3 Questions From Outsourcing Perspective You Need to ask During a Merger & Acquisition
A merger and acquisition becomes trickier when it involves outsourcing and here we have 3 questions that must be answered whenever such a deal is initiated.
It won’t be off the mark to tag 2015 as the year of mergers and acquisitions. The acquisition of Alca-Lucent by Nokia, the merger between Dow Chemical Company and DuPont, and Alibaba buying South China Morning Post are a case in point.
According to the statistics obtained from the financial analytics company Dealogic, M&As were worth a record $4.9 trillion in 2015, up from $4.6 trillion in 2007.
In general, M&A is generally resorted to in order to further consolidate different companies and their assets, and the rationale given is that two unified companies are always better than two separate entities. However, there are some pertinent questions that must be answered when the outsourcing angle comes into picture.
We’ll be discussing 3 key questions that the company that is the seller should be asking, both prior to and post an M&A, in order to meet the obligations of an outsourcing contract:
1. Have you understood the unique requirements of the buyer?
Derek Schaffner, an attorney at Mayer Brown, says “The buyer may have a different risk profile and set of policies that the outsourcing service provider will need to adhere to.” The tricky part here is that the acquirer is not contractually bound to negotiate terms until the new set of agreements is consigned to them, and the seller is sometimes in the dark about the buyer’s stand on this. Of course, the service provider may be prepared to accommodate certain changes post the completion of the deal, but the bargaining power may have subsided significantly by then.
Mr. Schaffner has one suggestion to bail you out of this predicament: upfront solicitation by the seller for inputs from the buyer on key areas covering legal, technical, and commercial aspects of an outsourcing contract. He says “Subject matter experts on the acquirer side should take an opportunity to vet statements of work, service level agreements, pricing, intellectual property rights, and termination rights since ownership and operation will transfer to them after the sale of the divested entity.”
2. Will the contract concerning cloud services work for the newly invented entity?
In their eagerness to make a foray into new IT services with the newly acquired entity, a buyer usually considers cloud computing as an ideal choice. This is where as Mr. Schaffner says, “There are tradeoffs between the ability to negotiate customized terms versus the speed to deploy the solution based on the provider’s standard terms, as is the case with any cloud-baseddeals.”
Typically, the terms stipulated in cloud contracts such as limited audit rights, service-level credits, the provision of minimal disengagement services, and the right to store and process client data may be problematic for a buyer.
Mr. Schaffner elaborates, “The economics of a cloud solution dictate that the provider is no longer able to offer the robust terms that the divested entity enjoyed under a master agreement while it was owned and operated by the seller. Consequently, the divested entity and of course the buyer need to evaluate these reduced terms and gain insightinto whether the newly proposed solutions will be effective enough to meet its requirements.”
3. What if the M&A fails to go through as expected?
Companies that are party to a merger and acquisition should ideally include a clause that makes it incumbent on the seller to cancel the newly sealed outsourcing agreement in case the deal fails to come through. However, the provider may be given the right to recover their business development expenses. Mr. Schaffner explains why this thing forms a critical part of this kind of an M&A agreement.
He says “Some, but not all, outsourcing service providers are open to inserting such a clause in a deal. Those that oppose including this type of clause typically put forth the argument that the seller will most likely want to find another replacement buyer for the entity and, therefore, would still need to contract for the same kind of services. These providers also make it clear that the seller can definitely terminate the agreement for convenience, but only after payment of applicable termination charges.”
While it is true that factors like tough economic times, the need to gain a competitive edge and a greater market share, and more efficiency drive most mergers and acquisitions, you also have a business necessity to bring outsourcing partners into the equation. It is as much a deal between the service provider and the buyer and seller as it is between the buyer and seller itself.
Factors related to outsourcing are known to open up new fronts in M&A, and if they are not taken into account at the right time, things may not integrate and synergize as they are supposed to.