By Scott B. Meyer, Glenview James LLC
Time was we had tech deals and non-tech deals. But the world has changed, and today, as Kewsong Lee of Carlyle Group puts it, “every deal is a tech deal.” Even old-school industries are confronting digital transformation.
This change has particularly hit home in private equity. Due diligence is the critical time to determine whether a company you’re considering investing in has a good digital strategy.
Clarifying digital strengths and weaknesses, and pricing them into your bid, is key to driving returns. The hard work of digital transformation kicks in post-closing, so diligence is your only chance to figure out what you’re getting into.
Easier said than done. Unwrapping the tech piece during diligence isn’t second nature to most sponsors.
Repeatedly, I see four main problems that can complicate your analysis, mess up your bid and depress returns. They are:
- tech buzzwords;
- claims of immunity;
- the digital-transformation conundrum, and
- a focus on process over results.
In this first part of a four-part series on how to make digital a key part of due diligence, we look at how to handle the Blizzard of Buzzwords scenario.
Imagine this. During diligence, you’ve asked, “What’s your digital strategy?”
The target company pitches a dramatic increase in the ratio of lifetime customer value to cost of customer acquisition. The CIO or CTO uses an array of buzzwords — PAAS. SAAS. Public Cloud Storage. IoT — to explain how it’s going to happen.
It’s enough to make your head spin.
So you sidestep the lingo altogether. Instead, focus on ensuring that the business side and tech side of the company are aligned.
Ask the business people about the technology and the technology people about the business. The software is no longer the complex part here. It’s the alignment with the business strategy that matters.
Ask the head of sales and the head of marketing these questions:
- How involved were you in the product definition and development process?
- How familiar are you and your team with this new workflow?
- How will this new platform change how you engage with sales prospects on your site and off? Have you talked to customers and prospects about it?
- How do you plan to port over your existing data to the new system? Have you been through this before? If not, what outside resources are helping you do it?
You will quickly see that the right answers have to do with how the company is run.
If the CIO is making big new investments in technology without working hand in hand with the CEO, there’s a problem. Everyone in the company needs to understand how the technology is driving better business results.
If the answers aren’t what you want, you don’t necessarily have to pull your bid. Rather, identify these disconnects and price them into your model. If you can’t make sense of the answers you are getting, ask for some outside consulting help.
I’ve lived through all these scenarios and many more over the past 20 years. I’ve seen how taking a business-first approach to digital drives outsize returns.
It’s a great time to be in PE as every deal becomes a tech deal. But every potential buyer needs to address these critical issues in digital transformation.