According to Refinitiv data, the total value of global M&A deals announced in 2021 stood at $5.8 trillion, surpassing the full-year tally of $3.59 trillion in 2020. The technology, financial, industrials, and utilities sectors continued to lead the way and made up the majority of this activity.
The fact is that your organisation may be involved in an acquisition or divestiture at some point - either as an acquiring company or as a target.
In order to ensure continuity during and following a deal being signed, rigorous research, analysis and planning is essential to understand any actual technology developed by a business and the associated supply chain, and also the critical software and systems used to support the business and its everyday operations.
Software Escrow acts as a modern-day insurance policy, ensuring the resilience and continued availability of business-critical Software Applications and Data during the M&A migration journey and thereafter.
Standard due diligence in M&A has historically focused primarily on the legal, commercial and financial aspects of a target business, but in recent years, a thorough technology & IP asset appraisal has also become an important part of the picture. As explained by Mayer Brown, “technology is often a key asset and value driver—in some cases, acquiring technology is the primary reason for the deal in the first place. Failure to conduct adequate technology due diligence can leave a buyer prone to overvaluation of a target.”
“Technology is often a key asset and value driver—in some cases, acquiring technology is the primary reason for the deal in the first place. Failure to conduct adequate technology due diligence can leave a buyer prone to overvaluation of a target”. - Mayer Brown, Global Law Firm.
To ensure that those key technology assets remain valuable and to maintain continuity and access during and following a deal, rigorous research, analysis and planning is essential to understand any actual technology developed by a business and the associated supply chain, and also the critical software and systems used to support the business and its everyday operations.
Understanding control, ownership and legal contracts surrounding critical software applications and systems is a must to ensure that anything that is purchased as part of the deal will be accessible, available and usable upon completion.
Here we focus on the importance of software resilience and how it plays a key role in the acquisition process in order to help assure business continuity post-acquisition.
It is critical for purchasers to have a focus on effective integration planning and evaluation right from the outset of the deal, not to start thinking about it as the ink is drying on the purchase agreement.
Here are some of the situations where software resilience can be integrated as a best practice.
When you acquire a business, you're acquiring it in a ready format. But you also want to make sure that you're acquiring the IP that may form part of the unique value proposition that comes with that business.
One way to protect the IP and ensure that it is intact is to hold it in a secure independent escrow account under an Escrow Agreement — this IP may be in a physical form such as diagrams or schematics, or more likely is in a digital form, such as (embedded) software or data. With an IP Development Protection Agreement, you keep an audit trail of the technology development in a date and time-stamped format.
This could serve as a master record of the technology assets that were reviewed and could offer further comfort to the purchaser, the investor, or even the insurance provider. This ensures to those interested parties that the IP included in the deal is complete, performs as promised, and is securely protected with a neutral third party.
Further, if there are key individuals whose knowledge is critical to the valuable IP in target, purchasers should also consider independent Escrow Verification services which verify, capture, and document how such IP is deployed so as not to have one single point of knowledge.
Another example where software resilience is effective is when integrating the companies to keep business-critical systems up, running, and successfully migrated.
Based on multiple studies, the Harvard Business Review reports the failure rate of mergers and acquisitions lies somewhere between 70% and 90%. The article concludes that companies that manage M&A activity successfully work hard at effective integration and invest in integrating the two businesses.
PWC's report on Success Factors in Post-Merger Integration explains, “Deal makers who manage a speedy integration benefit from the positive effects of a merger much sooner, enabling them to quickly return to managing daily business”.
As part of the integration plan, acquiring companies need to understand which systems are relied on by their acquisition target. One way they can ensure continuity of these systems is to safeguard the technology supporting them in a software escrow account.
An acquiring company must therefore understand which of the target company’s systems are essential and keep these operating smoothly to successfully serve customers post-transaction. This can be an afterthought in M&A transition plans but can have a profound impact on revenue if customers start to leave.
Depending upon the structure of the acquisition and the perspective of the seller, it may be that data as well as the systems have to be ported in a configurable format in order to allow the purchaser to keep operating in the ordinary and usual course of business.
The company being acquired may rely on certain technologies which they license from a third party, which the acquiring company may not already have. If during the due diligence process you identify dependencies on third-party applications, it would make sense to enter into an escrow agreement with those software vendors and have them securely put their source code, cloud environments, or other technology into escrow, with a technically capable escrow agent. This could be outlined as part of deal terms, if the technology is deposited into an escrow account, you will be able to maintain this solution should the software vendor become unable to support their product in the future.
NCC Group provides a suite of Software Resilience services, such as Software Escrow Agreements, which complement M&A deals. Software Escrow and Cloud Software Escrow solutions have an important role in securing the long term continuity of business-critical software applications and data through an acquisition.
With over 30 years experience and 14,000+ customers in 135 countries, NCC Group is the global leader in Software Escrow. Learn more about our Software Resilience solutions below or get in touch to speak with our in-house Legal & Technical teams.
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