m&a technology due diligence
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CAST
321 W. 44th St., Suite 501 – New-York, NY 10036 casthighlight.com +1 212 871 8330 [email protected]
M&A Technology Due Diligence The 5 insights you should consider to reduce your investment risk and ensure a more accurate valuation
casthighlight.com CAST 321 W. 44th St., Suite 501, New York, NY 10036 +1 212 871 8330 [email protected]
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W
hen companies engage in a merger & acquisition initiative, it is
mandatory to secure the transaction to gain a competitive
advantage or simply to grow. In an acquisition, companies inherit
assets that will enhance business operations, but they also come with
hidden risks and debt.
One aspect of due diligence focuses on Financials, where dozens of advisors &
auditors analyze income statements, balance sheets, the customer base and
anticipated revenue. Even though it’s a very complex exercise, the results are based
on objective facts. Nowadays, because of our digital world, software is everywhere.
The pre-merger phase must also include Technology Due Diligence which can be
much more complex, costly and time consuming.
Using Software Intelligence technology during Technical Due Diligence enables an
objective and rapid assessment of the entire portfolio of custom software in a
repeatable, cost effective, and timely fashion.
Software Intelligence technology provides insights into the structural condition of
software assets. Just like an MRI does for the human body, it allows one to see
accurately what is actually going on inside the software and determine precisely
what to do about it. It acts as an ‘MRI for software’.
The following chapters will focus on the benefits of using such unbiased intelligence
to inform five key insights needed during Technical Due Diligence.
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Although there are several ways to collect information on your application portfolio, many of them are time & cost consuming - and even worse - they largely rely on subjective metrics. So, by default you will end up with a biased view. As we know, “wrong data leads to wrong decisions”.
The ‘MRI for software’ collects information about the application portfolio from an objective perspective, where the data collection process comes directly from a source code scan. For the information that cannot be derived from a pure scientific method, the process leverages an online survey with specific questions that require closed answers (e.g. how many releases per year, original creation date, etc.).
Software Intelligence is used for visibility into: software health, cloud readiness, open source risk, complexity & technical debt – at both the portfolio and individual application levels. These objective metrics are critical to document when performing Technology Due Diligence in order to better target potential expensive and risky areas within the portfolio.
Technology Due Diligence questions you should answer
Insight #1 Capture & analyze the application portfolio to be acquired
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This new approach allows users to tackle the application portfolio through new angles. The computed metrics feed analytics models that are translated into compelling dashboards. These new complementary insights help to build advanced analysis against your assets. Each product is analyzed for critical characteristics that include reliability, maintainability, complexity, and technical debt.
Software Health measures such as Resiliency, Agility, and Elegance provide an objective assessment of short- and long-term quality issues. Resiliency identifies robustness of the software and identifies coding practices that are often correlated with product issues (short-term risk). Agility measures how easy it is to maintain or upgrade and application (mid-term risk). Elegance is a measurement of complexity which is a strong indicator of future reliability issues (long-term risk). Finally, it is critical to determine if the application is manipulating private data and poses a compliance risk with regulations such as GDPR, CCPA, etc. The ‘MRI for software’ can rapidly identify patterns within the application source code that relate to PII such as names, addresses, SSNs, etc. and flag applications that may present compliance risks to the organization requiring deeper investigation.
Technology Due Diligence questions you should answer
Insight #2 Mitigate the risks & anticipate the impact
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Technical debt is directly correlated to both the quality & the complexity of the end product. It measures the effort required to fix coding and architectural violations that remain in the code when an application is released. Unfortunately, the technical debt tends to grow more exponentially than linearly, which threatens some critical factors such as a) the overall portfolio agility; b) the number & cost of resources to fix; and c) the time to market. It is then mandatory to proactively manage the debt which might become a too heavy burden, and therefore prevent the portfolio from embracing the necessary/required transformations.
Technical debt awareness should be conveyed through a clear communication and frequent monitoring with application teams. The more mature the team becomes on this financial metric, the higher the opportunities are to take advantage of new programs & projects to alleviate it.
Technology Due Diligence questions you should answer
How much does the overall technical debt represent? What are the applications with the heaviest technical debt? What percentage of the technical debt can be reduced quickly? How is the debt split across the potential candidates to be
retired? Which percentage of this debt is caused by outsourced
products? How does the overall technical debt evolve over time?
Insight #3 Identify complexity to control technical debt
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Software Composition Analysis reports identify all open source and 3rd party components in use across the application portfolio along with possible security vulnerabilities, IP licensing risks, and obsolete components. Security vulnerabilities can lead to potential system hacks. Risky open source licenses can lead to IP issues. For example, if an open source component in use has copyleft license requirements, this could legally require the entire software application to be shared with the open source community. And, there could be components in use that are no longer supported by the open source community presenting obsolescence risk. The ‘MRI for software’ performs Software Composition Analysis automatically to identify all of these potential issues. Uncovering these critical insights during the due diligence phase greatly increases the opportunity to more accurately value the target entity.
Technology Due Diligence questions you should answer
Insight #4 Assess Software Composition and Open Source Risk
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In order for organizations to continue to innovate while reducing technology costs, they must transform their software estate to take advantage of modern architectures such as microservices and cloud computing. Assessing application readiness for cloud migration is often performed using subjective methods such as qualitative surveys. However, this approach does not accurately capture the true readiness of an application to adopt cloud computing innovations such as Platform as a Service (PaaS), Artificial Intelligence (AI), Machine Learning, (ML), and auto-scaling to name a few.
The use of Software Intelligence enables an objective assessment of the cloud readiness of an application portfolio by identifying specific patterns within the source code that can be roadblocks to cloud migration. It provides a more precise assessment of the readiness for a target entity to adopt the latest software architectures and digitally transform for future growth.
Technology Due Diligence questions you should answer
Insight #5 Measure the cloud migration and modernization readiness of the portfolio
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Conclusion
These insights are critical to building a more accurate assessment of an application portfolio during an M&A Technology Due Diligence process ensuring development of more accurate valuations and avoiding surprise post-acquisition costs.
Analyze & assess the health of the portfolio to be acquired Mitigate software risks to offer the best experience to
customers Leverage objective, repeatable and cost & time effective
standard units of measure to monitor the post-merger transition
Assess open source risks and cloud readiness
About CAST
Learn more at www.castsoftware.com/highlight
CAST is the pioneer and category leader in Software Intelligence, providing insight into the structural condition of software assets. CAST technology is renowned as the most accurate “MRI for Software”, which delivers actionable insights into software composition, architectures, database structures, critical flaws, quality grades, cloud readiness levels and work effort metrics. It is used globally by thousands of forward-looking digital leaders to make objective decisions, accelerate modernization and raise the security and resiliency of mission critical software.
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