Not too long ago, technology was considered a “vertical” market filled with companies that met the needs of the “technology” industry (think of the classic technology companies like Microsoft, Cisco, Apple, Intel, and IBM). However, technological products and services have evolved to the point of serving a “horizontal” market, having become an important aspect of businesses in a wide variety of industries (think fintech, healthtech, autotech, edtech, etc.) and, by extension, M&A transactions.
For example, deals in the media industry increasingly are focused on the digital media aspects, particularly given the decline in demand for print media. Likewise, parties to acquisitions in the financial services industry often pay close attention to the protection of proprietary investment strategies, data protection, trade names, and customized software. Even manufacturers and other traditionally “non-tech” companies are leaning on technology more and more in order to streamline their business processes, manage and analyze data better, and to protect themselves from cyber-attacks.
This trend towards a “horizontal” market only looks to accelerate as technology becomes more and more embedded in businesses of all stripes, as presaged by the announced $13.7 billion purchase of Whole Foods by Amazon.com Inc. this year. Similarly, private equity interest in tech and tech-enabled businesses has grown in recent years, particularly for more “stable” businesses such as software companies that generate recurring revenue or that serve other businesses.
Given the growing proportion of M&A deals that are considered to be “tech” deals (even where non-technology companies are involved), middle market businesses of all kinds that are evaluating the possibility of a sale or, conversely, looking for potential targets to acquire cannot afford to overlook the importance of technology as a key asset.
High-level legal concerns often revolve around the target’s ownership or right to use the key technological assets, as well as the level of protection and ability to transfer the same. This includes making sure that all owned intellectual property of the business is properly registered with the USPTO or copyright office in the name of the appropriate entity, and that all renewals and maintenance fees have been paid. Additionally, acquirers should check that employees and, particularly, key independent contractors of the target have assigned their rights in and to all key technologies to the target. Inbound licenses for key technology used in the business, as well as revenue generating outbound licenses, should be reviewed to determine assignability. It goes without saying that it is critical to ascertain whether the target has any existing or suspected infringement claims, as well as any security interests or encumbrances affecting its key technology assets.
Further, to the extent key technologies are held within a joint venture of the target, an acquirer should consider whether its business model would allow it to “step into the shoes” of the target vis a vis the joint venture versus the extent to which the acquirer could readily extract the technological assets and/or wind-down the joint venture.
The takeaway here is when engaging in M&A transactions – whether in the middle market or otherwise – ignore technology at your peril. Those companies (even “non-tech” ones) that can demonstrate a strong command of their technological assets should increase their attractiveness as targets as we move into the future. Conversely, acquirers that understand their own technology “gaps,” can assess the target’s key technological assets and grasp how such assets will improve the integrated business post-closing will be better positioned to focus their due diligence efforts, minimize indemnification risks, and ultimately achieve the intended synergies.
