Software M&A: What you need to know before
buying or selling software assets
Due diligence is becoming more
focussed
Increase in technology and digital media M&A since Q1 last year leading to:
focussed
More competition
Higher valuation multiples
Focus on delivering an efficient due diligence exercise identifying material
risks and facilitating the acquisition and integration of the target
S h t h tl i d f ?
So, what areas have we recently seen an increased focus on?
Integration
Information security and data management
IP and open source issuesIP and open source issues
Regulatory issues
Managing a diligence exercise
Make sure everyone understands the purpose of the acquisition, including:
Managing a diligence exercise
– Key business drivers and issues
– Plans for the target business
– Impact for the buyer
Set timings and materiality threshold early in the process
Pull together an appropriate internal and external team (lawyers,
accountants, investment bankers, consultants to undertake code review)
– Coordination can be very time consumingCoordination can be very time consuming
– Consider need for engagement letters, estimates, etc. from advisors
Management presentations to legal teams – put the business in context and can facilitate an understanding of key issues early on
Managing a due diligence exercise
If the target is a competitor, manage information sharing risk
Managing a due diligence exercise
NDA issues
Deal risks – how are they presented and graded? For the seller, managing the issues and identifying the “golden nuggets”
Ensure there is an understanding of the interaction between the sale and purchase agreement and due diligence including:
purchase agreement and due diligence, including:
– Warranties, indemnities and conditions to closing
– Assessment of disclosure
– Data room and general disclosure of the contents of the data room
Understand how due diligence is being managed at the target – what is their infrastructure? Do they understand the process?
Intellectual Property
Significance of IP assets in technology deals
Intellectual Property
Why it matters:
Focus on smarter DD analysis – deeper review of key assets:
what are the key
h th h d l d
what rights t t th what are the key
product components?
how were they developed?
who developed them and when?
protect them and how strong
are they?
What can go wrong?
Don’t have the rights post-deal to continue business Rights have been encumbered
What to look for
REGISTERED
UNREGISTERED
What to look for
Types of rights:
REGISTERED
℗,™, DR, domain names
UNREGISTERED
©, databases, confidential info.
- Relatively easy to establish - Potential for entitlement claims - Harder to establish as no title documents; - Need to check chain
of creation and
t t
OWNERSHIP
entitlement claims
- Expensive and often inconclusive contracts - Easier to assess validity inconclusive - Assess importance: defensive or basis of revenue streams? validity - Value likely to be linked to product revenues
VALIDITY
AND VALUE
IP Analysis
IP Analysis
How is the IP generated?
Possible encumbrances
For every key product component Internal employees Licences component, think about:
Key product
components
Consultants Securitycomponents
External providers Claims 3rdparty components 3rdparty licence termsThird party rights
What are third-party rights and why worry about them?
– Impact of claims
Third party rights
Don’t forget:
– Not covered by standard DD
– May impact business operation and expansion
H t h thi d t i ht ?
How to approach third party rights?
– Brands: searches
– Patents: freedom to market opinions
Patent Trolls
– What are they?