“Every company is now a tech company.” This phrase is heard more and more
in the business community, from commentators to CEOs of multinational
corporations. With few exceptions, every business today relies on information
technology to survive. In every sector of the economy, from banks to retailers to
energy companies, businesses depend on IT to manage their most important
assets: their information and their customers.
If every company is a tech company, then every M&A deal is a tech deal―and to
ensure the success of an M&A deal, companies must recognize that solving the IT
puzzle should be a central pillar of their M&A strategy. While this has been true for
the better part of two decades, the way in which IT has evolved has made defining
what is being bought or sold more difficult than ever in recent years.
Enter the Cloud
The emergence of cloud computing as a preferred model of IT is largely responsible
for this shift. The term “cloud computing” has been used to describe a variety of
service models, but here we use it to refer to IT services that, broadly speaking, are:
distributed (i.e., not centralized); and/or
shared, whether with other companies (public cloud) or other internal businesses
or functions—which may or may not be part of an M&A deal (private
Advances in software development and the proliferation of high-speed telecommunications
networks have allowed servers and data centres to be “virtualized”
across the globe, replacing more traditional IT models that rely more heavily on
local, customized infrastructure.
Cloud computing is appealing to businesses because, among other reasons, it
requires little capital investment by the service recipient and is adaptable to changing
business needs while promising a stable common platform across numerous user
groups. As a result, cloud-based platforms are increasingly favoured by CIOs seeking cost-savings and more agile resources. But it is called “cloud” computing for a reason: it is not easy to define what and where, exactly, your company’s systems are.
M&A in the Cloud
Solving the IT puzzle and determining which pieces are being purchased (or sold),
and which pieces will have to be purchased separately to fill the gaps, are critical to
realizing value from the M&A deal. This issue goes directly to the heart of an M&A
transaction where the target’s IT is central to its value. If the target is a heavy user
of cloud-based technology provided by third-party service providers or affiliates, then
what, exactly, is being sold and how is it to be valued? And once identified, how do
you ensure that technology is seamlessly transitioned to the buyer?
The success of a deal will depend now more than
ever on successfully untangling and integrating buyer and seller IT systems.
The negotiation of the transition services agreement (TSA) for acquisitions becomes
critical, but perhaps more critical is technology due diligence that must be performed
before a TSA can be drafted. The acquiror will need to identify and untangle
the target’s IT, which may be spread across multiple shared systems, and potentially
across the globe. The success of the M&A deal will depend now more than ever on
the success of this untangling and integration of the target’s IT with the acquiror’s IT
(or on the acquiror learning to run the target’s IT)―essential steps for the buyer to
effectively run the acquired business.
Planning Ahead for Success
Start the tech due diligence process early and enlist the assistance of your integration
team to plan the integration well before signing. Seek their input on the
cost and timeline, which could greatly affect the overall economics of the deal.
Study the target’s IT, not just as a supporting asset, but as part of the value
proposition of the company. Has the target developed systems and processes
that enhance the value of the company, or has the target simply made use of a
standard cloud computing service in a way that fits its business needs?
Have an IT procurement strategy that anticipates M&A scenarios. Make sure
your IT service providers are obligated to assist you in tech due diligence, and
that there is a mechanism in your service agreements to support the operations
of the target.
Ensure your cloud pricing model allows spin-offs without triggering minimum
commitments that will burden you or the buyer after the sale.
Protect your IP. Check that your cloud provider cannot claim to own your patentable
systems or processes that were incorporated into the cloud platform.
Plan early. Understand what will be sold as part of the M&A deal and what
transition assistance you are willing to prioritize, taking into consideration
confidentiality issues and your resourcing requirements.
Anticipating tech-related issues and establishing good strategies early on to address
them can work to ensure the success of M&A opportunities when they arise. Cloud
computing, too, will inevitably evolve, but the days of M&A deals without a meaningful
tech component are over.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
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