Aligning technology for post-close value creation

This is one of seven private equity value creation strategies we have compiled into our new guidebook. Download the entire guidebook here.

Once an organization is acquired, how technology is used can change drastically. During the hold period, investors may assimilate an acquisition to an existing platform, build a new platform on the acquired portfolio, or simply seek to double the earnings over a 4-5-year period through organic growth. Each strategy comes with a unique set of risks, needs, and objectives to allow for scalable growth that looks different from pre- to post-acquisition. It’s important to solidify the investment strategy and build an IT strategy and plan that allows for realization of the growth and value creation.

Establishing the IT strategy

IT is an enormous line item for many companies, and there’s often a significant opportunity to achieve operational efficiencies. Once the IT strategy has been established, you can begin to make tactical decisions about necessary improvements and build an actional plan to realize those improvements. Most organizations realize that existing IT resources may not have the experience required to independently improve the technology processes and platform. As such, they find it beneficial to use third-party experienced resources to deliver critical IT functions, including network monitoring, cybersecurity management, application strategy, operations technology, and/or cloud services to provide an elastic environment that expands with business growth.

At times, the best way to achieve efficiencies is by leveraging any existing IT resources — including people, systems, tools, and technologies — from other portfolio companies. Instead of thinking of each acquisition in a vacuum, reevaluate your overall portfolio and identify opportunities to redeploy assets in a way that increases value across the entire group. For example, you may be able to achieve economies-of-scale by standardizing certain processes or resources such as role descriptions or policy manuals.

Key IT considerations to ensure value creation

• What IT functions are candidates for shared services across other portfolio companies?
• What manual processes can be made more efficient through appropriate use of technology?
• Can cloud-based software-as-a-service be used to manage any portions of IT currently hosted in-house?
• Should any IT functions be outsourced to a third party?
• Does the organization have the right metrics in place to measure IT performance?

Organizing the approach

Many organizations initiate business objectives and launch their plan to grow revenue, organically and through acquisition, without first selecting the right "tools for the job." It’s important to get the right foundational IT tools in place at the platform level (e.g. enterprise applications, communications platform, policies & procedures, IT service delivery resources, hardware standards) before executing on numerous add-ons that will either not assimilate or unnecessarily increase business risk. Developing tools like an IT M&A playbook and post-merger integration plan are valuable models to support smoother transition and effective delivery. Additionally, it’s critical to assess the technologies in place and replace them, as required, with applications and assets that best meet the "newco" needs. It’s important to leverage experienced staff or partners in this process. A new ERP could cost $500,000–$1 million as well as 6-12 months of business and technology staff time.

Keeping cybersecurity on the radar

With increases in cybersecurity threats, private equity firms should also consider a high-level review of cybersecurity, regulatory, and compliance needs. Following the deal close, especially in industries that have stringent regulatory and compliance oversight, it’s critical to dive deeper into the acquired company’s cybersecurity:

• Dispense with unnecessary personal data: Inventory all personally identifiable information such as credit card numbers or social security numbers and protected health information of customers, and expunge all unnecessary data.
• Protect high-priority intellectual property and other data: Determine what information is most valuable or requires greater protection. Identify security risks in the new company’s systems, and establish whether the company has ever suffered a breach.
• Make sure you’re covered: Review the seller’s cybersecurity insurance. Policies may need to be updated or modified — for example, the terms of the policy might change with the change in ownership.
• Stay ahead of the curve: Monitor the threat landscape and evaluate any weaknesses or gaps in the company’s cybersecurity posture on an ongoing basis. Tap into professionals who stay abreast of the latest software and best practices — they can advise you on the optimal cybersecurity technology for your acquisition.