Software Compliance Impacts on Mergers and Acquisitions
They say the only constant is change but in the software compliance world, there are two constants: threat of a vendor audit and an ever-changing IT estate. Changes to the IT landscape are even greater when mergers and acquisitions come into play. Changes that bring potentially exponentially higher numbers of applications into the picture for IT and Software Asset Management (SAM) teams to have to incorporate and manage, and which in some cases can greatly impact the feasibility and profitability of the deal itself.
Critical questions you need to address
Why is the software compliance position so critical to a successful merger or acquisition? Because ignoring a potential financial risk that could be in the millions of dollars is just bad business practice. One general counsel I interviewed shared a story of how their company had canceled an acquisition at the eleventh hour because a software non-compliance issue discovered at the target company would have made the entire deal a loss.
When your organization prepares for an acquisition, software is a critical asset to include as part of the financial considerations and especially when evaluating the risks. In researching M&A best practices, there is a glaring lack of guidance or even mention of software licensing and its impact on mergers and acquisitions.
We’re here to change that. As part of your M&A best practices make sure to ask these two key questions:
- Is the company we intend to acquire properly licensed or are we inheriting a compliance risk?
- What will the software licensing position for the new merged entity look like?
Understanding and reducing inherited risk
Prior to any merger or acquisition taking place, a company completes thorough due diligence to account for almost every input and potential impact to the profitability and thus viability for that deal to be completed. Yet very often, companies target and even complete mergers but fail to account for the software position for the acquired company. In many cases auditors come in and examine all financials, so why is software often ignored in the audit scope?
The hidden costs of a non-compliant licensing position are quickly exposed by vendor audits that are often triggered by merger and acquisition activity. Vendors know that mergers and acquisitions are easy targets for finding companies out of compliance.
You may ask… why are these such easy targets? Take a look at any one of the hundreds of license agreements your organization has, and you’ll find hundreds of different versions and levels of rights and restrictions. It’s partly because software entitlements may not always transfer and will often require a “transfer of ownership” fee. Review your own contracts and your target merger/ acquisition company’s entitlements and contracts to make sure you get a complete picture of what the costs and restrictions are for software use post-merger.
Mergers and acquisitions bring up a multitude of questions. Towards the top of that list is to get an accurate understanding of the software licensing position of the target company. In order to ensure accurate disclosure is provided by the target, you need to know the as-is state of the software licensing soon after you acquire the entity, or ideally before. This can reduce the financial burden if the acquired entity is out of license compliance and allows you to hold the sellers accountable to the disclosure schedules.
This is, of course, assuming your own house is already in order. If not, take this as an opportunity to internally determine your own software compliance position by establishing a Software Asset Management practice.
Recommendations for success
So now that you are one entity, you need to assess the landscape of what applications and cloud services are in use. Have you inherited anything that may be beneficial? A good checklist to work through looks like this:
- Optimize Your Spend
Look for common software titles across the two companies. Identify and assess who actually needs the software, how often do they use it? Do they use it to its fullest potential or do they only need a lower level subscription or license?
- Improve Efficiencies
Look for similarly functioning software titles that could be consolidated to one or at least reduced in number. It is uncanny how often a company has an “approved list” for their software or cloud usage, but has several other titles running in their environment that perform the same task (but in an unsupported or even unknown capacity).
- Identify Areas for Consolidation.
Do you have duplicate licensing? If yes, what are the licensing rules for reassigning these to employees who need them? If the licensing rules restrict immediate reassignment, what are the timeframes and rules for removing or reducing them at the next renewal cycle?
- Reconcile Software Usage With Acquired Software Licenses.
A complete SAM practice ensures you maintain governance and compliance by rationalizing the versions and licensing rights across all your software. Eliminate blind spots in your M&A IT integration strategy by gaining visibility into all the disparate software and versions running in your landscape.
Conclusion
The impact of technology on the M&A world is increasingly streamlining and optimizing not only the integration process with regards to asset inventory and consolidation of business elements but also the processes surrounding the legal elements and practices. Accuracy and diligence are critical to a successful merger or acquisition and nowhere is the gap between expectations or false hope and the reality of the situation more prevalent than when addressing the software compliance risks a target company may have.
M&A activity triggers software audits. Audits are bad enough when they are (supposedly) random and infrequent, they can be devastating if your newly formed company is targeted by multiple vendors eagerly awaiting a financial windfall at your expense.
Make software compliance risk mitigation part of your merger and acquisition due diligence to help ensure your company’s financial success. Impending merger or acquisition? Talk to us to learn how we can help you with your M&A due diligence.