Whenever managers at private-equity firm The Watermill Group identify a likely takeover candidate, they look at the standard benchmarks. Those include a target’s earnings power and debt level, as well as intangibles like the competence of upper-level management. But in weighing a possible bid, the Lexington, Massachusetts-based firm goes beyond the usual suspects. Management also factors in the state of the target company’s IT system and its underlying data. “We need to know what kinds of systems the target company actually has,” says CFO Steve Kotler, “and how much it will cost to either separate or integrate those systems.”
These days, that’s crucial information. IT systems and databases are growing larger and more complex, playing an increasingly pivotal role in daily business activities. While factors like stock price and return on equity are relatively easy to quantify, judging the state of a company’s IT system can involve as much guesswork as judging the temperament of employees. “It’s a little like trying to estimate the value of rare artwork,” says Stephen Bruel, a securities and capital-markets analyst at TowerGroup, a financial industry market research firm. “Only it’s far more complex.”
Indeed, the calculation can be so complex that many eager merger-and-acquisition suitors simply brush it aside. “IT systems are the last things managers focus on,” confirms Bruce Richardson, chief research officer at AMR Research, a Boston-based business technology market research firm. “Then suddenly they realize they have to deal with the IT end of things, too.”
That Due Diligence That You Do
Several technology vendors have rushed in to help eliminate this blind spot. India’s Patni Computer Systems, for one, markets services and tools that help a buyer quickly assess the condition of a company’s IT assets.
The technology would seem to be particularly suited to private-equity firms, which often lack in-house IT expertise yet need every conceivable piece of relevant information when negotiating a deal price. Certainly, the discovery of faulty IT systems or data in a potential acquisition can be a powerful bargaining chip. And given the nature of takeovers, buyout specialists need information fast. They can’t wait months to find out if a target’s data warehouses are poorly stocked or impossible to navigate. “A lot of this comes down to turnaround time — how quickly you can provide this analysis to the company in play,” says Bruel. Adds Richardson: “What you don’t want to do is make decisions based on information that’s 30 or 60 days old.”
To help Watermill examine the tech capabilities of a potential takeover target, Patni evaluates the target company’s entire IT infrastructure, applications, organizations, and processes. That includes servers and networks as well as the company’s applications portfolio, from enterprise resource planning to business-intelligence deployments. Says Kotler: “They develop a baseline for IT, determining the organization’s operational and transactional aspects.”
So far the service has proved invaluable. Earlier this year, Watermill, along with Hicks Holdings, the buyout firm that recently purchased a 50 percent stake in Liverpool Football Club (see “Pitch Fever” in the Deals section of CFO magazine’s June issue), was looking to acquire Latrobe Specialty Steel. During that process, the two firms relied on Patni’s IT due diligence to provide a detailed breakdown of Latrobe’s computer systems and data. Eventually, Watermill and Hicks acquired the steelmaker from The Timken Co. for a reported $215 million. Once the deal was done, Patni helped ensure a smooth transition of all IT infrastructure and applications — often an overlooked part of an acquisition. Down the road, Kotler says, Watermill and Hicks may hand off Latrobe’s IT infrastructure and support operations to Patni.