According to CNBC, this year is very hot and active for Mergers & Acquisitions. I would agree with that assessment, as I have been in many meetings and conversations with clients regarding their M&A strategies, more so this year than in years prior. This might lead you to ask, “Why would a software analytics company be talking M&A with their clients?” Great question!
What most of our clients realize too late in the M&A process is their lack of understanding and awareness of risks lying deep within the software assets and processes of the company they are acquiring. M&A activity can cause major heartburn and indigestion for the technology executives tasked with figuring out how to assimilate outside technology and organizations into their own. Some of the basic questions that come up during such meetings are:
- How much of the software was organically developed by the acquired company?
- What open source and third party products are hard wired into the software?
- What intellectual property rights are protected or unprotected in the software?
- What type of additional exposure to cyber threats are being added to our system?
- What software process does this team follow and how does that integrate into our DEVOPS?
- Who are the domain experts on this software and how do we lock them down into a contract?
THERE ARE ANSWERS
The good news is that for each of the above, there exists a solution/approach to mitigate the risk. For example, “How much of the software was organically developed by the acquired company?” Well, most acquirers have no idea regarding the composition of the software being acquired. They have little-to-no knowledge as to how much of it is organic versus open source versus commercial off-the-shelf. But, there are technologies that will decompose a software system and analyze all of its parts, indexing what was organically developed and what wasn’t. In addition, these technologies will invoke sophisticated pattern matching algorithms to identify whole parts and fragments of software used from the open source market, alerting you if there is a copyright issue or if there are known security risks with this piece of code.
In one particular case, we had a client who neglected any of this due diligence upfront and found out post-transaction that they were exposed to massive copyright liabilities due to the software not properly documenting use of open source and third party products.
Investigating these issues before they become real problems can alleviate a lot of costly pain and frustration.
LET’S FACE IT, SOFTWARE IS EATING THE WORLD!
More and more, our lives are driven by software-intensive systems. Traditional hardware companies are trying to pivot to software-driven solution companies in order to increase their margins and differentiate themselves in a highly commoditized marketplace. A great example of this is when I recently had to replace my air conditioning units at my house. When the salesman showed up to discuss what types of new units I wanted installed, his comment on why I should choose one superior brand over the others was the software embedded in the superior brand’s units, allowing me to save more money and have a more comfortable climate-controlled home! This was a HVAC guy telling me that software is the reason why I should pay another $4,000 per unit! Really!? It’s a great illustration of how one company in a highly commoditized market is able to achieve a higher price point and superior brand recognition by emphasizing their software as the solution and not just the physical unit. Bravo!
BE THE “SMART MONEY”
What has always been interesting to us, knowing that software is truly eating the world, is that acquirers are quickly becoming more aware as to the risks that software represents within an M&A transaction. What we have found during M&A transactions is that, traditionally, the acquirer audits everything except the code. However, with cyber threats in abundance and software becoming a dominant strategy for brand dominance, the “smart money” leaves no software stone unturned before the ink is dry, truly understanding the value and risks of the transaction down to the bits and bytes.
If you’re curious about how we can help, a great place to start is our case study, “DCG Supports Acquisition Due Diligence Team in Managing Technology Risks for Transaction Success,” which is available on our website. Of course, if you have specific questions, feel free to leave a comment or shoot me an email!
PSC Vice President, DCG Sales