Merger & Acquisition Digital Due Diligence a Top Priority in Private Equity

From the complex dealings of the west’s oil and gas sector to the proposed merger of two of Canada’s most known telecommunications providers, the landscape of Canadian mergers and acquisitions resembles that of a game of Monopoly. The big question is, who will come out on top when profits and losses are dividing industries and companies across the country?

Since 2013, over $185 billion has been invested across Canada, impacting more than 4000 national companies. In Ontario specifically, we have seen 63.3 billion dollars in private equity investments divided amongst 709 companies. This does not come as a surprise as the province is home to 119 private equity firms. Over the course of 2020 and the beginnings of 2021, select companies with increased revenue and market share have emerged in their respective sectors, while other companies have dropped in their standings. Faced with such a unique market due to the unending and yet profound impact of COVID-19, Canada is poised to see an increase in mergers and acquisitions with an estimated 2 trillion dollars ready to be utilized. With so much uncertainty, however, private capital investors and managers of mergers and acquisitions must conduct their due diligence in ensuring that their investments and assets are conditioned to grow within the unique and shifting marketplace.

Conduct an Environmental Assessment

When purchasing a home, a buyer must conduct due diligence to make sure that the property is a good fit for them and their family. Due diligence can come in the form of speaking with a mortgage broker in order to gain financing, conducting a home inspection to determine structural issues and the costs associated with them, or even speaking with an insurance broker to gain a quote for the appropriate coverage. It is by conducting due diligence and asking the tough questions, that a buyer can move forward in the transaction with confidence.

The same principles apply in the field of mergers and acquisitions. The companies involved must conduct an environmental assessment (or due diligence) to determine if the infrastructure and management systems in place are suitable, or if they must be replaced or fixed before financial gains and alignment around a digital strategy can be achieved. In determining the health of a company before it is acquired, executives and business owners are able to address any areas of concern and put strategies in place to ensure that the business may grow and continue to serve clients, while supporting that staff, contracts, and licenses in place.

In conducting an environmental assessment in this space, chief financial officers and acquisition specialists must assess various protocols, systems, and operations currently in use. Technology infrastructure, such as a Corporate Performance Management (CPM) or Enterprise Resource Planning (ERP) solution, are two examples such system that needs to be reviewed and utilized as a tool by both parties. Taking a detailed look at the methods in place for managing transactions, taxes, cash flow, payroll, profits and losses, planning and reporting, decision-makers can gain invaluable insight and identify both the company’s current and transitional system requirements. It also begins to give an understanding of the broader digital application landscape, its integration points with other platforms and what needs to be solved for post-closing.

Take Inventory of IT Assets and Expenditures, Infrastructure, and Applications

Plan your work and work your plan. Business plans are only effective if they are utilized. In conducting digital due diligence in mergers and acquisitions, understanding the applications and infrastructure in place is key to ensuring that investments and strategies for scaling and maintaining sustainability are lucrative. By weighing business plans against the solutions in place and offsetting current and future technology investments required, the business’s value both now and in the future can be considered throughout the merger and acquisition process.

In investigating financial operations and infrastructure performance, a deep dive must be taken to identify areas that are lacking in accurate real-time data, sharing inadequate information amongst locations, departments, and teams, and are affecting the ability to scale with the ebb flow of the market. If one application does not seamlessly integrate with the infrastructure in place and teams are left questioning the technologies available to them, what was once considered an asset can quickly become a liability, resulting in further reliance in managing the business via manual spreadsheets.

Technologies change, and so does its effectiveness in serving a business, its employees, and its partners. While infrastructure and technologies purchased in the past were well-suited for the business at hand, evolving business practices require technologies to evolve along with them. If the future strategy and the roadmap to get there do not align, it’s time to find a strategy and ultimately system(s) that help sustain business operations and roll-up reporting requirements.

When addressing if your infrastructure is suited to your teams, business, and the sectors in which you serve, ask yourselves these questions:

  • Are you able to communicate effectively across teams, whether they are in the field or in the office?
  • Are the systems that are used throughout the day, able to be integrated or do they require teams to consistently change applications and programs?
  • Is your IT Team the company’s only resource in assisting with technology, applications, programs and other technological concerns?
  • Do you spend more time guessing at results than analyzing accurate real-time and historical data?
  • Do your current system’s align with overall business objectives?
  • Do your current systems provide the right information to support short- and long-term planning, decision support, and strategy management?
  • Can your systems be scaled to support business model changes, company growth including new products and services?
  • Can your systems generate information that can help management plan and respond for disruption or economic downturn?

Review Subscriptions, Licenses, and Contracts

Licenses and contracts are essential to a business’s operation. For a company to continue functioning post-merger, contracts and licenses must remain in place to help support finance and business operations. In auditing contracts and licenses, not only must a business ensure that a company meets the requirements and regulations needed to maintain licensing, but that they can continue to fulfill all contractual obligations.

When acquiring licenses and contracts, a business must also accept the expenses and data associated with it. With historical reports and various information streams to consider, solutions must be utilized to accurately analyze data and develop strategies that work to maintain licensing and meet contract requirements. Without the appropriate information or skills on hand, these financial streams and the business’s value can be compromised. Not to mention the requirement to know whether the existing systems in place will continue to be relevant post close.

The Benefits of Centralized Systems

At a high level in this article we mentioned two specific technologies (CPM and ERP). At the core of any merger is the need to consider pure Financial Management vs Financial Management and Operational Functions. At MNP we have worked with many Private Equity firms in implementing a standard ERP across portfolio companies and/or build out a sustainable rollup reporting structure necessary for portfolio management. There is no hard and fast rule on whether a CPM or ERP solution is the correct strategy, but what makes sense for the integration between the two companies coming together.

The need to reinvest in technologies that are already used in order to retain interested companies can be a hindrance if the technology itself does not provide adequate value. When looking at revamping the technologies used, it must be flexible enough to serve the unique needs of each company, yet complex enough to continue to add value as the company grows and evolves. For example, revamping financial reporting functions may not mean that it meets the requirements for Finance Financial Planning & Analysis (FP&A) personnel.

Conversely, if the technology due diligence uncovers the best approach is to keep existing investments in place from an ERP perspective, and leverage a CPM tool to help with centralized, planning, consolidations and roll up reporting, this has a different hierarchy function. At MNP we have worked with many Private Equity firms in executing on FP&A process improvements across various portfolio companies and have discovered there is no hard and fast rule on whether a utilizing CPM or ERP or utilizing both simultaneously is correct

Regardless of your application strategy, proper technology due diligence and a broader discussion maybe required in conjunction to the sunken investment into current systems to help determine what the technology roadmap looks like for you and your portfolio investments.

Ultimately, MNP is able to support your firm in effective technology M&A due diligence with either solution set (ERP/CPM). Both have pros and cons, but depending on the integration stategy one or both may help accomplish what you need them to do. The question to ask is not how each stack up against each other, but which makes the most sense for the business. Not features and functions, but viability and future direction. This is where MNP can help.

Whether you are in the process of a merger and acquisition or are looking to invest, conducting due diligence is crucial to making an informed decision that will be of benefit both now and in the future. At MNP we work with you to understand the unique advantages that an ERP or CPM system can provide, whether it be already utilized or integrated for the first time. Speak with our digital enterprise experts, and prepare for the future, today.

Request a free consultation to explore the ROI of an ERP solution for your organization.



 

Authors: Dan Caringi and Kerry Mann

Dan Caringi and Kerry Mann are Consulting Partners with MNP and leaders within the firm’s national Digital Enterprise practice.