Tech M&A Fallout: How Large Enterprises Can Minimize the Cost and Compliance Risks

July 11, 2023

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Globally speaking, M&A activity has been lackluster throughout 2023. Q1 2023 saw a global deal volume of $559 billion, one of the lowest quarterly volumes in the last 10 years. But there are bright spots – like tech M&A. In the tech sector, cautious optimism has been the prevailing sentiment with a 20% increase in deal volume and a 40% increase in average deal size according to PwC. Leading PE firms with large tech portfolios also remain active.

While current M&A activity signals good health in the tech sector, it has more concerning implications for the enterprise customers of those vendors impacted. A recent report published by ITAM Review suggested M&A activity could be a precursor to both persistent audits and higher than anticipated annual price increases. NPI’s in-the-trenches experience bears this out.

Price hikes are a proven tactic that helps vendors quickly offset acquisition costs and increase revenues. For example, in the case of Qlik’s acquisition of Talend, we anticipate more dynamic pricing and urge customers to benchmark their pricing asap. And when software vendors are acquired, customers should be well-prepared for license audits – they are common.

Monitor Tech M&A Timelines to Understand Your Runway for Preparation

NPI recommends enterprise customers keep a close eye on M&A activity in the tech sector to understand if, how and when their organizations will be impacted. Some acquisitions (Qlik/Talend is a good example) have rapid completion timelines measured in months, while others may take a year or more. The monitoring of acquisition timelines gives IT procurement practitioners a chance to prepare for possible software license audit activity and/or higher than usual price increases.

Review Current Agreements and Check Compliance Exposure for Any Recently Acquired Vendors

If you are a customer of an acquired vendor, you should assess the license metrics to determine whether a software license audit is possible (for certain software solutions, audits are not applicable but for many, they are). If so, NPI suggests double-checking your license management exposure, and gaining a clear understanding of entitlements, deployments, and upcoming renewal dates. If possible, conduct a self-audit (also called a license position assessment) as early as you can in the acquisition process. This will ensure you have the runway to remediate any exposure to noncompliance before the vendor becomes involved. It will also help you create renewal demand definition so you can plan a targeted negotiation strategy.

Validate and Pushback on Price Increases

In line with the audits associated with M&A activity, newly acquired portfolio companies have been displaying higher than average price increases, nearly twice as much as typical hikes.  Our advice to enterprise customers is to assume the vendor will raise rates and have a strategy in place for pushing back. This should include performing IT price benchmarking on existing and new pricing to determine if rates are best-in-class, as well as consideration of viable competitive alternatives. These efforts will provide leverage during vendor negotiations.

Stay Alert, Stay Ahead

There are a lot of factors driving up enterprise IT costs right now – business demand, inflationary pressures, post-pandemic supply chain hangovers, etc. These are well-documented. M&A activity in the tech sector is a less obvious dynamic, but one that has the potential to make a significant impact on IT spend for affected enterprise customers. Software license audits are unbudgeted, disruptive events that often lead to 7- and 8-figure penalties. Software price increases – especially more egregious ones – can be a springboard for long-term overspending. Fortunately, IT procurement teams can stay ahead of these risks and negate or minimize their impact.

Do you want to learn more about how you can mitigate IT cost and compliance risk during tech vendor M&A activity? NPI can help. Contact us today.