When the richest person in the world signed the paperwork to buy social media platform Twitter for $44 billion in April 2022, business reporters along with investors, CEOs and other billionaires who follow them, couldn’t help but do a double take. Elon Musk, who’s estimated net worth as of August 4, 2022, was $278.4 billion, “was at it again,” they said.
This was the kind of audacious investment that made him famous and fabulously wealthy. Unfortunately, something went wrong. A mere four months later, Musk decided that he did not have enough information to properly evaluate this massive acquisition, and he withdrew his offer. Predictably, legal action, on both sides of this deal, ensued and will continue for years.
This begs the question for other venture capitalists and private investors. If someone with the track record, technical resources and investment savvy of Elon Musk could be this uninformed, what are the odds that other investment due diligence might be lacking? Experts suggest that this Twitter deal collapse is part and parcel of a trend in deal negotiations. Inadequate information about companies targeted for acquisition is a big, EXPENSIVE problem. However, it doesn’t have to be.
The digital innovation consultants at Asinpa have seen this scenario before. The company’s founder and CEO, Gustavo (Tavo) Vasconcelos notes, “I believe current market conditions are responsible for driving this slowing of investment by VC’s and private investors.
“While activity has declined in the first six months of 2022, there are still a significant number of mergers and acquisitions happening. These are more strategic investments where private buyers are adding to their portfolio, versus a more stand-alone investment for growth such the Twitter deal. However, under any circumstances, proper technical due diligence for such issues as IT capabilities and a company’s efforts for digital transformation are more critical than ever before.”
Headwinds Are Blowing Against Investors
While the deal to buy Twitter was massive in size, its collapse was not an outlier event. According to this July 2022 piece in the Wall Street Journal, “Companies in the market for deals are grappling with higher financing costs and lower valuations as inflation and an uncertain economic outlook threaten to weigh on mergers and acquisitions for the remainder of this year.
“Last year (2021) saw a record year for deal making, fueled by low interest rates and large cash piles. But companies are now facing headwinds when it comes to buying and selling businesses. Among them: rising interest rates, Russia’s war in Ukraine and a selloff in capital markets.
“During the first six months of 2022, companies globally announced deals worth $2.17 trillion, down 21% from a year earlier, according to data provider Refinitiv.”
Interestingly, some “contrarian” investors are not sitting on their hands during these challenging times. “Warren Buffett’s company (Berkshire Hathaway) bet more on high-tech darling Apple during the second quarter, while also investing billions in old-school oil producers Occidental Petroleum and Chevron,” according to the Washington Post .
The Post notes that Berkshire’s most recent filing revealed several smaller moves it made during the second quarter, including adding to its stakes in Apple, Chevron, Ally Financial, Activision Blizzard, Paramount Global and several other stocks. Berkshire also trimmed its holdings in General Motors, US Bancorp and Kroger stocks while eliminating a stake in Verizon Communications.
What makes Berkshire Hathaway run with the bulls when other investors are hibernating with the bears? Most attribute this to its long-term vision for growth and impeccable due diligence in making informed decisions.
Technical Due Diligence
While there are many areas to consider in evaluation of the efficacy of an investment, Asinpa focuses on technology. “We provide technical due diligence for both mergers and acquisitions,’ Tavo said. “The process is the same for both types of transactions. What changes is the scope.
“We review all aspects of the company’s technology – its digital transformation, IT capabilities and operational software – including the team that is supporting it. As a technology partner, we then provide our recommendations based on what our client’s end goal is.”
For private investors and venture capitalists, Asinpa consultants have four critical considerations when helping a client evaluate a merger or acquisition. These assume that the transaction is a long-term “play”, and the systems and teams are being retained.
- The caliber of the team
Are the members predictable and is the team composition adequate going forward?
- The technology perspective from all angles
There is a focus on technology obsolescence and maintainability
- The company’s security posture
- The underlying IT maturity processes
The Hockey Stick of Growth
“With our M&A practice, our focus is on technology,” Tavo concluded. “As such we want to make sure we identify all potential risks that the infrastructure and software applications have. Our report drives the level of investment that will be needed for IT, post-transaction.
“I believe the success of a transaction is primarily driven by the ego of the companies and their commitment towards the new future. I have seen many transactions that are folded into the new company only to fail, while others that are left alone, continue to operate with new capital, and ‘hockey stick’ their worth!”