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Four Steps to Assessing Software Value in an M&A

Mergers and AcquisitionsIf there is one time when business value is front and center in a conversation, it is during a merger or acquisition process.  The acquiring company wants to know the true value of the company it’s acquiring and the company being acquired wants to prove its value as a viable option for acquisition.  In the case of a merger, both companies have these same two concerns – what is their real value and what is the value of the company with which they are potentially merging?

In today’s organizations, technology, and more specifically, software is an aspect that needs to be carefully assessed to determine its value to the M&A deal as an asset or potential liability (i.e. requiring significant upgrades or maintenance or performing poorly).     

To begin the evaluation process, I recommend looking at the software in relation to the business functions of the target company.  Is the software unique to the company’s line of business or is it used for a business function that is common between the two organizations (i.e. HR, payroll, CRM).  Most likely, the software that is performing the same function in both companies will be of little business value to the acquiring company as they will choose to keep their existing software. 

However, a software solution that is unique to the target company could have tremendous value.  The challenge is that the acquiring company may not be familiar with the software and have a limited understanding of its value or the risk associated with that software.  In addition, if there are only a few individuals who understand how to use and maintain the software (especially with proprietary software) there is a risk that they will not remain at the company and as a result there will be no knowledgebase to maintain and/or enhance the software. 

I recommend taking four key steps during the acquisition process to determine the value of the target company’s software:

1. Software Asset Due Diligence (ADD) – determine how the target organization relies on the software.
2. Software Asset Risk Management (ARM) – assess the risk involved in transitioning to the target organization’s software.
3. Software Asset Maturity Analysis (AMA) – determine the future ROI for the acquired software.
4. Software Asset Integration Management (AIM) – analyze how to integrate the acquired software into the current environment. 

A software assessment needs to be an integral part of the M&A process – no matter what end you’re on.  It can no longer be an after-thought.  Software can provide significant value or pose a huge risk for an organization and that needs to be determined up front. 

I’m always interested in hearing from others about your experiences on how your organization has handled the software assessment process during a merger or acquisition.  What lessons have you learned?


Mike Harris
CEO

Written by Michael D. Harris at 05:00
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April Conferences with DCG Software Value

Conference season is back in full swing! This month you'll find us at two different conferences - coincidentally held in the same city, on the same dates! Both of these conferences are ones we return to year after year, so we can be sure that this year's events will not disappoint.

QUEST conference

First up is the QUEST conference (Quality Engineered Software and Testing). The conference features an exhibition hall, presenters and workshops/tutorials with a focus on testing. Tom Cagley, our Vice President of Consulting, will present, "Budgeting, Estimation, Planning and #NoEstimates - They ALL Make Sense for Agile Testing!," on Wednesday, April 20, from 11:15am-12:15pm. Tom will explain the difference between budgeting, planning, and estimation, as applied to testing in an Agile environment, and when they make sense, when they don’t, and in what combination for testing.

He will also teach a workshop, "Agile Estimation," on Monday, April 18 from 8:30am-4:30pm. The course focuses on providing QA managers, test analysts, and test automation engineers with an in-depth understanding of the principles and methods of estimating leveraged in an Agile development environment, through a combination of lectures with hands-on technique practice.

DCG is also a sponsor of the event.

Date: April 18-22, 2016
Location: The Renaissance Chicago Downtown; Chicago, IL

IT Financial Management

The second place you'll find us is the IT Financial Management Association’s (ITFMA) Financial World of IT Conference. The focus of this event is how to improve IT financial management capabilities. Harrison Zipkin, our Director of VC/M&A, will present "Shifting Operating Expense to Equity Value," on April 20th in the afternoon. His presentation will discuss how to convert operating expenses to equity value, highlighting current methodologies in IT and finance to enhance ROI.

Date: April 18-22, 2016
Location: Palmer House Hilton Hotel; Chicago, IL 

So, that's where we'll be in April! After each conference the presentations will be available for download - we'll be sure to post the links on the blog (they'll also be in our newsletters).

Our full event calendar is available here.

Written by Default at 05:00

Big Fish Eating the Little Fish: Mergers & Acquisition Indigestion

Mergers And AcquisitionsAccording to CNBC, this year is very hot and active for Mergers & Acquisitions. I would agree with that assessment, as I have been in many meetings and conversations with clients regarding their M&A strategies, more so this year than in years prior. This might lead you to ask, “Why would a software analytics company be talking M&A with their clients?” Great question! 

What most of our clients realize too late in the M&A process is their lack of understanding and awareness of risks lying deep within the software assets and processes of the company they are acquiring. M&A activity can cause major heartburn and indigestion for the technology executives tasked with figuring out how to assimilate outside technology and organizations into their own. Some of the basic questions that come up during such meetings are:

  1. How much of the software was organically developed by the acquired company?
  2. What open source and third party products are hard wired into the software?
  3. What intellectual property rights are protected or unprotected in the software?
  4. What type of additional exposure to cyber threats are being added to our system?
  5. What software process does this team follow and how does that integrate into our DEVOPS?
  6. Who are the domain experts on this software and how do we lock them down into a contract?

THERE ARE ANSWERS

The good news is that for each of the above, there exists a solution/approach to mitigate the risk. For example, “How much of the software was organically developed by the acquired company?” Well, most acquirers have no idea regarding the composition of the software being acquired. They have little-to-no knowledge as to how much of it is organic versus open source versus commercial off-the-shelf. But, there are technologies that will decompose a software system and analyze all of its parts, indexing what was organically developed and what wasn’t. In addition, these technologies will invoke sophisticated pattern matching algorithms to identify whole parts and fragments of software used from the open source market, alerting you if there is a copyright issue or if there are known security risks with this piece of code.

In one particular case, we had a client who neglected any of this due diligence upfront and found out post-transaction that they were exposed to massive copyright liabilities due to the software not properly documenting use of open source and third party products.

Investigating these issues before they become real problems can alleviate a lot of costly pain and frustration.

LET’S FACE IT, SOFTWARE IS EATING THE WORLD! 

More and more, our lives are driven by software-intensive systems. Traditional hardware companies are trying to pivot to software-driven solution companies in order to increase their margins and differentiate themselves in a highly commoditized marketplace. A great example of this is when I recently had to replace my air conditioning units at my house. When the salesman showed up to discuss what types of new units I wanted installed, his comment on why I should choose one superior brand over the others was the software embedded in the superior brand’s units, allowing me to save more money and have a more comfortable climate-controlled home! This was a HVAC guy telling me that software is the reason why I should pay another $4,000 per unit! Really!? It’s a great illustration of how one company in a highly commoditized market is able to achieve a higher price point and superior brand recognition by emphasizing their software as the solution and not just the physical unit. Bravo!

BE THE “SMART MONEY” 

What has always been interesting to us, knowing that software is truly eating the world, is that acquirers are quickly becoming more aware as to the risks that software represents within an M&A transaction. What we have found during M&A transactions is that, traditionally, the acquirer audits everything except the code. However, with cyber threats in abundance and software becoming a dominant strategy for brand dominance, the “smart money” leaves no software stone unturned before the ink is dry, truly understanding the value and risks of the transaction down to the bits and bytes.

If you’re curious about how we can help, a great place to start is our case study, “DCG Supports Acquisition Due Diligence Team in Managing Technology Risks for Transaction Success,” which is available on our website. Of course, if you have specific questions, feel free to leave a comment or shoot me an email!


Rob Cross
PSC Vice President, DCG Sales

Written by Rob Cross at 05:00
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"It's frustrating that there are so many failed software projects when I know from personal experience that it's possible to do so much better - and we can help." 
- Mike Harris, DCG Owner

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