Comprehensive due diligence and
risk advisory services play a
critical role for technology
organizations involved in mergers
or acquisitions. Due diligence
uncovers the hidden details that
will help you avoid risk, create
opportunity and strengthen your
negotiating position. Risk advisory
provides a thorough examination of
the transaction and isolates
potential problems that may stall
or even terminate a deal.
Axcension's M&A services team
conducts in-depth due diligence and
risk advisory on behalf of private
equity and venture capital
investors, private and public
company buyers, and entities
divesting wholly-owned subsidiaries
and operations. As your advocates,
Axcension partner with your
decision-making team, using
Axcension’s depth of knowledge and
expertise in the technology
industry, and well as Axcension’s
worldwide resources, to help you
make strategic decisions based on
complete and accurate information.
Axcension’s M&A services team will
work with you through every step of
a merger or acquisition to provide
you with a timely, accurate
determination of the risks and
related costs associated with a
target or divestiture. As your
proactive business partner,
Axcension provide unparalleled
insight in the technology industry
and expertise with a wide range of
business areas, helping you develop
innovative solutions and protect
your assets in even the most
complex business deals.
Identify current estimated accruals
for outstanding liabilities, and
compare with Axcension's actuarial
projections to identify risks and
leverage a better purchase price.
Develop loss mitigation strategies
and options to cap known
liabilities Identify and evaluate
exposures to catastrophic loss,
such as earthquakes, floods and
political risks, to provide
comprehensive risk strategies,
Conduct comprehensive, current and
historical program assessments to
provide an evaluation of limits,
coverage, carrier solvency,
deductibles and self-insured
programs.
Identify pre-closing collateral
obligations and estimate
post-closing collateral
requirements and alternatives to
obtain complete information for
strategic decision making.
Provide industry benchmarking to
assess liability exposures and
claims experiences based on
industry-wide information.
Evaluate liabilities,
indemnification obligations and
other issues associated with a
targets previous acquisitions and
divestitures to uncover hidden
liabilities.
Review purchase agreements to
ascertain relevant insurance and
liability issues, as well as
indemnification provisions;
Evaluate employee benefit plans to
understand health, welfare and
retirement programs, underfunded
and overfunded plans, and proforma
budget and alternatives
Human Due Diligence
Human due diligence is an in-depth analysis of the management team, staff, structure, issues, and managerial capacity of a potential partner. Most aspects of human due diligence are not as quantifiable as financial due diligence. This does not make them less significant. In fact, in many ways they can be more significant and critical to the success of the merger than the financials. During merger negotiations and integration, attention and energy must be devoted to the real people issues. Human due diligence will help focus your attention on what will become the core of an integration plan.
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IT Due Diligence
IT is becoming one of the most
critical elements to supporting
business objectives, and yet many
times, it is overlooked in M&A
activity, causing much undue risk
for its stakeholders. The cost of
IT has become a greater percent of
the operating expenditure. The
role of IT has changed as well.
Investors today need to know, up
front, how it will support the new
business. IT has become more than
just an asset that is inventoried
by accountants. It has become more
part of the strategic thinking and
planning.
Because IT
functions are integrated into
nearly every aspect of an
organization, a buyer will not have
done effective
Due
Diligence until the buyer
understands how the target uses IT.
Is the target merely using IT to
manage information within the
organization? Or, is the target
using IT to generate revenue,
increase productivity and manage
customer relationships?
IT due diligence should assess the
status and sufficiency of the
target’s technology, and determine
how well the target uses its
technology to conduct its existing
business. The target may have state
of the art IT assets that are not
being fully utilized. The buyer may
bring value to the target’s
business by managing and utilizing
target’s existing IT assets more
effectively.
The IT assessment should assist the
buyer determine whether it will be
necessary to make expenditure
post-closing to upgrade target’s IT
assets, and estimate the difficulty
of the post-closing integration
process.
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A thorough and comprehensive IP due
diligence requires much more than
compiling a listing of the targets’
IP assets. An IP due diligence
involves an assessment of the
strength of the targets’ IP rights
in the marketplace, the strength of
the targets’ competitors’ rights in
the marketplace, and the effect of
the IP on the targets’ products and
other IP rights.
Because IP assets are so critical
to the profitability of a business,
a buyer will not have done
effective
Due Diligence until the
buyer understands the target’s IP.
When undertaking on IP due
diligence review during a company
merger or acquisition, negotiating
a license or joint venture
agreement, purchasing patent other
IP rights, there are some basic
steps to go through to cover the
important considerations of the
transaction.
Unless the
main motivation for the deal is
acquisition of IP assets (such as
proprietary software, a key patent
portfolio or a valuable brand),
buyers often underestimate the
importance of IP due diligence. IP
assessment is not considered
mandatory in the sense that
particular government filings might
be required. IP might not be
regarded as being as crucial as
real estate, equipment and employee
matters. Accordingly, IP due
diligence often is relegated to the
end of the deal checklist and, as a
result, is addressed inadequately
or in a last-minute manner. Not
surprisingly, there are numerous
cases in which an oversight in IP
matters has caused the buyer's or
the seller's position to be
seriously compromised.
From the buyer's point of view,
disclosures in the IP due diligence
process might deliver the grounds
to renegotiate the price or other
key terms of the transaction. The
buyer might learn that the seller
does not own the copyright in, but
merely licenses, key software. The
buyer should confirm that the
license is assignable and that the
terms of the license are acceptable
or else negotiate an independent
license with the owner of the
copyright. The buyer might learn
that the seller uses but has not
registered a key trademark that the
buyer intends to continue using
after the acquisition.
From the seller's standpoint,
reviewing all relevant information
regarding the IP being conveyed
will enable the seller to craft the
representations and warranties in a
way that limits the seller's
exposure. For example, the seller
might represent that it is
transferring all of the IP assets
that the buyer will need to
continue doing business. The seller
might discover through due
diligence that the seller needs to
keep rights to use a particular
trademark in connection with
business assets that are not being
transferred. Or, the seller might
determine that it does not own a
copyright in software it had
commissioned from an independent
contractor because the project did
not qualify as work made for hire
and because no assignment of rights
was executed. If the seller
discovers such a situation early
enough, it is able to formulate a
work-around that does not kill the
deal or compromise the seller's
bargaining leverage.
The level of IP due diligence
should be appropriate to the deal,
considering the over-all value of
the deal, the importance of the IP
assets and the parties' risk
tolerance. The goal for both buyer
and seller should be to enter the
deal with eyes wide open as to what
IP assets are necessary to the
deal, what IP assets are being
transferred and what, if any,
encumbrances are attached to the
relevant IP assets. Once these
questions are answered, both
parties is able to better evaluate
their individual needs with respect
to the representations, warranties,
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Identifying IP Rights
The identification of all IP is
very useful in estimating future
value of a business. The best
approach, is to sort by listing all
IP. In addition to exploring the
right-to-use, it is also important
to determine what IP assets are
owned by the business itself.
Not all IP rights may be of
significant value to a business. It
is necessary to review all aspects
of the target and assign priorities
to the rights according to their
value. The more important the
rights are to the future vitality
of the target business, the more IP
due diligence that will be
necessary.
Mature products and services often
are the most important source of
the current financial state of a
business. A changing market demands
that more IP due diligence be
performed to understand any
future product changes or
improvements that are being
implemented or planned.
It is one thing to own IP rights;
it is another thing to be able to
conduct a business without
infringing third party IP rights.
Thus, the fact that the target
company has a patent for a product
does not give it the right to make
the product. The unfettered right
to use, make or sell certain
technology, or to use trademarks or
material subject to copyrights, is
often crucial to the health of any
business. If one of the target’s
competitor holds patents,
trademarks, copyrights or other
related rights that dominate a
successful product or service of a
business, the profitability of a
business, and even the ability to
survive, may be at stake.
If patent, trademark, and trade
secret rights, for example, have
been licensed in from another
company, it will be important to
look to the license agreement to
determine whether the scope of the
license is sufficient in relation
to the target’s business
activities. It is also possible
that the licensor company obtained
additional IP, such as patents, not
in the license agreement, that may
affect freedom to operate.
It is often important to conduct
independent IP searches in areas of
relevance to the target’s business
to identify third party patents,
trademarks, or copyrights that may
be of importance. It is important
to scrutinize any demand letters,
litigation history, and other
relationships with competitors to
identify potential third party IP
risks.
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Title to IP Assets
Title to recordable IP rights (e.g.,
patents, trademarks and
copyrights) should be verified by
doing the appropriate searches. Any
licenses, assignments, government
rights, and liens (secured or
unsecured) also should be verified
by searches. Any new IP interests
arising from an investment,
acquisition or sale should be
recorded in appropriate state and
federal offices. Ownership
interests in foreign countries
require separate title searches, as
well as separate assignments or
other legal instruments for
perfecting rights in those foreign
countries.
Detailed listings and explanations
also should be provided for IP
rights not identifiable as an
issued patent, a registered
trademark or a registered
copyright. Such rights may include
trade secrets, know-how, common law
trade names, trade dress,
trademarks and unregistered
copyrights. For each of these, the
inventors, authors and uses of the
rights should be identified and the
dates of first use recorded. Often,
the dates of creation of first use
are critical in protecting and
preserving the rights. Dates and
evidence of use of common law
trademarks are important to
preserve superior rights over a
later user.
The nature and ownership of
intangible assets is not always
clear, particularly in the absence
of written agreements by and
between individuals who developed
intangible assets. To address this
issue, inventors and developers,
consultants and their employers
typically set down their rights to
inventions, improvements and
proprietary information in written
agreements. Determining ownership
of intangible assets is much less
clear when no agreements exist to
deliver an easy answer regarding
who owns the technology.
Determining ownership of intangible
assets is much less clear when no
such agreements exist to deliver an
easy answer regarding who owns the
technology.
Documenting IP ownership is
important to avoid disputes between
parties who develop the technology
and other parties, such as
employers, who may have a claim to
such technology in the context of
the sale of businesses.
The default rule is that if an
independent contractor develops IP
that they maintain ownership of
those developments. A company
should also protect its proprietary
and confidential information
through contract when independent
contractors are utilized. Early
stage companies often fail to
obtain IP assignments from all
contractors, which is able to cause
substantial uncertainty in future
investors.
A company should execute an
invention assignment and
confidentiality agreement with each
founder and each employee. Absent
such an agreement, employees and
founders may have rights to the
company's IP and the company may
have no recourse if a rogue
employee or founder discloses the
company's confidential information.
If an investor discovers in
conducting diligence that a company
has failed to obtain these
agreements with each employee and
founder, the investor may cease
negotiations with the company.
A company should execute a
non-disclosure agreement with each
person and entity prior to
providing the person or entity any
proprietary or confidential
information. Failure to do so may
substantially restrict the
company’s future ability to get
proper IP protection – which is
able to equate with devaluation of
the company or worse, company
failure. Investors are the only
exception to this rule - although
you should ask an investor to sign
a non-disclosure agreement, it will
be unusual for an investor to agree
do so.
IP due diligence is usually
conducted prior to the transfer of
IP rights or assets through
commercial transactions such as
mergers or acquisitions, or where
investment is being made into the
business. IP due diligence is an
investigative exercise to check for
the existence and quality of assets
which are the subject of the
commercial transaction. Those
contemplating the commercial
transaction want to be satisfied
that they have a good understanding
of the IP assets that often
underpin the commercial
transaction.
Often the due diligence process
follows the steps of an IP audit.
Venture capitalists often undertake
quite extensive due diligence
exercises prior to committing
venture capital.
IP due diligence should also
consider potential regulatory
considerations, product liability
considerations, assessment of
in-house procedures and staff
training, trade practices sales
insights and a review of the
funding conditions.
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