Information-Age Acquisitions: Talent And Technology Part II: The odds on successful IT acquisitions narrow if the buyer can keep good people who will advance the company’s technological quality.

While technology assets are an important part of every modern organization, the future viability and success of any information technology company rests ultimately with its human capital. The employees of a high-technology target company are responsible for creating and developing the unique products and services that make that company competitive. They require special attention during a due diligence process which must be tailored to the unique characteristics of the IT industry and the important contributions delivered by the people that make the target worth buying. Employee redundancy is to be expected in any acquisition, and an IT deal is no exception. But because of the critical role played by the employees, the acquirer must determine quickly which key employees will be retained for the future entity. Once the key-personnel decision is made, the acquirer faces the organizational and cultural challenge of integrating the retained employees into the structure of the combined company so that it minimizes the impact of the trauma and uncertainty they feel. Simultaneously, the acquirer faces the transitional challenge of providing severance packages and outplacement services to the people who are not retained. The due diligence review may be the first opportunity for the acquiring company to select the key employees it will retain and determine whether it will be successful in keeping them. It is therefore essential that the buyer develop or obtain biographical sketches of key individuals which not only detail their skills and contributions but suggest the likelihood that they can be retained. An area of great importance that must be reviewed covers employment contracts and agreements. Non-compete clauses, non-solicitation covenants, and employee rights to technology can be found throughout the IT industry. A purchasing company must ensure that it acquires the exclusive rights to the technology and concepts it seeks. It is not enough to examine only the initial target company’s exposure to the risk that it may not have the desired exclusivity. As a result of the recent explosion of mergers and acquisitions, a thorough due diligence inquiry should probe beyond the initial level and examine layers created by previous m&a transactions in which the target was involved. Often, adverse clauses and contingent rights may be lurking deep within a company’s past deals. The target company’s employment policies should be reviewed thoroughly from a number of perspectives. For instance, the acquirer should determine whether prospective new employees are interviewed about possible restrictions related to their previous employment. Existing non-compete clauses, for example, may limit the abilities of new employees. Other areas that acquirers should investigate include issues of confidentiality. An acquirer should be certain that current and former employees of the target are aware of all trade secret policies and confidentiality obligations. Education of employees and service providers on matters of confidentiality and the use of warning letters to former employees and their new employers are effective measures by which a target company can ensure confidentiality of its proprietary information. It is incumbent on the acquirer to determine that such employment policies and actions are intact and in force. An examination of miscellaneous labor issues should be undertaken. For example, the acquiring company should determine whether a labor union represents any of the employees at the target, whether organizing efforts are taking place, or whether there are any current proceedings before a state or federal labor agency. The acquiring company also should procure a summary of current compensation plans. Employee benefits issues, such as stock rights of the target’s employees, also should be examined. Table 1 summarizes some of the human resources issues to be addressed during due diligence, and possible strategies and solutions designed to deal with them. Products, R&D, and Technical Capabilities Due diligence is important not only for uncovering deficiencies and ascertaining the accurate value of a transaction but also for ensuring a smooth transition for a combined company after the deal closes. The review of products, research and development, and technical abilities can be thought of as the first step in the technical and product transition plan. Because of time and budget constraints, the diligence team must be cognizant of the need to focus resources on critical issues. The larger diligence team, and particularly its technical personnel, should convene and brainstorm to develop a list of goals and to establish a timetable for conducting the diligence process. The technical diligence team also should supplement the diligence requests made by the primary transaction team. And both teams should delegate responsibilities, such as allocating the resources for interviews with key personnel, reviewing codes, etc. The emphasis of diligence must be on uncovering the matters that would render the acquisition unfeasible or significantly influence the pricing of the transaction. Thus, one of the main objectives of the broad diligence team is to channel the technicians’ proclivity for viewing due diligence in a broad way. This can be done by establishing the appropriate agenda for the technical personnel reviewing materials and products. The agenda should examine the genealogy of a target’s products and services, the personnel that created and maintain those products and services, and the future viability of such products and services. In the acquisition of a software company, for example, the diligence team should develop a chart of the firm’s products and the various versions of those products. That product-specific chart would contain such information as a genealogy of any inbound or “in-licensed” technology, the tools used in development of those products or as embedded components that are redistributed by the target in its products, and whether the technology is subject to per-product royalties, or “run-time” license charges. A thorough product review also should explore the adequacy of product support. By investigating code creation, product roadmaps, and the success of troubleshooting support, the diligence team can determine current customer satisfaction with the products and future success of the products. A code review of products should identify the key personnel whose expertise is essential for their ongoing support and development of the products, and these people should be interviewed. An examination of the future roadmaps of products and a review of support requests and other data such as the cycle time for the correction of bugs and problems will shed light on the stability and organization of the products and the quality of the product development team. In many cases, a technical review of products will include some direct contact with customers who are using them. In some circumstances, such contact may be severely limited because of the extreme confidentiality associated with diligence and m&a transactions. But when contact with customers is authorized by the target, it must be conducted with extreme sensitivity to avoid any potential claims of interference should the deal not close. Like product reviews, an evaluation of research and development is another way to focus due diligence resources. The diligence team of course will want to evaluate any separate R&D that is related to product roadmaps. But regardless of whether the R&D is connected to a product roadmap or to some other projects, the diligence team should make an assessment of the feasibility of the R&D and review invention disclosure statement records or any other materials on patentable and protectable inventions. The R&D review phase of due diligence also is an excellent opportunity to build relationships between the target’s technical personnel and the acquirer’s management team. As a result, the buyer’s due diligence team should include senior personnel from its product and technical sides who can talk the same language and understand the issues bridging the two firms. The use of outside consultants during the R&D review and other due diligence projects may be helpful. Target company personnel may be more candid with third-party consultants, who don’t have a vested interest in the outcome of the transaction. Moreover, the consultants won’t suffer from a “not invented here” syndrome which may infuse the attitude of personnel at the acquiring company. But most important, the independent consultants will not be involved in any of the potential political issues that could arise if the transaction is aimed at consolidating the product management operations of the two companies. The due diligence process is often a long and arduous task that involves many different parties. The work of each component of the diligence team may go unheeded, however, if coordination and cooperation between them is not established. Legal counsel must work closely with the accountants and bankers who are valuing the assets, and all parties must form liaisons with senior management to ensure the proper flow of information. In the end, success or failure of an m&a transaction depends on the accurate allocation of risks. Technology due diligence and intellectual-property audits allow all parties to the transaction to understand, evaluate, and place a meaningful value on the target’s business. Intellectual property audits focus due diligence efforts on the technology assets and human resources, which are often the key components in IT mergers and acquisitions. The value of these assets depends on their protection under the regimes of patent, copyright, trademark, and trade-secret law. Likewise, an intensive review of products, research and development, and technical due diligence can help evaluate the stability, satisfaction, and potential future success of a target company. The Human FactorQuality people and strong technology are theprimary attractions in buying an informationtechnology company, and it is up to the acquirer to put them together for creation of value.Checking out the work force’s abilities and theworth of the technology are only starters in athorough evaluation of IT targets. The buyer must assure itself that it can get full commitment of the people and exclusive use of thetechnology. That means probing for ubiquitous non-compete and restrictive agreements that mightlimit the use of technical personnel charged withadvancing technology, determining that the targethas a tight policy of confidentiality for its ownworkers and new hires, and finding out whethercustomers like doing business with the acquisitioncandidate. The findings can influence thepurchase price.