In mergers and acquisition transactions (M&A), buyers often prepare themselves to take on tangible assets, but neglect to consider the importance of technology to the functional success of the combined business after the transaction closes. The parties tend to overlook the transaction's impact on the operational “backbone” of the business, including the need to merge technological aspects of two separate business operations into one. By considering the need to merge different technology infrastructures and business processes as part of the overall M&A transaction, and by involving internal information technology (IT) departments and experienced IT attorneys early in the process, parties can maximize their chances for a successful deal.
Technology Areas to Examine
An early examination of the operational needs of the parties after the closing affords both sides a chance to identify cost-saving and efficiency-enhancing opportunities such as the ability to replace portions of the backbone with better or less expensive IT solutions or to outsource key functions that were previously handled in-house. Otherwise, if parties only examine the IT infrastructure after a merger, they face potential pitfalls such as key technology that cannot be transferred, processes that do not provide needed value, and disagreements over the technology needed to run the new business successfully.
Data retention and records management are also critical aspects of the IT infrastructure of the seller. Electronic records and data (e.g., e-mails, Word documents, Excel spreadsheets, PowerPoint presentations, enterprise resource planning databases, and so forth) comprise and document the vast majority of most companies’ intellectual and other intangible assets. The proper storage and retention of this data (and ability to retrieve it quickly) are vital to fully utilizing the benefits of the acquired company.
Pre-closing due diligence should include a focus on electronic records management and retention. Sloppy recordkeeping can result in the inability to effectively access and use the intellectual assets of the seller — or worse — can lead to liability from not retaining records as required by law. Post-closing planning should address transitioning and integrating the acquired company’s electronic records management and retention systems into the buyer’s systems.
Making Technology Part of M&A Due Diligence
Unfortunately, these issues are often only given a cursory glance by the teams documenting the merger and acquisition transaction. Oftentimes, the plan to keep the business running on the day after the closing and transfer operational control to the buyer is left solely to the IT and other operational departments of the companies. Electronic records management is often an afterthought, if considered at all.1 Although well positioned to help identify issues and risks and mitigate them as part of the overall deal, the teams working on these issues are often not involved with the teams working on the sale transaction, resulting in an uncoordinated and sometimes costly transition.
Planning for an effective post-closing transition and integration involves at least three phases:
Obstacles and Hindrances
Business acquisitions sometimes encounter significant difficulties over the failure to inquire about third-party services provided to the seller's business operations as a whole. Examples of these types of services include enterprise software license agreements as well as the related support, maintenance, and IT and business outsourcing agreements.
The parties should involve and use the knowledge and experience of their IT and outsourcing lawyers to help plan for and document the agreements necessary for a smooth transition. In addition, these professionals can help identify all of the assets, hardware, or software the buyer will need to use or access and that the seller will need to provide, license, or otherwise procure. Additionally, IT and outsourcing layers can provide an estimate of the associated expenses required for the parties' post-closing needs and goals.
The degree to which the parties focus on these technology issues early on in the transaction is often a key factor in the success of the transaction. The economic details are important, but giving consideration to the business' intellectual property and technology needs as a part of the functional aspects of the business will save time and money after the sale is complete.
1 A checklist of relevant records management inquiries and issues is available at: http://www.foley.com/files/TechnologyMAQuestionnaire.pdf.
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If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individuals:
Christopher C. Cain
Chanley T. Howell
Karl A. Hochkammer