Why you can’t ignore software licenses during merger and acquisitions

The total value of mergers and acquisitions on the Dutch market in 2015 tripled to 179 billion euros, according to recent research by KPMG. The number of deals, for the most part closed by large firms, was slightly lower than in 2014. This means that the acquisitions made in 2015 were much bigger than a year earlier, with an average value of 320 million euros. Such large deals require a large amount of control in areas such as employees, business processes and IT integration. Due to this, the managing of software licenses is often neglected despite the large financial risks and savings opportunities that are attached to it.

If a company acquires another company, it buys all the available assets of that company. This, of course, refers to tangible assets such as office buildings, furniture, production equipment, computers and hardware, but also software contracts and licenses. In a takeover you become owner of a staggering amount of existing software contracts and it is extremely important that these are identified. As a company, you mainly want to know what exactly you have in-house. Firstly, because otherwise you can’t benefit from the potential, large cost savings, and also you have no idea what financial risks you may run into by being out-of-compliance.

Cost savings

Cost savings is one of the main objectives in a merger or acquisition. The economy of scale allows companies to do this, especially in the IT field. The new situation is the perfect opportunity to give the entire IT architecture a redesign, to cancel existing contracts, renegotiate with vendors and in so doing, reap the financial benefits. It is important that these savings are identified as early as possible. The sooner they are recognized and accurately sketched, the greater the gain of the integration will be.

Here too, a knowledge of IT and the merging of IT systems is generally required. An especially deep understanding of software contracts is also crucial. It goes beyond just reading the contracts; you have to see the opportunities offered by the contracts to bring down costs. This also requires a general knowledge of IT and merging IT systems. But before contract experts can get going, much hands-on work is necessary. Contracts, which have sometimes been closed and for years need to be collected and put in order, with a simple premise: what software is actually all still there?

Software compliance

The question that immediately follows involves compliance: what software is being used and is it all in accordance with the contractual agreements? In an acquisition you definitely know one thing: there will be a surplus of contracts. If both organizations at the start of the acquisition are compliant, there is basically not much going on: the acquisition then mainly provides an opportunity, as described above, to cancel contracts and obtain financial gain. However, if the acquired business is not compliant, it becomes a different story. When IT is integrated, it is very difficult to determine where the sub-licensing came from after-the-fact. It is, therefore, important to check this as early as possible during the takeover and to make arrangements in advance with the previous owner.

To illustrate, for example, a client of B-lay recently took over another company for around $6 million. We figured out in time that this company had 21 million dollars worth of compliance issues with various software vendors. By removing software, creating a clever architecture and preparing for negotiations, we were able to bring quite a bit of that amount down, but eventually payments did have to be made. However, because proper arrangements were made beforehand, this financial risk could be deposited with the previous owner. If no such agreements are made beforehand, you shoot yourself in the foot and you risk taking on millions in debt.

In an acquisition, every company wants to see that their scaling back is translated into financial benefits and they don’t want to be faced afterwards with unpleasant surprises. Also, it’s important to make sure that when you go into a merger or acquisition software license management is high on your to do list from the beginning and all the risks and opportunities are identified as early as possible.

This article is also published on Executive People (Dutch)