Mergers & Acquisitions - Software Licensing in the Due Diligence Process

It's been said that 2010 is the year of M&A (LOL...again, there have been many years in the past that have also held that moniker) and having just seen a posting on LinkedIn on this topic reminded me that it's probably time to blog about it again (check out my earlier posting on this topic for additional information).



There are lots of things to be considered, but I'm going to focus on the company doing the acquiring for this posting - if you need other scenarios check out our whitepaper on the topic.



There are typically two scenarios in acquiring: (1) you don't acquire any of the IT assets, or (2) you acquire all the assets of the company, including IT assets. The first scenario is simple as you know walking in that you have to provide these assets yourself. The second scenario is where the waters get muddy.



If acquiring all of the assets, the assumption is typically made that all the software installed at time of acquisition is (a) properly licensed and (b) the license will transfer to the acquiring company. Unfortunately, these are both naive assumptions and too frequently incorrect.



In the ideal situation, IT would have the opportunity to receive the licensing statement (including copies of contracts and proof of licensing) for the company being acquired in advance so it could be factored into the valuation of the company (remember software is frequently the 2nd or 3rd largest line item in the IT budget and represents significant expense).



However; reality is that acquisitions are typically completed without IT's involvement or even if IT is involved they are very limited in the information that can be shared in advance of the completion of the deal.



So, how can IT help the company avoid acquiring someone else's licensing headache? Through education and quick follow up.



A couple of basic steps:

1) Get the issue on the table in advance of M&A activity. During M&A you're going to have a hard time getting the attention of the proper parties so preempt the situation.

2) Get some allies on the topic - legal counsel, CFO, compliance officer and purchasing officer are all key allies. Obviously this means senior level IT to senior level operations discussions.

3) Create a high level IT due diligence checklist of what IT truly needs to (a) help avoid large unnecessary costs and (b) ease integration post acquisition.

4) With the aid of your allies, get the IT due diligence checklist added to the overall company due diligence checklist. Be prepared for push back and be able to quantify through hard dollar and compliance risks the reason behind each item.

5) Post acqusition, work fast. Not only do you have a mandate to get the company integrated but you also need to ensure that if there are any licensing costs associated with acquisition that you're able to identify those for proper accounting in the financial statements as part of the acquisition cost.



Get help - understanding the licensing terms for each major publisher and the transferability of those licenses can be a daunting task. Now is the time to focus on integrating your two companies, have an expert handle the acqusition licensing issues for you.



Any other suggestions? Post them!

Software Licensing - 2010

Wow, can't say I'm upset to see the end of 2009! Having been in business since 1999 I've seen some ups and downs (think California, technology, early 2000's...ouch!) and am happy that with business maturity comes a certain tolerance to economy and business shifts...but I'm ready for this year to be over!

What's in store for licensing in 2010? I think we will continue to see a lot of acquisitions occur this year - which means eventual changes to volume licensing agreements. Be sure to keep an eye on mergers, acquisitions and divestitures to see which of your software licenses are impacted. It typically takes at least a year for any changes to volume licensing agreements but it might have a big impact on your maintenance decisions.

For Microsoft users there will be several new releases this year in Office, SharePoint and SQL Server to name a few. SQL Server is also being purported to have a couple of new editions and changes to some of the licensing terms (in particular SQL Enterprise and SQL Datacenter edition). Be sure to keep a close eye on these, especially if you have a virtualized model.

SaaS will continue to feel it's way and don't be surprised to hear more about the Microsoft Enterprise Subscription agreement...an agreement that has long existed but (in my opinion...as is all of this blog) wasn't priced well for most businesses.

Also, for those renewing Microsoft agreements there are some changes to your terms and conditions that you might not be aware of...the loss of the 30 day "grace" period on renewing of Software Assurance and an increase to 90 days for notice of change of reseller (hint, this determines who gets paid for your purchases and impacts any incentives resellers will offer to you - be sure to handle this on a timely basis if changing. You don't want the reseller you're "firing" to get paid for the renewal you do next month.)

What do you expect to see happen with software in 2010? Any licensing trends you know are happening or changes to PURs?

Mergers & Aquisitions - the importance of software licensing

I got a call the other day from a former co-worker. It appears that her new company had recently spun off from it's parent and in preparing for their software upgrade they got an ugly surprise...their former parent had never bought the software they contractually "transfered" to my friend's company. About $400,000 worth of software needed to be bought.

Knowing for sure about software licensing during Mergers and Acquisitions or any other type of change of control activity is extremely important.

Divestitures

When a company splits off from a parent company there is a lot to be figured out, including who gets the software.

If the company has only purchased OEM software then the software rights transfer with the machine – however; documentation is key. The onus of ownership remains with the company using the software.

If the company purchased retail software, will this be transferred to the new company? If so, physical transfer of the licensing agreements and records needs to occur as well. It would also be wise for the new company to insist on financial records showing the initial purchase.

If the company purchased under volume agreements (non-contractual), then the publisher needs to be notified of the transfer (transfer fees may be involved) and appropriate documentation needs to be retained by both companies.

If the company purchased software through a contractual agreement then there are additional considerations. Is the contractual agreement also covering any of the former parent’s software as well? In most cases it would be. Does the contract allow for separation or transfer of licenses? Is there a license transfer fee or notifications? Will either company still be of appropriate size to qualify for the contract?


Acquisitions

The last thing a company wants to do is acquire someone else’s software licensing nightmares. Ensuring that you receive full documentation of what you are paying for when you acquire the company and its software assets is key.

Additionally, a company that is acquiring another company generally has its own software assets already under various forms of contracts (or through acquisition a company might finally be of a size to qualify for a contractual volume agreement). Maintaining separate agreements or being able to wrap multiple agreements together is one of the items to be considered. Additionally, some contracts have language in them requiring a company to wrap acquisitions into an existing contract. It is important that a company be aware of any such requirements upfront so there are no costly surprises.

It's also important to know your rights. It's not unusual for software publishers to limit what rights can be transfered when a company is bought or sold.

If you need to know more, contact us through our website at www.cynthiafarren.com