

Customers

As part of the due diligence process, Netspective will collect information about the target company’s current customers, and about their success rate in ensuring customer loyalty. Netspective will investigate into instances where customers were dissatisfied with the products or services delivered by the target company, and inquire into the reasons for the same. Netspective will also examine the extent of client involvement in product development if any, and also study possibilities for cross-selling between clients. Deliverables of the customer-focused due diligence exercise will include the following:

• A list of purchase orders in hand with details regarding client, and nature and value of order
• Contact information relating to major clients present and past
• Copies of relevant contract agreements with clients
• Details of accounts receivable with aging information

Partners

As part of due diligence, Netspective will see if the target company has been conferred partnership status with technology leaders such as Microsoft, IBM, Oracle, SAP or other such companies, and whether there are any formalized contracts in this regard. Netspective will analyze the extent to which such partnerships can help in enhancing revenue, and also examine the possibilities of entering into such partnerships, taking into consideration the combined technology capabilities that post acquisition / merger entity will have.

Cultural Compatibility

One frequent reason for failure or dysfunction in M&A situations is incompatibility of organizational cultures. Problems can arise due to critical differences in organizational philosophy and values, management style, hierarchical structure, internal processes and administrative practices. Netspective’s due diligence service will study the human factors and cultural aspects involved in an M&A initiative, and examine ways to make the two organizations mesh seamlessly. Netspective will identify and analyze areas of possible conflict, and propose remedies to minimize dysfunction and avoid failure. Our approach is to seek the cultural common ground between the two entities and to build the integration process from there. This helps to minimize loss of key personnel and avoid demoralization of workers.

Practical and Down-to-Earth Approach to Due Diligence

Netspective follows a proven, practical and down-to-earth approach to due diligence. We perform fact-based analyses appropriately aligned to the business strategy behind the M&A transaction, and focusing on the synergies between the acquiring and acquired companies. Netspective’s due diligence effort will involve the following:

• A detailed SWOT analysis to discover the strengths, weaknesses, opportunities and threats that the M&A initiative can bring in its wake
• Understanding the limitations of the underlying technology and learning how it will play out in real-world applications
• Determining whether or not the new technology being introduced would be compatible with existing legacy systems, applications and operational environment
• Assessing the security aspects and ascertaining whether data assets are properly protected against loss, abuse, disclosure, intrusion and destruction
• Documenting information on existing systems, processes, software / hardware assets, projects in hand, committed deliverables and their financial implications
• Creating a high level action plan to mitigate identified risks, resolve key issues, and capitalize on new opportunities that will open up as a result of the M&A initiative
• Arriving at a true understanding of the scope and significance of any patent, copyrights, trademarks, and trade secrets
• Looking into administrative aspects including collecting reliable information about budget outlay for IT functions, background of key IT personnel, and existing employee retention plans
• Identifying near-term requirements for additional capital investment in IT

Netspective will also help you address immediate action items necessary for stabilizing the newly acquired entity and ironing out bumps in the transition process. Mergers and acquisitions are expensive propositions, fraught with risks. Failure can be disastrous. With our proven due diligence approach, Netspective can make the difference between success and failure.

Special Due Diligence Focus Areas for Technology Firms

Because we focus on technology due diligence, there are some special areas that we can dive into and provide gap analysis and scoring reports for technology firms. The following are some subjects where we provide special consideration (like healthcare IT firms).