Why you can’t ignore software licenses during a merger or acquisition?
During a merger or acquisition (M&A), software license inventory and compliance are often a low priority. But the legal and financial risks of noncompliance can be steep. With your chances of an audit increasing after a merger or acquisition, you could be facing millions of dollars of unanticipated software expenses.
When a company acquires another company, it buys all the available assets of that organization. These assets include tangible assets such as office buildings, furniture, production equipment, computers and hardware, and software contracts and licenses. Now that you own all existing software contracts it's essential that you understand what's included in these contracts to benefit from the potential cost savings and to identify any financial risks of being out-of-compliance.
Cost savings
Cost savings is one of the primary objectives of a merger or acquisition. The economy of scale allows companies to cut costs. It’s the perfect opportunity to redesign their entire IT architecture, cancel existing contracts, and renegotiate with vendors—to reap the financial benefits. But identifying these savings early in the M&A negotiations is critical. The sooner they are recognized, the more significant the gain.
Knowledge of IT and the merging of IT systems is essential, along with a thorough understanding of software contracts. Merely reading the contracts is not enough; you need to have the technical and contractual expertise to identify the opportunities to bring down costs. But before the experts get involved collecting and sorting through all the contracts is necessary to identify the software in question accurately.
Software compliance
In an acquisition, there will be a surplus of contracts. If both organizations are compliant, then it’s mainly an opportunity to cancel contracts and obtain financial gain. However, if the acquired business is not compliant, complications arise.
When IT is integrated, it is very challenging to determine where the sub-licensing came from post-integration. Ensure the M&A agreement allows enough time to accurately review your software licenses, claim any gaps or shortcomings, and ensure that the previous owner is responsible for deficiencies, including the cost of software noncompliance.
After a recent acquisition by our client, we found 21 million dollars in compliance issues with various software vendors. By removing software, redesigning the IT architecture and preparing for negotiations, we brought this amount down considerably. However, because we advised our client to make the proper arrangements beforehand, the financial risk was left with the previous owner.
During an acquisition, every company wants the transaction to translate into financial benefits and do not want to deal with unpleasant surprises. Before you enter into an M&A agreement, make sure you place software license management high on your priority list from the start. Staying on top of your software risks and opportunities as early as possible, will allow you to reap the maximum benefit.
To discover how SCG can help your business prepare for a merger or acquisition, contact us at info@softwarecg.com or +1 888 466 2899.
