By Enrique O’Connor, Managing Director of Vaultinum for Spain, Portugal and LATAM
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The growing dominance of technology in mergers and acquisitions underscores its critical role as a driver of growth. Yet, technological assets also pose intricate risks, often concealed at first glance. These include programming obsolescence, cybersecurity vulnerabilities, technical debt, lapses in best coding practices, and non-compliance with open-source licensing requirements. For investors, a meticulous evaluation of the target company’s technological landscape is no longer optional—it is essential. Technological due diligence has emerged as a cornerstone for identifying risks and opportunities tied to these assets, ensuring transaction success.
Why Technological Due Diligence is Vital for Search Funds Investing in Tech
In today’s environment, technological due diligence is not a “nice-to-have” for tech investors—it’s a critical necessity. For Search Funds, it delivers a clear, strategic assessment of the target company’s software assets. This goes far beyond a simple technical audit. It encompasses a comprehensive review of systems and infrastructure, a deep dive into risks, and an evaluation of the assets’ capacity to drive innovation and growth.
A well-executed technological due diligence process answers several strategic questions:
- Do the target’s technologies align with the acquirer’s long-term objectives?
- Are the assets adequately protected against legal or cyber threats?
- Can the existing infrastructure support scalability and adaptability?
- Are coding and IT management best practices in place to sustain a strategic roadmap?
- Are there unpatched cybersecurity vulnerabilities in the code?
- What is the state of the technologies in use, and is technical debt a concern?
Key Steps for Successful Technological Due Diligence:
1. Analysis of Infrastructure and Technological Systems
The initial phase assesses the target company’s IT framework—including servers, networks, databases, applications, and internal tools. This evaluation determines whether the infrastructure is optimized for both current operations and future scalability. It also identifies potential incompatibilities between the acquirer’s systems and those of the target company, mitigating risks of cost overruns or post-acquisition disruptions.
2. Cybersecurity Risk Assessment
Given the critical nature of digital assets, cybersecurity demands top priority. A thorough due diligence process evaluates the company’s adherence to best practices and its defenses against cyber threats. Identifying vulnerabilities—whether in system architecture, data management, or third-party dependencies—enables the acquirer to incorporate mitigation strategies into acquisition negotiations or post-transaction plans.
3. Intellectual Property (IP) Verification
Intellectual property is a critical determinant of a company’s value, yet it can also become a legal liability if not adequately protected.
Due diligence must ensure that all software, patents, trademarks, copyrigts etc are properly registered and owned by the company. However the major risk lies in the improper use of open-source software. Contrary popular belief, open-source software is not free of licensing obligations. Many licenses impose strict conditions on the software’s distribution. Non-compliance with these terms, if discovered by the license holder, can be costly, as illustrated by the March 2024 case of Orange in France, which incurred over €800,000 in penalties for violating the GNU GPL v2 open-source license held by Entr’ouvert.
4. Source Code Scan
Engaging a tech due diligence expert that is equipped with a code scanner is strongly advised. This is the only way to identify all vulnerabilities within the code. Such analysis can thus detect issues like:
– Inefficiencies or redundancies in the code,
– Cybersecurity vulnerabilities,
– Undocumented dependencies on third-party or open-source libraries.
Tools like Vaultinum’s scanning solutions provide detailed insights into code quality, cybersecurity risks, and the proficiency of the development team, offering investors a well-rounded perspective on short- and medium-term challenges.
5. Scalability and Maintainability Evaluation
For investors, the primary concern is ensuring that the software can scale effectively with growing demand while remaining maintainable. Scalability—the capacity to support increased workloads without degrading performance—and maintainability—the ease of implementing updates and improvements—are critical to achieving sustainable profitability.
A lack of adaptability in these areas could hinder growth or require significant additional investments for modernization, ultimately affecting the long-term profitability of the acquisition.
6. Risk Identification and Value Creation Opportunities
Effective tech due diligence not only identifies tech risks but also uncovers potential for long term value creation. Furthermore, by assessing technological synergies and pinpointing areas for infrastructure optimization, investors can uncover cost-saving opportunities that enhance profitability. These opportunities should be incorporated into the post-acquisition business plan to maximize the transaction’s value.
The Importance of Post-Acquisition Planning
Post-tech due diligence, a detailed integration strategy is recommended. This strategy should focus on the following areas:
- Harmonization of IT infrastructures,
- Comprehensive team training, and
- Implementation of strengthened security policies.
Such planning ensures that the identified risks are managed and the full potential of the acquired assets is realized.
Vaultinum’s approach to Technological Due Diligence for Search Funds
Vaultinum offers Search Funds a sophisticated toolkit for assessing and managing technological risks. Combining expert analysis with advanced diagnostic solutions, Vaultinum provides investors with a comprehensive view of the target company’s software quality, coding practices, and long-term cybersecurity posture. Armed with these insights, acquirers can make confident, informed decisions.
Conclusion
For Search Funds targeting tech acquisitions, technological due diligence is a non-negotiable step. By uncovering risks, assessing digital resilience, and highlighting synergies, it lays the groundwork for secure investments and enhanced value creation.
