Passing the baton

By Kim Sbarcea

The backbone of almost any business operation is its IT infrastructure. When a business is being purchased, it is critical to consider the technology issues involved in the acquisition process.

Melanie Noble, Senior Associate in the Melbourne office of national law firm, Minter Ellison, considers that "IT aspects of merger and acquisition (M&A) deals need to be specifically addressed because of their potential to affect ongoing business continuity."

As a member of the firm's National Technology and Communications Group (TCG), Noble, along with colleague Saul Ryan, offers advice to clients on transitional IT services, which are services provided by the seller of the business to the purchaser so that IT systems of the business are smoothly transitioned to the purchaser and ongoing operation of the acquired business is assured.

Often the transitional services provided extend beyond the effective date of acquisition of the business because, according to Noble, "you can strike problems and unexpected costs, well into the initial period when the purchaser is acquiring the business, which can have a significant impact on the value of the business moving forward".

So what exactly are transitional services? The vendor of the business will usually:

• Use its IT systems for its own business as well as providing services and data streams to the purchaser;

• House software and data which the purchaser needs to access and use; and

• Help the purchaser of the business migrate onto replicate or replacement systems.

Essentially, the vendor is providing and maintaining IT services for a period to transition the vendor's IT systems and associated data to the purchaser in an efficient and organised way.

With M&A activity once again on the rise, Oliver Barrett, Partner and National Head of the TCG, considers it timely to ensure that clients, especially the purchasers of a business, are equipped with a good legal understanding of their rights and obligations when it comes to the IT assets of a target business. According to Barrett, "there has been a tendency to sideline IT in M&A deals because IT has sometimes been seen as a small part that goes to make up a business".

However, "IT assets" are in fact quite an extensive part of any business, involving not only the IT hardware or infrastructure, but the suite of software solutions used in the business, along with the know-how and information stored in various databases.

The due diligence process is the period during which a thorough review of a target business is conducted and potential risks and exposures present in the business will be uncovered.

Noble and Ryan believe that the purchaser needs to identify early in its due diligence what risks there might be in terms of the IT assets of the target business; prioritise the business criticality of each of the IT assets so that arrangements regarding critical applications can be addressed early, allowing the business to operate continuously; and assess the degree of acceptable risk the purchaser is willing to assume. It is especially important to identify the IT assets that are required for the ongoing operation of the target business, but are not included in the acquired business.

How can the purchaser be protected? Noble and Barrett advise that in order to ensure business continuity in technology operations, the purchaser should negotiate and settle a shared services agreement with the vendor to provide the necessary services. A shared services agreement is a key aspect of an acquisition, they suggest, and needs to factor in issues such as technical feasibility of data exchange as well as responsibility for costs and liability in the event of disruption to business.

A further important aspect a purchaser should consider is the length of the transition period. It should be long enough to allow the purchaser to become independent of the vendor's IT infrastructure, however, Noble says "if there is any concern that the period will be insufficient, then the purchaser needs to negotiate a right to extend. Always err on the side of caution because it is very common to underestimate the time required".

With over 25 years experience in this area, Barrett further comments that security and confidentiality issues need to be well considered. Often sensitive financial and client information is involved and the vendor and purchaser have access to one another's systems. The purchaser is well advised to impose strict obligations on the vendor so that the purchaser's data is protected within the vendor's IT systems and perhaps data segregation needs to occur.

Clearly, the transition of technology services is a vital step in the M&A process. Barrett asserts "few examples make more clear the strategic role that CIOs play in this and how the commercial managers should work with CIOs for a whole-of-business approach on important issues like business continuity. The skill sets of both are needed to achieve the optimum results".