Red Flag Due Diligence: Early recognition of IT deal breakers
Comprehensive due diligence is an indispensable part of the company acquisition process. However, it is also very costly. Red flag due diligence can be used as a preliminary step to help would-be purchasers exclude the main deal breakers right at the start of the M&A transaction process.
Due diligence is also a cost-sensitive issue for potential investors, since it always represents a significant investment with an uncertain outcome. Consultants, lawyers, and auditors are commissioned to analyze target company documents in the data room for potential risks and opportunities. If unsurmountable obstacles (deal breakers) are identified, a potential investor can withdraw early to limit the costs of due diligence. If, on the other hand, special opportunities are identified, the investor can make a better offer to increase the chances of being awarded the contract.
The cost risk can be reduced by performing red flag due diligence before comprehensive due diligence. The scope, and therefore the costs, are significantly lower. A GAMBIT consulting team of experienced IT experts and auditors examine the IT organization and systems of the target company. The outcome of red flag due diligence may indicate that IT problems are unlikely in the M&A process or that certain IT areas will need to be examined in greater depth.
Red flag due diligence focuses on identifying critical risks—not on verifying and analyzing possible synergies in or through IT. Red flag due diligence is also carried out before full due diligence in the financial sector.
A rapid risk inventory to ensure that you complete the good deals only
The information gathering process focuses on the areas that typically involve the greatest risk. Important areas to consider for a potential integration include carve-out complexity, transfer of licenses and usage rights, and possible incompatibilities. In addition, risks may be identified in relation to custom developments, day one readiness, or the need for comprehensive transition service agreements (TSA).
The following proven risk categories are analyzed as part of red flag due diligence:
- Check for operational risks: day one, process and delivery interruptions
- Monetary risks associated with the transaction process: unforeseen investments, relicensing
- Examination of dependency risks: loss of specialist knowledge
Nicht immer tauchen gleich Dealbreaker auf, aber der Investor erhält im Bericht zu mindestens valide Hinweise darauf, wo tiefer zu analysieren wäre, um neben der Risikovermeidung auch Argumente für die Preis- und Vertragsgestaltung zu erhalten. Letztlich obliegt es jedem Investor, wie er die aufgezeigten Risiken und Probleme bewertet und ob er den begonnen M&A-Prozess in die nächste Phase weiterverfolgen möchte – die Red Flag Due Diligence liefert in kompakter Form die nötigen Fakten.
Summary: Advantages of IT red flag due diligence
IT red flag due diligence can be used to investigate the target company before performing full due diligence. It is less expensive and identifies the most critical issues. It allows a decision to be made about whether a subsequent full due diligence investigation is worthwhile. The advantage of this two-phase approach is that it minimizes the risk of making a bad investment in a costly due diligence process with an uncertain outcome. Processes in financial transactions are highly dependent on IT. For this reason, it is not enough to focus exclusively on financial due diligence.