From The Due Diligence Show (Episode 2), the team at Thought Source talk about when technology acquisitions don’t go ahead.  Sometimes it’s because of “the deal” which cant be successfully negotiated, but many times it’s due to findings within the technology due diligence process which the team undertake.

Adam Jaques: Well welcome back everyone to the deal room with the Thought Source team here talking to you about mergers and acquisitions, technology acquisitions, I should say and particularly talking about tech DD now, this episode is about the deal that got away.

Luke Silcock: Okay, so we’re talking about when the deal was meant to be a merger or an acquisition. You may have started to do diligence. But then you didn’t continue. Is this a success? Or opposite of failure?

Andrew Borzycki: Look, everybody goes into a deal. They get all excited every single looks great from the outside. But once you actually dig deeper, it starts to look a bit sketchy. It may feel like you have failed when you actually don’t proceed, but it’s actually a really good thing. Because you’ve saved your company a ton of money, you haven’t gone down the path of something that may just cause an awful lot of problems down the track. We always say that M&A diligence is like diligence buying a house. And when you do that house inspection, you may find the house is full of termites it’s ready to fall apart fall apart. That sunroom that’s meant to actually be at the back, which is on the brochure doesn’t actually exist. It’s just a glint in the owner’s eye. Or the house isn’t even actually there yet. You know these analogies, all translate to tech companies. Because you know, you might find what you actually want this product to do – it doesn’t actually do it all. They might have done mistakes and how they’ve actually licensed and acquired or their source code, or it may just be all too difficult to extend. This is all information you actually want to find out which you only find once you actually go into diligence

Adam Jaques: It is disappointing though. Absolutely. I mean, it’s easy to say from our perspective that you know, it’s a good thing to find these issues. The reason you bring us in is to discover that sort of thing. And the reason you do technical due diligence is to make sure while you’re actually trying to make sure it’s as good as it was in the PowerPoint. But it is disappointing for the folks that have committed to bring the deal across the line. What about products that we see that look like a thin layer of orchestration?

Luke Silcock: That’s a situation where the solution and what’s been found, discovered and presented looks great. But then on closer inspection, the acquired the company that was the target doesn’t really embody the solution that you’re looking for. It’s a veneer, or a thin layer of orchestration over say, a predominantly open source stack, predominantly cloud or publicly available Platform as a Service pieces. And really, the substance is not substantial.

Andrew Borzycki: And we find out that it’s a product or solution that’s been crafted with very little insight. So the IP is just not there. Companies are also about people you may find that the company is just in such a state that it’s not actually able to move forward. What you thought was that a motivated team who understands the product are the caretakers who on the third or fourth round through the at this company and don’t actually know how to actually take the product forward.

Luke Silcock: These are useful discoveries. In the most cases that we’ve worked on, we do find that the deal proceeds. We do find either that the buyer is actually acquiring a company that’s definitely a going concern and hopefully aligns with the deal thesis and the amount they intend to spend. That the tech integration and product opportunities are validated. And the large amount of the deals that we find do proceed, but it is worth reflecting. If you’re on a team that needs to do a diligence, keep that open mind it may be that this one doesn’t proceed and certainly keep that veil of confidentiality over the work. It may well be pulled and all the deal information may well be shredded.

Adam Jaques: Well, that’s enough for the Deal That Got Away because we’re here to talk about more about the process of how these deals are done. And what we’re looking at is the background. And our next episode is the start of that road. It’s about due diligence, specifically about due diligence for technology, acquisitions, and we’ll start talking about the way that deals are performed. The deal thesis, the models that they follow as well and take you down that road. We’ll see you very soon.



The Thought Source team have produced a video series covering the "behind the scenes" of performing technical due diligence for M&A projects.

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