Are you prepared for your Software supplier being taken over by another supplier?

We suspect that the pace of Merger & Acquisition activity that began in earnest in Q4 2010 is likely to continue throughout 2011. For this reason, we think it’s imperative that procurement, legal and IT organizations prepare themselves for the chance that their current software suppliers might be acquired. Aside from coming up with the right general strategies and preparations for the potential takeover of the owners of your licensed (or rented) application assets, it pays to look specifically at the opportunity that material change of control clauses present to reduce potential risks to your business and provide some reward based on your contributions to a supplier’s success at selling itself.

One structure for these clauses is to require the supplier to refund monies based on how soon the firm was sold. The theory behind such a clause is like a sinking bond fund requirement: the longer you get to use and get value out of your software ‘investment’, then the lower your liquidated damages are. If the supplier is sold after ten years, for example, you may get nothing for damages as you got full value for your investment. However, if the supplier is sold within the first year of your licensing, shouldn’t you get something for all of those implementation fees, license fees and maintenance monies paid to get this now obsolete solution partially installed?”

Suppliers hate these clauses; they believe that if too many of their contracts contain language that a potential acquirer would find economically challenging, then the value of their firm is adversely affected. Of course software providers are most likely to push back when they encounter additional considerations in these clauses that extend beyond the outright company sale. For example, a clause might also cover the loss of key software executives.

Regardless of how onerous you want to get with suppliers in negotiation, you’ll have far more leverage in larger suite deals than one-off module situations. And make sure that you allow adequate time in these discussions towards the end of a quarter to get what you want (incidentally you should always negotiate towards the end of a quarter, but hopefully you knew that already). The legal wrangling and back and forth between your legal counsel and suppliers could take days or weeks, hence the extra time to budget for. But in the end, it could very much be worth it.

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