Ignoring a target’s back office can spell doom for a pending M&A deal, according to William Stone, founder, chairman and CEO of SS&C Technologies.
While it doesn’t seem exciting, the back office is the infrastructure that ties a company together, Stone said in an interview with Buyouts. It ensures that the bills go out on time and clients are taken care of while customer satisfaction is monitored, he said.
“The whole essence of a business is embedded in your [back office],” Stone said. “You are at your peril if it is not run efficiently and effectively.”
One way to check on a target’s back office is to ask for data during due diligence, he said. He recommends that PE firms give the companies a deadline to provide information, Stone said. “The quality of data and timeliness can teach you some things,” he said.
Targets should be up to date on their software, Stone said. If a potential acquisition is using Microsoft Windows but is running version 2.0, and the latest out is 10.0, that’s a sign, Stone said. “The latest software release being installed is one more measure of efficiency and effectiveness,” he said.
Stone founded SS&C in 1986. The Windsor, Connecticut, company, a provider of financial software and services, has gone public twice and at one point, in 2005, was owned by Carlyle Group.
SS&C is a leading PE-fund administrator and offers administration services for more than 300 clients, representing more than $550 billion in committed capital.
SS&C has a $10.35 billion market cap. It is a frequent buyer of financial-services firms, having made 26 acquisitions in the past decade. The most recent saw SS&C in January agree to buy DST for $84 a share, or about $5.06 billion, excluding debt.
Over the summer, Bloomberg reported that SS&C was entertaining buyout interest and had contacted several PE firms. Stone declined to comment on the report. “We’re the largest PE administrator in the world,” he said with a laugh. “It’s pretty likely we talk to [PE] every week.”
With so many deals completed, Stone said he feels qualified advising private equity on what issues to look out for in M&A processes. “We’re very methodical,” Stone said. “We’ve done a lot of these, so we have a pretty strong playbook and it’s been effective for us.”
During due diligence, PE firms should send people to the company and interview employees. He advises sending executives who specialize in technology, finance or sales and have them compare systems. Executives should check for “competency and quality of the data” that the target is using to make decisions, he said. “Stale data can be ruinous to decision-making,” he said.
One bad sign is if employees at a potential portfolio company are looking to leave or the environment is very difficult, he said. If so, PE firms may want to reconsider the acquisition, Stone said.
In addition, forcing a portfolio company onto a buyer’s technology sometimes doesn’t work, he said. “Change back,” Stone said. “Failure is not an option. You have to be willing to do what is necessary to be effective.”
Action Item: Contact William Stone at +1 800-234-0556
Photo of William Stone courtesy of SS&C