DIGITAL TRANSFORMATION VENDOR

Preventing a disadvantageous merger

Our client – a leading Digital Transformation vendor – wanted to acquire an IT infrastructure services provider to augment its existing offering in the cloud services and digital workplaces domain.

​

Our Client’s Problem 
Our client approached us with a complex engagement: they were looking to acquire an infrastructure services provider that had been spun-off from a cloud technology player.
The client was interested in acquiring the company for its infrastructure services portfolio, as well as being able to offer its clients a suite of services across cloud migration, digital workplaces, disaster recovery, edge networks, and cloud security.

​

However, the client was unable to determine the value of the different accounts the target held, and it was concerned at possible existing relationships that remained with its former parent. Added to this, the client wanted to understand whether owning an outsourced infrastructure services company would sufficiently grow their own offerings.
 

​

Our Brief

The client wanted to understand the target company’s account values, sales structure, and market penetration in order to understand the value of the company’s client base.

As such the client came to us with several distinct questions for us to answer:

• What is the scope of the services offered by the target?

• What is their offering and strategy for cloud management?

• What is their footprint across banking and telco customers?

• What current accounts do they have and what is the value of these accounts?

• What is their account structure and sales structure?

• What is the relationship with their former parent company?

• Do they have access to any of the parent’s IP?
   

These key questions would inform our client’s valuation of the business. 

​

Our Method
Revenues and sales are often presented at a high level by a company looking to be acquired, however gaining the true value of individual accounts cannot be achieved simply by estimating or modeling the information given by an acquiree in its data room.

Similarly, how can the true value of a company’s tech stack be assessed without viewing the product itself or the levels of IP dependencies?

​

To ensure the Depth of relevant information, in line with our core values, 4D Due Diligence undertook to interview eight senior-level consultants – two formerly in the sales team of the target to inform us of the structure of the organization, and the value and relationship of each account; and six technical leaders in various domains to inform us of their scope of services and IP dependencies.

​

Across the different calls, the interviewees walked us through their organization matrix, their footprint across various sectors, the value and strength of relationships across major accounts, and any major IP dependencies of the target.

 

Client Outcomes
4D Due Diligence uncovered several major red flags:

​

The company itself was a poison chalice in that its creation came about from its former parent divesting its least profitable business line – the infrastructure business – to improve its own valuation. This was due to a high staffing overhead and, worse, a technical debt to the parent company for application and security services (which were retained by the parent) with liabilities written into the contract at the time of the spin-off.

Moreover the former parent was unsuccessful in selling this division, hence the forcible divestment and spin-off of the business. This in and of itself was a major warning for any potential buyer in that the company couldn’t be sold in the first instance, let alone the inherited liabilities.

​

Further, we found that for almost all of the customers for which the target was an infrastructure vendor, the same accounts also relied on the former parent as a service provider for their technology services with high markups. So, the infrastructure business of the spin-off actually had extremely low profit margins.

4D Due Diligence also managed to ascertain much about the target companies services: 

the target had no applications services, security services, and lost some maintenance services offerings as well, which remained with the parent. As such, key elements of the company which our client wished to acquire simply were not part of the target’s offering.

The target had retained its infrastructure operations services (network management, data center management, database management, operating system management); however these were low-growth, low-margin businesses with high subcontractor dependencies on the former parent company, making them barely profitable.

The company was focussed on becoming profitable again by increasing its margin and footprint in core infrastructure, and building its cloud business – though this in itself was unlikely to be a high revenue growth area due to market saturation and low margins. 
 

In terms of the scope of services, the target company had no application services, was reliant on the former parent company for security services, and did not have a mature cloud migration and cloud management offering.

The target was still trying to make the company profitable as well as developing these offerings which surprised our client, given that this was far from the proposition that they thought they could benefit from. As such, our client saved millions and years of wasted effort and resources by avoiding this acquisition entirely, and focusing on developing their own solutions in-house.

​