United States: 2014 Merger Activity Highlights Need For IT Due Diligence
Last Updated: May 7 2014

Heavy merger and acquisition activity in first quarter of 2014 highlights the need for IT due diligence. Scott & Scott, LLP says IT assets acquired in mergers can carry more risk than they are worth.

Many large mergers and acquisitions have been in the headlines since the beginning of the year: IBM announced on March 4th the acquisition of Cloudant, Inc., and on April 10 reported an agreement to purchase SilverPop. Others listed in the April 4 LA Times include Facebook's announced acquisitions of WhatsApp for $19B and Oculus for $2B, and Google's purchase of Nest for $3.2B and DeepMind for $500M.

M&A transactions usually involve due diligence on the part of the purchaser, but many times it is not accompanied with a risk assessment. "There are a number of compliance risks regarding acquiring IT assets in a merger, and it's important that the purchaser ensures that the hardware and software included in the transaction has necessary ownership documentation and that all software licenses are compliant. We recommend IT asset due diligence because it provides an immediate return on investment," said Robert J. Scott, Managing Partner of Scott & Scott, LLP.

The risks of software non-compliance can be very costly because liability attaches at the time of the closing without regard to fault or knowledge.

A buyer who is looking to purchase the assets of another entity may consider the following strategies for limiting its risk exposure and ensuring smooth post deal operations:

  • Review all deployments and entitlements
  • Add software asset schedules to deal documents
  • Negotiate new license terms
  • Seek indemnification from seller
  • Negotiate pre-closing expenses to be paid by the seller
  • Use holdbacks or price adjustments to cover contingencies

After a buyer has acquired the assets of an organization or is involved in some other type of merger, it could result in a disruption to post-deal operations to find itself in the position of defending a copyright infringement claim by the original licensor. Any time an organization is considering an acquisition, it is recommended that it seek the advice and counsel of an attorney experienced in software license agreements.

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