Product technology companies have been top targets for private-equity investors in recent years. Through the COVID-19 disruption, there has been a slowdown in overall deal activity, but deals are still being done in product technology. In the current economic environment, however, it is harder for PE investors to find value in their technology investments.
This makes it critical that a detailed product technology diligence be performed to understand any underlying technical issues, risks and potential technical debt—burdensome technical designs or complexities built that would need to be addressed. The rigorous analytical process of product due diligence can also help PE funds to position existing portfolio companies to weather the economic downturn by spotting opportunities to cut costs, improving operating performance, and identifying growth opportunities.
A new KPMG paper, Product technology and value creation, shows in detail how PE firms can use product technology due diligence to find attractive deals and improve the performance of existing portfolio companies.
Product due diligence for better deals
During the deal process, the product technology diligence team works closely with the commercial, operational and financial diligence teams with a focus on different sets of metrics. The technology diligence allows the buyer to gain significant insights into the product architecture, technology stack, hosting and deployment infrastructure, underlying software code and development operations.
These insights can be factored into the financial models to help investors identify the value drivers behind the growth and optimization plan. This information is used to redirect and design short-term and long-term value-generation programs with a keen focus on underlying issues that could contribute to overall technical debt.
On the sell side of the deal, a product technology diligence allows the seller to optimize its product strategy, cost structure, and value proposition before the transaction. By designing an appropriate technology strategy that addresses market demand and demonstrates market leadership, the seller is equipped with in-depth information to help structure a deal and realize maximum valuation.
Product technology due diligence to improve performance
Using the same analytical techniques, PE firms can also assess performance improvement opportunities within product technology portfolio companies. In the COVID-19 economic environment, this can be crucial for maintaining and improving EBITDA performance. By applying product technology diligence, management can assess continuing value creation potentials, determine competitive advantage within a shifting market, and make decisions on technology and product initiatives to adapt and grow.
Product technology due diligence should be conducted as deeply and comprehensively as possible. But different sectors within the technology industry can have different focus areas:
- For software companies, the focus can be more on annual recurring revenue and a cost shift through digital transformation and infrastructure cost optimization
- For semiconductor companies, diligence can lean more toward manufacturing supply chain diversification, inventory, and re-planning capex for infrastructure
- For hardware companies, diligence can focus more on assessing product strategy by applying digital transformation and a service model, optimizing operating expenses, and re-planning capex for R&D, plant and machinery
- For telecom companies, some of which are positively impacted by COVID-19, diligence could focus on network capacity/stability and long-term product and technology strategy for revenue growth
To learn more, please download our full report.