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!

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