Due diligence checklist for tech acquisitions

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With increasing pressure from inside and outside the boardroom for executives to make every acquisition a “bang for one’s buck,” executives looking to do M&A in the tech space are faced with the tough question of how to capture real value in the acquisition of a tech company.

According to the 2021 Global M&A Report by financial market data provider Refinitiv: “USD698.7 billion worth of deals were announced globally during the first two months of 2021, 56% more than the same period last year, and a year-to-date total only exceeded twice in recent history (in 2000 and 2018).”

The same report also mentioned that “tech has been the leading M&A sector since August 2020. Technology deals total USD157.7 billion in the first two months of 2021, the highest year-to-date total of all time, up 173% from last year. Technology deals account for 23% of global M&A by value in the first two months of 2021, up from 13% in 2020, and the highest share of all time.”

Surveys conducted by EY have suggested that 51% of technology executives plan to pursue M&A in the next year. Data from Refinitiv, as analysed by the Financial Times, suggests that large tech companies have spent at least USD264 billion buying up potential rivals since the start of 2021, so much so that it has caught the attention of US regulators.

This trend is also apparent in the Asia-Pacific, according to Charting Growth – The New M&A Landscape in Asia-Pacific, a research report recently launched by Baker McKenzie that explores trends shaping the current M&A deal environment as well as the factors and challenges that will drive the next wave of deal making in the region. The report says corporate executives remain optimistic, with 77% of respondents expecting an increase in M&A activity in 2021.

Despite the pandemic and the varied challenges each country has endured, the M&A outlook remains robust in the region, particularly with regard to tech acquisitions, according to the report. The Asia-Pacific’s attractiveness remains the same, with government incentives and access to new markets.

If anything, the covid-19 pandemic has largely benefitted the tech industry. The disruptions brought on by the pandemic have forced companies to re-think their strategies and business models. The demand for new products and solutions, and the critical need to engage in digital transformation, have led companies to look to M&A as solutions. Bolt-on acquisitions to help companies access new talent they do not have, or new customer bases or systems to increase the efficiency and resilience of their supply chains, are among some of the key drivers for M&A activity in this space.

The region has seen an increasing number of high-value M&A transactions in the technology sector. Technology and telecoms companies surged to a 23% share of deal value, up from 14% last year in the Asia-Pacific. M&A targeting technology companies hit a record high in the region, with deal value increasing by 88% year-on-year.

Japan contributed half of the region’s mega-deals worth USD5 billion or more, including Nippon Telegraph and Telephone’s (NTT) USD40 billion tender offer for NTT Docomo. In Indonesia, two of its largest technology companies, Gojek and Tokopedia, have said that they planned to merge to create a behemoth platform including e-commerce, ride-hailing, food delivery and financial services based in the world’s fourth-most-populous country.

This year also saw the record-breaking SPAC transaction listing of the largest US equity offering by a Southeast Asian tech company (with significant operations in Thailand) to date, and the emergence of tech unicorns in Thailand.

But all the attractive headlines aside, what makes a tech acquisition successful? What some companies have done well when approaching a tech acquisition is to focus on the capabilities and “brains” of the target, rather than simply viewing it as an asset to acquire. This means understanding the capabilities and impact of key personnel. Accordingly, identifying any key personnel who are critical for the successful operation of the target business becomes important during due diligence.

The essential know-how or trade secrets of the business may be in the head of only a few key personnel. The main reason to acquire certain tech companies may even be to acquire the talent of the founders, or certain key personnel. In an industry that is characterised by rapid change, and that often faces a shortage of qualified personnel, the acquirer will want to consider putting in place an arrangement to incentivise and retain these personnel with the business. The acquirers may also want to explore engaging in “acqui-hires” instead, where the key focus of the acquisition is to acquire the personnel of the target company.

Integrating the operations and personnel of the acquired company or business may also not be straightforward. Many tech companies may be more forward-facing in their business practices or collaborative in their corporate culture, while the acquiring company may not share the same culture and business philosophy. Therefore, it is also important during due diligence to ensure that the target has a corporate culture that aligns or is able to integrate with the acquirer’s own.

Any potential acquirers may need to step back and rethink the value of the technology, and whether that is what the acquirer needs. With acquirers sometimes prone to put too much emphasis on the technology behind the business – this often being one of the main reasons why the acquisition was initiated in the first place – it is important to understand the value of that technology, its future applicability and prospects, and, for certain acquirers that are looking to integrate that technology into its existing technology, system, supply chain or facilities, the impact of integrating that technology to that of its own, post-completion. Effective due diligence should already help the management of the acquirer answer these questions before, not after, the acquisition.

With the business or value proposition of many tech companies (especially startups) characterised by the disruption of the business and activities of the incumbents, often these tech companies may have some business activities that may be in areas where the laws or regulations of the jurisdiction have not caught up with yet. It is important to understand the current status of the laws and regulations, their implications on the target’s business, and the direction that the relevant legal framework is moving towards with respect to that business to fully evaluate the value and risks associated with the target company.

This is especially true for tech companies that operate in highly regulated industries such as healthcare and life sciences, where the company may be subject to various laws and regulations, and active enforcement by regulators. Given the nature of the business of tech companies that may operate in many jurisdictions, these companies need to comply with all the nuances of the laws, regulations and policies of regulators in various countries. Acquirers should not fall into the trap of only focusing on the laws and regulations of the jurisdiction that is familiar to the acquirer, and not conducting sufficient diligence on the operations in other countries in which the target has operations.

Whether you are looking to acquire a tech company to integrate into your existing business, or to invest in a tech company for future growth and profit, conducting effective, value-focused due diligence will be one of the key factors that will help you to understand and realise the value of the tech company to be acquired.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact the authors by emailing Bulin (bulin.sanooj@bakermckenzie.com), Ornsiri Samarnmitr (ornsiri.samarnmitr@bakermckenzie.com), and Panyavith Preechabhan (panyavith.preechabhan@bakermckenzie.com)