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Why M&A due diligence needs to include SAM -PT I

 

After its people, technology is the second-largest investment for many organizations. Although it feels like we’ve worked with software for ever, the past 20 years or so of the ‘IT-enabled organization’ is a mere sliver in the history of commercial organizations undertaking acquisitions and mergers.

Over hundreds of years, the due diligence surrounding understanding the financial implications of buying or joining forces with another organization has evolved into a fine art.

When one organization is poised to acquire another company, it looks at the balance sheet, the profit and loss, financial projections, market awareness, and in a due diligence process it will also look at the capital structure of the company. Naturally it’ll look at the balance sheet and see what investments have been made over the past x years and recognize any active investments.

However, one area of best practice that hasn’t kept pace with technology change is assessing the value and liabilities associated with an organization’s software entitlements. Given that organizations around the world spend more than US $320 billion on software each year, failing to understand an organization’s licensing position prior to acquisition can seriously impact whether or not the purchasing company gets a good deal.

In a world where the software publishers are increasingly paying special attention to M&A activity, omitting an accurate assessment and understanding of software during due diligence can lead to both compliance risks (unplanned costs) and over spend (unnecessary cost).

The software vendors are ready to pounce

There are three primary concerns in terms of software licensing when undertaking an acquisition:

  1. Is the company being acquired currently accurately licensed and can we be sure we are not inheriting a compliance risk?
  2. Is the target company optimized for licensing or is the acquirer about to take on unnecessary costs?
  3. What will the software licensing position for the new merged entity look like? Are there opportunities to optimize agreements and get a better deal 

 

From a software publisher’s point of view

M&A activity is often enough to get them rubbing their hands together in excitement. 
Why? Because they know that most acquisitions fail to address the three points highlighted above. And where there’s a lack of best practice, there’s a financial opportunity.


That’s why M&A is now one of the top triggers for a software license audit. In the next instalment, I’ll highlight examples of how software licensing can truly affect the profitability of a deal and see how, by controlling and managing the software licensing position it can really make the difference to the success of any M&A activity.

In the meantime, to learn more about software audit best practices for mergers and acquisitions, why not talk to one of our Software Asset Management experts?