A Multidisciplinary Approach to Technical Due Diligence

How is AI raising the stakes for evaluating complex technologies and intellectual property in M&A? 

In 2024, Fortune Magazine evaluated 40,000 mergers and acquisitions (M&A) over the past 40 years, finding that 70-75% failed "to achieve their stated objectives of enhancing post-acquisition sales growth, cost savings, or maintaining the buyer's share price." While there are several factors that contribute to post-acquisition success, a key driver can be a limited technical understanding of the acquired company's product or service offering.

Accurately assessing the value of technical innovations and intellectual property (IP) claims is increasingly complex. AI is lowering the barrier to integrating algorithms into industries that have been historically hardware-driven — ranging from automotive, robotics, and industrial manufacturing to energy, utilities, and medical devices — meaning that many evaluations require a much closer look at a potential target's technical capabilities, skill sets, and offerings. This is especially true of start-ups and early-stage companies, which may represent innovations with unknown or unproven market value. 

While M&A teams often review large amounts of information to understand a company's financial health, staffing, and long-term viability, the engineering behind a target company's products or services can be harder to analyze. Investors may bring in specialists to assess certain aspects of a technology only to find that key questions fall outside a single team's area of expertise. For example, a team specializing in hardware can assess scalability and technical viability of the physical components of a product but may not have enough understanding of software to understand processing and data flow needs driving the hardware selections.

A multidisciplinary approach encompassing experts from a variety of backgrounds and disciplines can help acquiring companies and investors better assess the value of a target company's technology and IP, including its strengths, risks, and dependencies. Fully evaluating target companies that deal in robotics, medical devices, sensors, solar technologies, quantum systems, AI, computing, control systems, and other emerging or deep-tech fields could require teams with both domain expertise and knowledge in relevant hardware, software, cybersecurity, intellectual property, and more. 

How does technical due diligence typically work? 

M&A firms often work alongside technical experts to develop the questions, requests, and analyses that need to be completed for a particular product or technology. This collaboration helps both teams focus on product/service viability, market placement, and competitive analysis. 

Technical due diligence typically begins with exchanging information, such as internal engineering documents, schematics, design discussions, and marketing materials, often followed by site visits to gain firsthand understanding of the target company's offerings. During these visits, due diligence teams may view hardware or software demonstrations, explore manufacturing or test facilities, and meet with technical staff. 

After analyses and inspections, a full technical evaluation report can provide the acquiring/investing company with critical insights as to the technical advantages, challenges, and overall novelty of the target company's offerings. A full technical evaluation report may include: 

• An in-depth description of the technology's functionality and feasibility 
• An overview of the competitive landscape, including primary competitors, depending on the availability of reviewable materials
• An evaluation of the target company's IP (e.g., patents) to assess how it captures novel or differentiating aspects of products and services
• A detailed list of benefits and considerations 

These reports can support different goals, such as providing a comprehensive overview of the technology, as well as highlighting areas for improvement or growth for the target company. Technical due diligence teams can evaluate many aspects, including:

The technical evaluation team can use the results of their analysis to further generate a "red flag report," highlighting aspects of the target company that the M&A team may need to evaluate further. The analysis may end here if the acquiring/investing company determines risks outweigh benefits or the product/service offering is not significantly differentiated from current market standards.

Independent review of each technical domain 

M&A teams commonly approach technical due diligence by engaging with different teams to review various aspects of the target company, whether that be software, hardware, intellectual property, cybersecurity, or ability to scale products and offerings. The acquiring/investing company typically coordinates separate technical teams. While this approach may have worked in the past, today it comes with substantial risks such as increasing organizational overhead and overlooking critical dependencies between domains. These dependencies may reveal bottlenecks, schedule drivers, or development constraints that teams working in isolation can miss.

For example, a software-only assessment may assume available hardware meets the specifications required for implementation without verifying the actual hardware matches the software development roadmap. Likewise, a software team may conclude that a company's development plan is appropriately architected and scalable on one type of processor, although the hardware team plans to shift to an alternative processor due to cost, availability, contractual agreements, etc., rendering the software team's conclusion invalid. In contrast, a hardware-only assessment may assume that software developments are available and adhere to the specifications of the hardware components, risking assumed time to market launch, financial targets, and so on. 

Intellectual property due diligence

IP adds distinct concerns to technical due diligence. IP may take the form of patents or patent applications but can also include trade secrets that differentiate a target company from its competitors. Broadly speaking, IP-specific technical due diligence covers critical hardware/software systems or methods and requires a rigorous, thoughtful approach to confirm that IP is protected from imitation, suitably differentiated from existing technologies, and documented in a manner that does not leave survival of the patented work to chance or interpretation. 

An experienced reviewer can help determine which patents in a company's portfolio protect core technologies and which are more peripheral in nature. Patent analysis requires interpreting claim language and can easily fall beyond the capabilities of the acquiring firm without specialized expertise. It is also important to understand how a target company treats innovation and what internal processes exist for identifying patentable work. Do they maintain an internal research and development team? Do they allow employees freedom to work on long-shot developmental ideas? Does their internal legal staff guide the process of bridging the gap between a possibly IP-unaware engineering staff and the need for the company to protect its own interests in the IP space? A complete review of a company's IP portfolio can answer these questions about the target company's potential to continue producing patents into the future.

Why does a multidisciplinary approach to technical due diligence matter? 

Interdependencies between various technical areas are increasing as technology advances. Software programs used to develop hardware products may result in cybersecurity issues or licensing dependencies that render a hardware roadmap infeasible. Hardware systems now employ the use of advanced software, AI models, or network connected controls. Project management strategies and approaches leverage a hybrid approach of agile and waterfall methods, impacting assessments of development timelines and risks. A collaborative, multidisciplinary approach allows M&A teams to draw on the right expertise as questions evolve, adding both broad perspective and deep technical understanding to comprehensive evaluations that support critical acquisition decision-making.