Tech M&A: Challenges and key success factors for private equity players

This year, Eight Advisory’s Technology & Transformation team conducted a study on the importance of Tech for investment funds. The analysis covered the three phases in the life of a deal, from acquisition through transformation to exit. The aim of this study is to understand how funds approach the topic of technology in each of these phases and to identify the biggest challenges related to IT issues in the current context.

In total, more than 30 investment funds took part in the survey via interviews with investment directors, managing directors and operating partners. The survey was recently presented at an event open not only to investment funds but also to Eight Advisory’s clients, in particular CEOs and CIOs involved in LBOs (leveraged buy-outs).

More and more IT/Tech due diligence during acquisitions

Jean-Christophe Fuzzati, Partner in charge of the Technology & Transformation team, who works with his team on IT strategy and transformation assignments as well as deal context and post-acquisition transactions and integrations, always with a focus on Tech, presented the main conclusions of the study.

“IT is playing an increasingly important role in mergers and acquisitions,” he said, “93% of respondents believe that technology in financial transactions is an issue in itself. We see this on a daily basis and increasingly so with major developments in digital technology and artificial intelligence opening up new areas of value creation.

“Tech is having an impact on a company’s business and financial analyses, and IT due diligence is increasingly being carried out as part of an acquisition, whether on the seller’s or buyer’s side, to determine this impact. At the same time, 78% of respondents confirm that they are taking the necessary steps to ensure that they have a good overview of the IT investments required over the coming years.”

Jean-Christophe Fuzzati continues:

“More and more often, analyses of existing systems are requested immediately after a deal has been closed, if this exercise has not been carried out beforehand, in order to determine the ability of the information system to support the company’s strategy and to re-evaluate investments.

Technology, a lever for business

The survey shows that 74% of respondents see Tech as a lever for business when the IT roadmap is aligned with the corporate strategy. According to the Eight Advisory Partner, “this last point partly explains why Tech can be a source of deal failure”. In fact, one in five respondents have seen a deal fail for technology reasons.

“That‘s just the beginning! In fact, this phenomenon will increase in the coming years as issues such as resilience and cybersecurity become increasingly important in the context of a deal, emphasises Jean-Christophe Fuzzati.

Surprisingly, Jean-Christophe Fuzzati also found that

“only six out of ten respondents consider cybersecurity as one of the top three Tech priorities in the context of a sale or acquisition. As an acquisition increases the visibility of a company and therefore its risk, we believe that cybersecurity is one of the areas that should be systematically analysed, especially as significant investments may be required depending on the level of maturity.

Tech challenges that evolve over the life of an asset

The survey breaks down the IT-related challenges for investment funds by phase. The biggest concern at the deal stage is one-off costs, i.e. the non-recurring costs associated with the transaction and the likely cost of Tech investments.

“IT due diligence fulfils this need for a cost assessment: it is important to examine the extent of an asset’s legacy and obsolescence, as these costs will be reflected in crucial investments, which will vary depending on growth dynamics. IT due diligence can also be used to assess the costs of a carveout, particularly in terms of potential synergies if integration is involved,” says Jean-Christophe Fuzzati.

In the transformation phase, financial reporting is the top priority for 79% of shareholders. This is also the phase in which the definition and monitoring of an information systems master plan can mobilise IT to meet business challenges.

“In many organisations, the gap between strategy and technology is widening. The definition of an IT roadmap, for which we are increasingly called upon, must ensure that all requirements have at least been identified and then prioritised to meet the constraints of the shareholder, the business and each internal function, with the right translation of these challenges in terms of cost and Tech organisation,” analysed the Partner in the Technology & Transformation team.

The study shows that this should make it possible to anticipate the final exit phase, where for 52% of respondents the biggest challenge is to demonstrate the robustness of the Tech environment to support the business plan.

“Data, AI, digital technology and IT are at the centre of the equity story. The resulting prism of value creation has not stopped evolving and brings new challenges for integration within the asset. The inertia resulting from the activation of these levers is a real playground within an asset in the retention phase. Our role today is to support funds and companies in this process,” concludes Jean-Christophe Fuzzati.

Read the full article by Maxime Monniotte published in Affiches parisiennes on October 7, 2024.