Understand supplier motives and prepare contracts to protect your IT after a merger

If you are reading the market, a supplier merger should rarely come as a surprise

If you are reading the market, a supplier merger should rarely come as a surprise

The software industry has been in the grip of merger mania over the past few months. Recent multibillion-pound deals include Oracle's acquisition of enterprise software rival PeopleSoft and security specialist Symantec taking over storage company Veritas.

Although mergers may mean a windfall for shareholders and boost market share for suppliers, the outlook for users can be less rosy. Experts have warned that in the past some mergers have caused disruption and delays in new products as two organisations fuse into one. At worst, there could be a deterioration in service levels and pricing and the demise of well-loved, well-made products.

But what should users do if one or more of their suppliers is involved in a merger or takeover? First, most mergers should not be a surprise if the user has followed the supplier market closely.

"If it is a surprise, you are not doing your job properly," said Andy Kyte, a research fellow at analyst firm Gartner.

David Roberts, chief executive of user group the Corporate IT Forum, agreed. "Change and disruption can be lessened through planning and understanding what the likely risks are and where the changes will happen," he said.

Second, users should determine how dependent their business is on the supplier. "Do not base this decision on contract value alone - if a small supplier fails, this can make a big difference to business," said Roberts.

You also need to know whether other software is dependent on the acquired products, as it may not survive if the acquired product is killed by the new supplier.

Users should demand answers from merged suppliers as soon as possible after the deal is announced.

"You must look at other options from when you first think there may be a takeover and be very serious about them," said Ruth Rosenthal, IT director at Age Concern, and formerly of insurer Guardian Royal Exchange. "I tell both the incumbent and the acquirer I will change suppliers at the blink of an eyelid."

Influence on the supplier is normally greater when discussions are held collectively through a user group.

"Users do not always appreciate just how big they are collectively," said Rakesh Kumar, vice-president of technology research at analyst group Meta. "Remind the acquirer that 'collectively we spend billions of pounds - do not mess us around'."

Also, remember that the new supplier has an interest in avoiding problems with acquired customers.

"Take your new account manager out," said Kyte. "Do not be adversarial. Tell them 'we will be a good customer, but we have got some issues to work through'.

"Have your chief executive phone the acquirer's manager to remind the company you expect it to see you right."

There are other forms of pressure that users can apply, said Kumar. "Do not forget negative publicity. Threatening to kill off products can mean a lot of blogs and press coverage."

Your value as a company may amount to more than just the invoices, said Roberts. "You could be a reference site, you may be using the products innovatively or have a prestigious brand."

At some point, users will have to decide whether to stick with their existing supplier or move to a new one. A good contract should include a "change of control" clause, said Suzanne Mercer, IT partner at law firm Eversheds. This allows the customer to terminate the contract without penalty if it changes ownership.

"If someone acquires a company they must honour [existing] contracts," said Lucy Vernall, head of corporate law at law firm Kemp Little. "They cannot force you to change your terms and conditions."

Rosenthal agreed that such change control clauses in contracts were useful.

"It gives us six months to decide whether to terminate and gives the [new] supplier six months to prove the service is not deteriorating," he said.

But termination may not be the best option. "Do not have a knee-jerk reaction just because you do not like the new supplier," said Kumar. "It has to be a sound business decision after you have done metrics and risk assessments."

An IT strategy must include coping with a consolidating IT industry and more takeovers must be expected.

Acquisition fears

  • Good products may get cancelled
  • Loss of complementary products
  • Confusion over future roadmaps
  • Distraction of account managers and service support
  • Lack of communication
  • Shrinking competition
  • Unwelcome change in supplier corporate culture.

Mergers and acquisitions action list   

Run a risk assessment on the impact of the takeover. 

  • How critical is the product to your business? 
  • Have you checked your contracts and service level agreements? 
  • Where are you on the upgrade cycle? 
  • Are any other products dependent on the affected systems, and how important are they? 
  • What alternative products exist? 
  • What are your mid- to long-term strategic needs? 
  • Can you outsource the system or business process? 
  • What will the cost of change be? 

Understand the rationale for the acquisition 

  • Was it to kill competition, improve competitiveness, grow market share, move into new markets, boost product portfolio or obtain more revenue from maintenance charges? 
  • How likely is the acquirer to kill/save/integrate the acquired products and over what term? 

 What pressure can you put on the new supplier? 

  • How valuable a customer are you to the supplier? 
  • How strong is your user group? 
  • How keen for your custom are third parties? 
  • Does your contract have change of control clauses? These could buy you time 
  • Have you built a relationship with the new supplier at account management level and between your chief executive and the supplier's top management? 

Don't forget: 

  • Keep business users of the products informed 
  • Check out all of your other IT contracts for legal vulnerabilities arising from a change of supplier 
  • Document all your actions and reasoning for future justification should a dispute arise 
  • Keep a look out for other acquisitions - the IT industry is consolidating.

Source: The Corporate IT Forum

Read more on IT risk management