While UK mid-market deal volume in 2022 fell from the post-lockdown surge of 2021, last year saw the rise of bolt-on acquisitions. In fact, 62% of all-mid market deals in 2022 were bolt-ons, representing a record-high of half-yearly proportions to date.
It’s clear that bolt-on acquisitions can provide a great way of acquiring new technology, increasing market share and branching into adjacent markets, but there’s a lot to consider from a technology point of view in order to make them a success.
Acquisitions aren’t a silver bullet – work is required to make them successful. When done right, acquisitions can be a huge benefit to the organisation, often through reaching new markets or introducing new technologies. However, in other circumstances, the work required to make an acquisition viable doesn’t justify the time, effort and cost involved – and isn’t worth pursuing.
Here, the Intechnica team discusses some of the things you should consider from a technical perspective that could make or break a deal – and will help you decide whether to commit to contract negotiations.
What is your strategy for the target business?
It is important to understand what you want to do with the business you’re acquiring – are you acquiring the business solely for its orderbook or do you plan on integrating systems? Do you need to merge your software, or can you support standalone products? If you’re planning to buy a number of businesses, have you considered creating a playbook and dedicating a team to this? Answers to these questions and others like them will impact what your dealbreakers are.
For example, having different technology stacks might not be an issue if there is no desire or need to integrate or combine the software.
Even for non-technology businesses, understanding the different technology in use is key – it may not be a dealbreaker, but it’s important to understand what different systems are in use and define a strategy for integration or migration; as well as your overall risk appetite.
In-house capability
Technology integration is the second most commonly faced challenge by acquirers. It’s therefore important to spend time considering this ahead of an acquisition.
Can your team pick up and run with the technology of the acquired business? If not, how are you going to support the technology, and how much is this going to cost you? Adopting a wildly different technology stack could end up doing you more harm than good.
This goes beyond just development languages – it can be hard to merge different team processes and cultures, and it’s important to understand whether teams will be a good fit before starting down this path.
If you’re integrating non-bespoke software, do you have the right people who can effectively integrate back-office systems and off-the-shelf tooling? This likely isn’t a deal breaker, but bringing individuals who will be involved in the integration as early as possible will ensure effective planning and a smooth(er) transition during and post-acquisition. Some businesses engage external advisors who are experts in this area to support them throughout the process.
Internal security, risk governance and other processes
Security is one of the biggest risks identified in IT Due Diligence reports and potential acquirers are naturally concerned about how target businesses stack up in this area and what level of risk they are taking on. However, we have found that issues relating to security controls and risk governance are relatively quick to fix – especially when you have strong processes, policies and controls in your own organisation that can be adopted by an incoming business.
We do need to say, however, that this is not always the case – sometimes security flags are raised regarding serious vulnerabilities within the product that require significant development effort to fix – and that may be dealbreakers for acquirers.
Conclusion
It’s important to have a strategy and high-level understanding of how the target organisation will fit into your business before starting any due diligence processes.
Once you have determined that the target acquisition is a good fit, it’s time to start due diligence. Depending on the nature of the acquisition (business itself and type of deal), different levels of ITDD and different focus areas will be important. We’ll explore this in more detail next time.
Thanks to Chief Technical Architect David Bamber and Consultant Rachel Ng for their contributions to this post.
Preparing for a bolt-on acquisition? We are highly experienced in providing IT Due Diligence for M&A. To find out more, get in touch with our team of experts.
