By Claire West
An upturn in the technology sector mergers and acquisitions (M&A) deals market during 2011 could lead to many businesses’ losing access to their operation-critical applications, according to NCC Group Escrow.
Activity, such as today’s acquisition of Skype by Microsoft for $8.6billion, highlights the uplift in M&A activity and the growing concern about source code maintenance.
In 2009 it was revealed that eBay had failed to purchase the core technology that powered Skype when it bought the company in 2005. The owners of Joltid Ltd (and Skype founders) claimed that the service was only licensed to Skype and after it expired in 2009 that Skype and it’s owners, eBay, were using the software illegally. While a legal battle was avoided, eBay was reported to be building the source code from scratch in a bid to avoid potentially expensive licensing deals.
A recent report from PricewaterhouseCoopers (PwC) predicts a resurgence in technology M&A in 2011, citing the alignment of cash-rich trade buyers, the return of private equity players with large funds to invest and continued improvement in the debt market. A survey by fellow business advisory firm Deloitte in June 2010 also predicted a return for corporate transactions in the technology market in 2011, with 60 per cent of respondents saying that they felt optimistic about the M&A outlook for the next 12 months.
However, experts at NCC Group Escrow are urging companies to consider the long-term availability of their software, in light of providers being acquired by larger competitors. In these cases, new parent companies could discontinue specific software lines of acquired companies, meaning that, should these software packages encounter a fault or become unavailable to the end user organisation, it neither has the support function or owns the rights to the application source code to rectify the problem.
Software Verification and Escrow are used by organisations to ensure that they can continue to maintain and support essential software applications in the long term. The software application source code is stored with an independent third party, with the agreement of the software supplier. This form of protection allows the end user to legally redeploy software in the event that the original supplier is no longer able to provide maintain or support it — as could be the case should it be acquired.
Mark Ormerod, group managing director at NCC Group Escrow, believes that medium to large privately owned businesses, which are not subject to the same auditing and regulatory pressures as public companies, and are more regularly targeted for acquisition, could be even more susceptible to losing access to business critical software.
Ormerod said: “For software and, more widely, technology entrepreneurs, tax and pricing conditions are the most favourable we have seen since the beginning of the recession. There is also no shortage of buyers for these businesses; with private equity houses keen to invest in the best sector assets having sat on large funds while the economic outlook remained unclear. In addition, large trade buyers are eager to gain ground on competitors by acquiring businesses with complimentary propositions in preparation for an upturn.
“This is great news for investors, entrepreneurs and management teams, but could potentially spell disaster for organisations that use applications to deliver critical functions. The message to businesses on software is clear: You may have paid for it and it may be central to your business, but you don’t own it and if your supplier stops working with the software you can’t fix it. Losing access to a critical application could stop a business in its tracks, causing notable financial as well as reputational damage.
“The active software M&A market means that the prospect of a supplier being acquired by a larger competitor, and discontinuing specific applications, remains high. With this in mind, Escrow should be considered by organisations to insure their software and combat this risk.”