McKinsey’s M&A Annual Report highlights that the global deal value was up 12% to $3.4 trillion in 2024, with expected further growth in 2025. Despite the best intentions, 70-90% of mergers fail to achieve their goals, according to Harvard Business Review. The primary reason? Investors often focus solely on financials while neglecting hidden threats such as technical debt, security flaws, and scalability risks.
Technical due diligence (TDD) is the unsung hero of mergers and acquisitions (M&A). This crucial process thoroughly examines a target company’s technology to uncover its true value. Not performing a thorough TDD can lead to disastrous consequences, including:
- $4.88M: Average cost of a data breach (IBM).
- 33% of developer time is wasted on technical debt (Developer Coefficient report by Stripe).
- 50-70% of integrations fail due to tech misalignment (PwC M&A Integration Survey).
This article delves into the intricacies of technical due diligence, its significance, and how it serves as a secret weapon in investments and acquisitions. It also reveals how TDD turns risk into ROI and why firms like Zartis reshape M&A outcomes.
What is Technical Due Diligence?
Technical due diligence (TDD) is an in-depth evaluation of a target company’s technology infrastructure, systems, and intellectual property. It involves a comprehensive assessment of the technical aspects and functionality of a product or company before an M&A transaction begins. The acquiring company or investor typically initiates this process to gain a holistic view of the target company’s true worth and its ability to deliver on promises made before the M&A.
Key Elements of Technical Due Diligence
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Software and Systems Evaluation:
A thorough examination of the target company’s software ecosystem, including proprietary software, open-source components, third-party licenses, and mission-critical dependencies. This evaluation ensures that the technology stack is scalable, maintainable, and flexible enough to meet both current and future business needs.
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IT Infrastructure Assessment:
A robust assessment of the target company’s IT infrastructure, encompassing hardware, networks, data centers, and cloud solutions. This involves benchmarking performance, reliability, and scalability against industry standards while identifying single points of failure.
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Technical Debt and Compliance:
Identifying and evaluating technical debt, software lifecycle management practices, and compliance with intellectual property and regulatory requirements. This helps uncover latent risks and directly informs valuation, post-acquisition integration planning, and risk mitigation strategies.
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Team and Talent Evaluation:
Assessing the team behind the technology, including their skills, experience, and ability to drive the technology forward. This is crucial for understanding the human element that supports the technical environment.
Why Technical Due Diligence Is Non-Negotiable
In the modern landscape of mergers and acquisitions (M&A), technical due diligence has become a non-negotiable step for several compelling reasons. The depth and rigour of this process can significantly impact the success of an acquisition and ensure that the acquiring company or investor makes informed decisions. Here’s why technical due diligence is indispensable:
1. Uncovering Hidden Risks
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- Identifying Vulnerabilities: Technical due diligence helps uncover potential vulnerabilities in the target company’s technology infrastructure, such as security flaws, outdated systems, and unlicensed software.
- Mitigating Post-Acquisition Issues: By identifying these risks early, the acquiring company can address them proactively, reducing the likelihood of costly surprises post-acquisition.
2. Assessing Technology Viability
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- Evaluating Scalability and Flexibility: It is crucial to assess whether the target company’s technology can scale to meet future business needs and adapt to changing market conditions.
- Ensuring Compatibility: Technical due diligence ensures that the target company’s technology is compatible with the acquiring company’s existing systems and infrastructure.
3. Evaluating Intellectual Property
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- Verifying Ownership: Ensuring that the target company owns the intellectual property it claims to possess and that there are no ongoing legal disputes is essential for protecting the acquiring company’s interests.
- Assessing Value: Evaluating the value and potential of the target company’s intellectual property can provide insights into the long-term benefits of the acquisition.
4. Understanding Technical Debt
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- Quantifying Technical Debt: Identifying and quantifying technical debt allows the acquiring company to understand the resources and time required to address these issues.
- Informing Valuation: Technical debt can significantly impact the valuation of the target company, influencing the final deal terms.
5. Enhancing Value Creation
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- Identifying Synergies: Technical due diligence helps identify potential synergies between the acquiring company’s technology and the target company’s assets, leading to enhanced value creation post-acquisition.
- Driving Innovation: By understanding the target company’s technology landscape, the acquiring company can leverage innovative solutions to drive growth and stay competitive.
6. Facilitating Smooth Integration
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- Planning Integration: A thorough understanding of the target company’s technology enables the acquiring company to plan for a smooth integration, minimizing disruptions and ensuring continuity of operations.
- Aligning Teams: Technical due diligence also involves evaluating the target company’s technical team, ensuring that they have the skills and experience necessary to support the integration process.
7. Regulatory and Compliance Assurance
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- Ensuring Compliance: Technical due diligence helps ensure that the target company complies with relevant regulations and industry standards, reducing the risk of legal and financial penalties.
- Assessing Data Privacy: Evaluating data privacy practices is essential to protect sensitive information and avoid potential breaches.
By conducting thorough technical due diligence, acquiring companies can mitigate risks, enhance value creation, and ensure a successful acquisition.
Advantages of Technical Due Diligence in Investments and Acquisitions
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Identifying Hidden Risks
Technical due diligence helps uncover potential risks in a target company’s technology infrastructure, systems, and processes. This includes identifying outdated technology, security vulnerabilities, and scalability issues that could impact the acquisition’s success.
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Accurate Valuation
By thoroughly assessing the technical aspects of a target company, investors can gain a clearer understanding of its true value. This ensures that the acquisition price reflects the actual worth of the company’s technology assets and capabilities.
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Informed Decision-Making
Technical due diligence provides critical insights into the strengths and weaknesses of a target company’s technology. This information enables investors to make well-informed decisions about whether to proceed with the acquisition and how to integrate the acquired company effectively.
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Mitigating Post-Acquisition Risks
Conducting technical due diligence helps identify potential post-acquisition risks, such as integration challenges and compatibility issues. By addressing these risks early on, investors can develop strategies to mitigate them and ensure a smoother transition.
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Enhancing Operational Efficiency
Technical due diligence can reveal opportunities for improving the efficiency and effectiveness of a target company’s technology systems and processes. This can lead to cost savings, increased productivity, and enhanced overall performance post-acquisition.
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Ensuring Compliance
A thorough technical due diligence process includes evaluating the target company’s compliance with industry standards and regulations. This helps investors avoid potential legal and regulatory issues arising after the acquisition.
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Maximizing ROI
Investors can maximize the acquisition’s return on investment (ROI) by identifying and addressing technical risks and opportunities. This includes leveraging the target company’s technology to drive growth, innovation, and competitive advantage.
Latest Trends in the Global M&A Market
The global mergers and acquisitions (M&A) market is continually evolving, driven by various trends that shape its growth and dynamics. Let’s delve deeper into some of the most notable trends influencing the market:
1. Resurgence of Large Deals
- Increase in High-Value Transactions: The volume of deals greater than $1 billion in value increased by 17% in 2024. This resurgence of large deals sets the tone for the market, encouraging other companies to pursue M&A as a strategic growth avenue.
- Strategic Consolidation: Large deals often involve strategic consolidation, where companies merge to achieve greater market share, operational efficiencies, and synergies.
- Industry Leaders: Industry leaders increasingly engage in mega-deals to solidify their dominance and expand their global footprint.
2. Focus on Growth and Transformation
- AI and Digital Transformation: CEOs are focusing on growth and transformation in this new era of artificial intelligence (AI) and digital advancements. Acquiring businesses with cutting-edge technology capabilities allows companies to stay competitive and innovate faster.
- Expansion into New Markets: Companies are leveraging M&A to enter new geographic markets and diversify their product and service offerings.
- Innovation-Driven Acquisitions: Acquisitions are often driven by the need to acquire innovative products, services, and technologies that can propel growth and differentiation.
3. Increased Supply of Assets
- Private Equity and Venture Capital: There is an increased supply of assets from private equity portfolio companies and venture capital-funded startups. These firms often look to exit their investments through strategic sales.
- Corporate Divestitures: Corporates are divesting non-core assets to streamline operations and focus on their core business areas. This divestiture creates opportunities for other companies to acquire valuable assets.
- Distressed Assets: Economic challenges have led to an increase in distressed assets coming to market, providing opportunities for opportunistic buyers to acquire undervalued businesses.
4. Geopolitical and Economic Uncertainty
- Volatile Geopolitical Landscape: Dealmakers are navigating a volatile geopolitical landscape, including the impact of recent elections, policy changes, and trade tensions.
- Regulatory Changes: Regulatory changes in different regions can create uncertainties and impact the timing and structure of M&A deals.
- Risk Mitigation: Companies are focusing on risk mitigation strategies to manage geopolitical and economic uncertainties, including diversifying their investments and engaging in cross-border deals.
5. Rising Interest Rates
- Impact on Financing Costs: Long-term interest rates are rising again, making returns harder to find and leading to more challenging refinancing processes. Higher financing costs can impact the affordability of acquisitions.
- Strategic Financing: Companies are exploring strategic financing options, such as using a mix of debt and equity, to manage the impact of rising interest rates.
- Focus on Value Creation: With higher financing costs, companies are emphasizing value creation more and achieving synergies post-acquisition to justify the investment.
6. Cross-Border Deals
- Global Expansion: Cross-border deals enable companies to expand their global footprint, access new customer bases, and leverage international growth opportunities.
- Cultural and Regulatory Considerations: Cross-border M&A requires careful consideration of cultural differences, regulatory environments, and integration challenges to ensure successful outcomes.
These trends highlight the dynamic nature of the global M&A market and the various forces shaping its growth and evolution. As companies continue to navigate these trends, strategic planning, risk management, and innovation will be key to achieving successful M&A outcomes.
Economic Indicators Affecting M&A Growth
Several specific economic indicators significantly influence the growth of mergers and acquisitions (M&A):
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Gross Domestic Product (GDP) Growth
Strong GDP growth correlates with increased M&A activity due to heightened corporate profitability and investor optimism.
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Interest Rates
Lower interest rates stimulate M&A by reducing borrowing costs, while higher rates deter acquisitions.
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Inflation
High inflation drives companies toward acquisitions for economies of scale, but prolonged inflation can erode profit margins.
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Unemployment Rates
Low unemployment fosters M&A activity by boosting consumer spending and business confidence.
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Stock Market Performance
A robust stock market provides companies with higher valuations, making it easier to use stock as currency for acquisitions.
Final Verdict
In today’s fast-paced and technology-driven world, technical due diligence has become a critical component of the mergers and acquisitions (M&A) process, valued at approximately $3.4 trillion. This meticulous evaluation of a target company’s technology infrastructure, systems, and intellectual property allows acquirers to uncover risks, identify opportunities, and make informed decisions.
Companies can ensure smooth integration, drive innovation, and create value post-acquisition by conducting thorough technical due diligence. It provides a strategic advantage, helping businesses stay competitive and navigate the complexities of the M&A landscape.
Ultimately, technical due diligence is not just a checkbox activity; it’s a non-negotiable step that empowers companies to achieve successful and sustainable growth in the ever-evolving market of mergers and acquisitions.
The M&A Game Changer: Future-Proofing Technology with Zartis
At Zartis, we specialize in providing top-notch technical due diligence services to help businesses make informed and strategic decisions. Our expertise covers a wide range of areas, including software architecture and infrastructure assessment, AI and data strategy due diligence, DevOps and infrastructure review, and cybersecurity assessment. By partnering with us, you can ensure that my technology stack is scalable, reliable, and compliant with industry standards. This thorough evaluation helps identify potential risks, optimize efficiency, and enhance the overall value of target companies.
With our approach, you can navigate the complexities of mergers and acquisitions with confidence. If you are looking to maximize the value of M&A transactions and stay ahead in the competitive landscape, let’s discuss your technical due diligence needs. Start a conversation today and unlock the full potential of your investments!
