Mergers, Acquisitions & Divestitures: Why it pays to keep ITAM in mind

Author: Chris Gough, Chief Strategy Officer, Livingstone Group

Mergers, acquisitions and divestitures are complex transactions that result in fundamental structural company change or transformation. There are many aspects to consider, from staffing and office space, to operations and finances – and, crucially, software and cloud contracts.

Ensuring that software licensing contracts are in order ahead of such significant deals is an essential part of ensuring smooth IT transition in the future, avoiding unexpected costs, and mitigating any potential risks (some of which can go to overall sale or purchase value). As such, organizations need to fully understand their software and cloud landscapes, commercially and contractually. This is where IT Asset Management (ITAM) is key.

The pitfalls of not knowing your contract position

Understanding your current contract position and carrying out detailed risk due-diligence is vital for any company to successfully manage change or a strategic transformation event. It can be far too easy, especially with the many other facets of preparing for a major company change, to consider postponing the necessary commercial risk due-diligence – but this is a key part of ensuring a smooth transition and avoiding unwelcome surprises.

We’ve seen organizations try to rectify contractual problems too late in the process, and by not understanding how exposed their organization can be to specific terms and licensing risks, they have quickly spiralled into costly and complicated issues, with escalating liabilities that can impact significantly the process and business value.

It is also important to understand the risks that come with a merger or acquisition. Acquiring a company, for instance, could also mean inheriting a host of compliance risks and costs, resulting in potential valuation problems and even further liabilities.

By not fully understanding the ins and outs of your contract, you could also find it difficult to negotiate favourable terms with a publisher – even as part of a new company or as an independent entity, publishers will still have knowledge of your requirements, so it is important that you are on the same page.

Establishing a new contract sets the tone for all future contracts, dictating the discounts and terms that could have a positive (or negative) effect for years to come. It is crucial, then, to understand your software and cloud needs now to ensure the benefits continue.

Points to consider:

• Most publishers offer a specific (often short) window for companies to declare whether they have been through a merger, acquisition, or divestiture. Oracle, for example, has a 60-day declaration period
• When it comes to contractual discounts, keep an eye out for unit price increases, as upon being acquired, an organization may not keep its original discounts
• Be aware of preferential buying regions – if two companies are coming together from different regions, check to see which offers the best deal on pricing
• Understand your right to request a contractual amendment agreement or a contract re-negotiation
• Keep in mind the Transfer of Service Agreement that gives companies permission to use software for a short transition period after being divested
• With modern licensing now primarily cloud-based, remember that the rules around licensing ownership have changed.

An opportunity to start afresh

When managed correctly from an IT perspective, mergers, acquisitions and especially divestitures provide great opportunities for organizations to renegotiate brand-new, more favourable software and cloud contracts. These organizations can rationalize and optimize their terms and licensing to create a more agile contract for future requirements, suited to deliver better, long-term value.

They can also take advantage of a variety of discounts. Programmatic or earned discounts, for instance, or an increased discount if an acquisition has resulted in a greater number of users. Organizations can also use the opportunity of structural change to become more sophisticated in buying licenses. For example, if a divested company has a reduced number of requirements, it can look to develop its specific user persons and create a more tailored environment.

But it is key to remember that these benefits can only be achieved if contracts and licensing are properly understood and contract renewals and negotiations are planned well in advance, without the pressure of a looming business event.

Preparation is essential

While assessing contracts, it is crucial to consider the contractual intricacies for both parties in the transaction – what is the impact on usage and what are the forward contract requirements? Now is the time to insert smart clauses such as taking ‘Future Affiliates’ into account. What are the constraints of the exiting contractual agreement? This can take a substantial amount of time to learn and understand. This will also need to be completed for each publisher, each with different contractual terms and dependencies. Time to prepare is therefore essential.

As for any aspect of SAM, planning ahead is key to a successful outcome. Only when contracts have been thoroughly analysed and understood can licensing and compliance risks be reviewed and calculated across their respective estates. Factoring in future demand, optimization and growth allows an optimal negotiation strategy to be achieved.

By preparing as far ahead of schedule as possible, organizations will be prepared to handle any unexpected findings and be able to come through the other side of a merger, acquisition or divestiture with a futureproofed and optimized contract.

Support through a challenging period

Enlisting help from an experienced third party such as Livingstone can provide invaluable advice and insight to help you navigate the complexities of software and cloud contracts, especially where organizational transformation can create significant reputational risk for all parties. During an acquisition, we can help organizations profile risks and reduce financial exposure, and for newly divested companies we can help negotiate your first entity level contract, establishing benchmarks for the future. Similarly, if an organization is going through a breakup, Livingstone can help provide independent mediation to ensure all parties get what they need.

We know that the prospect of combing through every little detail of a contract can be an overwhelming prospect. We have extensive experience in supporting clients through the Merger, Acquisition & Divestment process; minimizing risk and optimizing our clients’ post-transaction technical, commercial and contractual positions.

With teams of contract experts across mega vendors and publishers, we can help define an optimal Bill of Materials and use our expert industry knowledge to secure publisher discounts. We can help to plan and negotiate your contracts, and ensure you know the specific details, terms and risks to ensure you achieve an optimal outcome – whatever the structural company change.

For more information, contact a member of our team, and keep an eye out for our upcoming ‘Mergers, Acquisitions & Divestitures’ e-guide.

ABOUT THE AUTHOR

Chris Gough, Chief Strategy Officer, Livingstone Group

Chris has worked in the IT Industry for over 20 years, starting as a consultant he then took on more senior practice management roles, focusing on networking, security, data centre and unified communications and in recent years specialising in data centre optimisation and particularly in software licensing. Having worked with large enterprise organisations, Chris understands the challenges faced in data centre licensing and the lack of expertise in the marketplace.

Having founded the Derive Logic business until its acquisition by the Carlyle Group in April 2019, Chris is now on the senior executive board for the world’s largest independent IT Transformation Assurance and Software/Cloud Risk Management business, Livingstone Group.