The importance of IT license & contract management in M&A activities
The rumor mill has been bubbling for months and the M&A department is working at full speed. There is much speculation about what is in store for the company. But reliable information is a long time coming, until in the end the official announcement arrives: We have sold or spun off a part of the company, or we have acquired a new part of the company. But what does such news mean for IT license and contract management? During M&A activities, IT license and contract management is faced with major tasks and challenges in a short period of time. So with the official announcement, the game can now begin.
The contractual provisions in M&A deals as well as with SW manufacturers are crucial
In M&A deals, many agreements are made during negotiations to ensure as smooth a transition as possible. Ideally, the IT department, including license and contract management, is also involved during the contract negotiations for the company purchase agreement. However, IT licenses and contracts are not the focus of these negotiations, which means that questions relating to IT licenses and contracts often only arise shortly before the contract is signed or only after the contract has been signed. As a result, it is often not fully clarified whether and in what way IT licenses and contracts are also transferred. In addition to the regulations between the parties to the M&A deal, the contractual agreements with the software manufacturers are also important here.
This is intended to ensure how IT licenses and contracts are handled in the context of M&A activities and whether and for how long spun-off parts of the company are entitled to use IT licenses of the previous company. In M&A deals, a transitional service agreement (TSA) can then be used to agree the extent to which IT services will still be provided for a spun-off part of the company. Transfer pricing based on the value of the existing licenses should also be regulated here.
Timing is of the essence - especially in M&A deals
Timing is not only important in the financial execution of the deal. In license and contract management, too, contract durations, periods for TSA arrangements and sufficient time to complete license and contract transfers must be considered. A spin-off or acquisition can significantly change contract volumes and thus impact pricing. Thus, if a spin-off significantly reduces contract volumes in the future, the end of the contract is at best in the distant future. In this way, you can still benefit from the more favorable conditions over a longer period of time and prepare specifically for the next contract negotiations.
However, if a spin-off or repudiation does not include a license transfer for all or even individual manufacturers, this can also pose significant challenges. Then the company may have to pay for a large amount of licenses that are no longer used and an adjustment is only possible at the next contract renewal. In such cases, having the contract end as soon as possible can be advantageous. Therefore, it is imperative to keep an eye on contract terms in M&A deals or, if necessary, agree on a contract adjustment or early renewal with a manufacturer. To avoid penalties or high prices associated with such an adjustment, a strategy should be devised to ensure that attractive conditions can still be achieved in the future, for example by switching to the cloud or making product adjustments.
Therefore, a contract and license transfer is not always desired by one or even both parties and should be settled in advance if possible. But it is not only penalties and declining contract volumes that can be a deterrent; compatibility with the existing standard portfolio and the effort involved in the transfer are also relevant factors.
The realization of license transfers is sometimes more difficult than expected
Even if an agreement has been reached on license and contract transfers as part of the M&A deal and the contractual arrangements with the SW manufacturers are also clear, there are always stumbling blocks during implementation. Careful documentation of contracts and licenses is one of the keys to success. If there is transparency about which contracts and licenses are relevant and assigned to the users in the affected part of the company, a lot has already been achieved. Not only current contracts and subscriptions need to be taken into account, but also long-standing agreements in earlier contracts and old basic licenses. However, experience shows that the transparency of data is often only available to a limited extent, so that in many cases the spin-off is associated with considerable additional effort to correct the data and document license and contract transfers.
Furthermore, not all licenses can be clearly assigned to specific users. Especially with enterprise licenses, a license transfer can be problematic. In some cases, a company license cannot be split up and thus transferred, or the license may be tied to certain volumes. This means that both the split-off part of the company and the remaining parts of the company may no longer be qualified to use the previous company license. Under certain circumstances, the volume can then be adjusted accordingly or a separate agreement must be reached with the manufacturer.
But there are also hurdles to overcome on the technical side. It is not always possible to clean up the portals of the software manufacturers or the company's own SAM tool without problems. During administration, links between licenses and contracts, as well as between basic and upgrade licenses, may have to be broken up, and a wide range of adjustments may have to be made for which the relevant expertise is required. Additional costs and effort may also be incurred if parallel tenants must be set up in the cloud in order to be able to separate them technically. It is also important to ensure that no disadvantages arise from potentially unfulfilled commitments, e.g., for cloud consumption, if a large part of the volume is covered by the part of the company that has been spun off.
Transparency and preparation are the key to success
In conclusion, transparency about existing contracts and licenses as well as careful preparation of M&A deals are of considerable importance.
Therefore, in the course of M&A transactions, an early involvement of IT license and contract management should be aimed for. In the aftermath, it must also be ensured that all data, tools and portals are updated after the license and contract transfers have been completed and that the cleanup work is not put on the back burner.
Author: Jessica Loi Müller