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What’s the impact of software compliance on M&As?

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What’s the impact of software compliance on M&As?

By Michael Krutikov, Product Marketing Manager, Snow Software

It’s said that the only constant changes. But in the software compliance world, there are two constants: the threat of a vendor audit and an ever-changing IT estate.

The latter comes into even greater focus when mergers and acquisitions are on the table. Such changes bring an exponentially greater number of applications into the mix for IT and Software Asset Management (SAM) teams to get their hands around. And in some cases it can greatly impact the feasibility and profitability of the deal itself.

The big questions

But why is the software compliance position of all parties involved so critical to the success of a potential merger or acquisition? Because ignoring a potential financial risk such as this, which could be in the millions of dollars, is just bad business.

One general counsel I spoke to told me how their company had cancelled an acquisition at the eleventh hour because a software non-compliance issue was discovered at the target company, making the entire deal a loss. So any organisation that’s preparing for an acquisition, needs to consider software as a critical asset for inclusion as part of the financial and risk assessment.

Yet, in researching M&A best practices, there is a glaring lack of guidance or even mention of software licensing and its impact on M&A activity. That needs to change, and as part of a drive towards M&A best practice, two questions need to be front of mind:

  1. Is the company we intend to acquire properly licensed or are we inheriting a compliance risk?
  2. What will the software licensing position for the new merged entity look like?

Understanding inherited risk and mitigating it

Thorough due diligence is fundamental to any M&A activity, where almost every input and potential impact to the profitability and thus viability of the potential deal is accounted for. Yet very often, companies target and even complete mergers without taking into account the software position of the targeted company. So when external auditors are employed to examine all financials, why does software compliance so rarely fall into the scope of such an audit?

The hidden costs of a non-compliant licensing position will be quickly exposed by vendor audits, which are inevitably triggered by merger and acquisition activity. Vendors know that mergers and acquisitions are easy targets for finding companies out of compliance, so if someone’s going to do it, it’s incumbent on the acquiring party to make sure they get in there ahead of the software vendors.

Taking a look at any of the hundreds of license agreements an organisation holds, there will be any number of different versions and levels of rights and restrictions. It’s partly because software entitlements are not always transferable, or will incur a “transfer of ownership” fee. Only by reviewing owned contracts and those of a target merger/ acquisition company’s entitlements and contracts, is it possible to get a 360 view of what the costs and restrictions are for software use post-merger.

To ensure accurate disclosure of the software licensing position by the target, it’s necessary to understand the as-is state of the software licensing before the deal goes through, or worst case, soon after. This can reduce the financial burden if the acquired entity is out of license compliance and holds sellers accountable to the disclosure schedules.

This is, of course, assuming that the acquiring party’s house is already in order. If it isn’t, then warming up for M&A activity is the perfect opportunity to internally determine the existing software compliance position by establishing a SAM practice.

Success with software post M&A

Once all parties become a single legal entity, it’s time to assess the software landscape across the whole estate; what applications and cloud services are in use? Has the acquiring party inherited anything particularly beneficial? Are there now duplicate software licences? The following is a good checklist to work through once the ink has dried:

  • Optimise spend

Look for common software titles across the two companies. Identify and assess who actually needs the software and how often they use it.Is it being used to its fullest potential or is a lower level subscription or license appropriate?

  • Improve efficiencies

Look for similarly functioning software titles that could be consolidated to one or at least reduced in number. It is frightening how often a company has an “approved list” for their software or cloud usage, but has several other titles running in its environment, performing exactly the same task (but in an unsupported or even unknown capacity). Now take that problem and apply it to two companies, with different approved lists and unsupported outliers.

  • Identify areas for consolidation.

Do you have duplicate licensing? If yes, what are the licensing rules for reassigning these to employees who need them? If the licensing rules restrict immediate reassignment, what are the timeframes and rules for removing or reducing them at the next renewal cycle?

  • Reconcile software usage with acquired software licenses.

A complete SAM practice ensures continued governance and compliance by rationalising the versions and licensing rights across all software. Gaining visibility into all the disparate software and versions running in an estate eliminates blind spots in an M&A IT integration strategy.

Conclusion

Technology is increasingly streamlining and optimising M&As – not only during the integration process concerning asset inventory and consolidation of business elements but also the processes surrounding the legal elements and practices. Accuracy and diligence are critical to a successful merger or acquisition and nowhere is the need for better practices more pressing than when addressing the software compliance risks a target company may have.

Software audits are bad enough when they are (supposedly) random and infrequent, but when triggered by M&A activity, they can be devastating if the newly formed entity is targeted by multiple vendors at the same time, eagerly anticipating their pound of flesh.

Make software compliance risk mitigation part of merger and acquisition due diligence to help ensure any organisation’s financial success.

Business

Exclusive: China’s Huawei, reeling from U.S. sanctions, plans foray into EVs – sources

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Exclusive: China's Huawei, reeling from U.S. sanctions, plans foray into EVs - sources 1

By Julie Zhu and Yilei Sun

HONG KONG/BEIJING (Reuters) – China’s Huawei plans to make electric vehicles under its own brand and could launch some models this year, four sources said, as the world’s largest telecommunications equipment maker, battered by U.S. sanctions, explores a strategic shift.

Huawei Technologies Co Ltd is in talks with state-owned Changan Automobile and other automakers to use their car plants to make its electric vehicles (EVs), according to two of the people familiar with the matter.

Huawei is also in discussions with Beijing-backed BAIC Group’s BluePark New Energy Technology to manufacture its EVs, said one of the two and a separate person with direct knowledge of the matter.

The plan heralds a potentially major shift in direction for Huawei after nearly two-years of U.S. sanctions that have cut its access to key supply chains, forcing it to sell a part of its smartphone business to keep the brand alive.

Huawei was placed on a trade blacklist by the Trump administration over national security concerns. Many industry executives see little chance that blocks on the sale of billions of dollars of U.S. technology and chips to the Chinese company, which has denied wrongdoing, will be reversed by his successor.

A Huawei spokesman denied the company plans to design EVs or produce Huawei branded vehicles.

“Huawei is not a car manufacturer. However through ICT (information and communications technology), we aim to be a digital car-oriented and new-added components provider, enabling car OEMs (original equipment manufacturers) to build better vehicles.”

Huawei has started internally designing the EVs and approaching suppliers at home, with the aim of officially launching the project as early as this year, three of the sources said.

Richard Yu, head of Huawei’s consumer business group who led the company to become one of the world’s largest smartphone makers, will shift his focus to EVs, said one source. The EVs will target a mass-market segment, another source said.

All the sources declined to be named as the discussions are private.

Chongqing-based Changan, which is making cars with Ford Motor Co, declined to comment. BAIC BluePark did not respond to repeated requests for comment.

Shares of Changan’s main listed company Chongqing Changan Automobile rose 8% after Reuters reported the discussions. BluePark’s shares jumped by their maximum 10% daily limit.

GROWING EV MARKET

Chinese technology firms have been stepping up their focus on EVs in the world’s biggest market for such vehicles, as Beijing heavily promotes greener vehicles as a means of reducing chronic air pollution.

Sales of new energy vehicles (NEVs), including pure battery electric vehicles as well as plug-in hybrid and hydrogen fuel cell vehicles, are expected to make up 20% of China’s overall annual auto sales by 2025.

Industry forecasts put China’s NEV sales at 1.8 million units this year, up from about 1.3 million in 2020.

Huawei’s ambitious plans to make its own cars will see it join a raft of Asian tech companies that have made similar announcements in recent months, including Baidu Inc and Foxconn.

“The novel and complicated U.S. restrictions on semiconductors to Huawei have slowly been strangling the company,” said Dan Wang, a technology analyst with research firm Gavekal Dragonomics.

“So it makes sense that the company is pivoting to less chip-intensive industries in order to maintain operations.”

In the United States, Amazon.com Inc and Alphabet Inc are also developing auto-related technology or investing in smart-car startups.

Huawei has been developing a swathe of technologies for EVs for years including in-car software systems, sensors for automobiles and 5G communications hardware.

The company has also formed partnerships with automakers such as Daimler AG, General Motors Co and SAIC Motor to jointly develop smart auto technologies.

It has accelerated hiring of engineers for auto-related technologies since 2018.

Huawei was awarded at least four patents related to EVs this week, including methods for charging between electric vehicles and for checking battery health, according to official Chinese patent records.

Huawei’s push into the EV market is currently separate from a joint smart vehicle company it co-founded along with Changan and EV battery maker CATL in November, two of the sources said.

(Reporting by Julie Zhu in Hong Kong and Yilei Sun in Beijing; additional reporting by David Kirton in Shenzhen; Editing by Sumeet Chatterjee and Richard Pullin)

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Facebook switches news back on in Australia, signs content deals

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Facebook switches news back on in Australia, signs content deals 2

By Renju Jose and Jonathan Barrett

SYDNEY (Reuters) – Facebook Inc ended a one-week blackout of Australian news on its popular social media site on Friday and announced preliminary commercial agreements with three small local publishers.

The moves reflected easing tensions between the U.S. company and the Australian government, a day after the country’s parliament passed a law forcing it and Alphabet Inc’s Google to pay local media companies for using content on their platforms.

The new law makes Australia the first nation where a government arbitrator can set the price Facebook and Google pay domestic media to show their content if private negotiations fail. Canada and other countries have shown interest in replicating Australia’s reforms.

“Global tech giants, they are changing the world but we can’t let them run the world,” Australian Prime Minister Scott Morrison said on Friday, adding that Big Tech must be accountable to sovereign governments.

Facebook, whose 8-day ban on Australian media captured global attention, said it had signed partnership agreements with Schwartz Media, Solstice Media and Private Media. The trio own a mix of publications, including weekly newspapers, online magazines and specialist periodicals.

Facebook did not disclose the financial details of the agreements, which will become effective within 60 days if a full deal is signed.

“These agreements will bring a new slate of premium journalism, including some previously paywalled content, to Facebook,” the social media company said in a statement.

The non-binding agreements allay some fears that small Australian publishers would be left out of revenue-sharing deals with Facebook and Google.

“It’s never been more important than it is now to have a plurality of voices in the Australian press,” said Schwartz Media Chief Executive Rebecca Costello.

Facebook on Tuesday struck a similar agreement with Seven West Media, which owns a free-to-air television network and the main metropolitian newspaper in the city of Perth.

The Australian Broadcasting Corp has said it was also in talks with Facebook.

Google Australia managing director Mel Silva said in a statement published on Friday the company had found a “constructive path to support journalism”.

She thanked Australian users of the search engine for “bearing with us while we’ve sent you messages about this issue”.

Facebook and Google threatened for months to pull core services from Australia if the media laws, which some industry players claim are more about propping up ailing local media, took effect.

While Google struck deals with several publishers including News Corp as the legislation made its way through parliament, Facebook took the more drastic step of blocking all news content in Australia.

That stance led to amendments to the laws, including giving the government the power to exempt Facebook or Google from mandatory arbitration, and Facebook on Friday began restoring the Australian news sites.

(Reporting by Renju Jose and Jonathan Barrett; Editing by Richard Pullin and Jane Wardell)

 

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China’s factory activity growth likely moderated during February holiday lull – Reuters poll

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China's factory activity growth likely moderated during February holiday lull - Reuters poll 3

BEIJING (Reuters) – China’s factory activity likely grew at a slightly slower rate in February as factories closed for the Lunar New Year holiday, a Reuters poll showed, although growth is expected to remain firm, buoyed by an early resumption of production.

The official manufacturing Purchasing Manager’s Index (PMI) is expected to dip marginally to 51.1 in February from 51.3 in January, according to the median forecast of 20 economists polled by Reuters. A reading above 50 indicates an expansion in activity on a monthly basis.

Chinese factories typically scale back operations or close for lengthy periods around the Lunar New Year holiday, which fell in the middle of February this year.

However, the resurgence of COVID-19 cases in the winter had prompted local governments and companies to dissuade workers from travelling back to their hometowns, giving a boost to the earlier-than-usual resumption of production at many factories, analysts say.

“Although government COVID-19 prevention measures may constrain some manufacturing activities in the near-term, the fact that a majority of migrant workers stayed in their workplace cities for the holiday should facilitate an earlier resumption of business activity following the holiday this year,” said analysts at Nomura in a note to client on Thursday.

Wang Zhishen, a migrant worker from Gansu, told Reuters that his factory, a manufacturer of logistics boxes in the manufacturing hub of Dongguan, only closed for three days during the holiday, thanks to overwhelming businesses. Lured by the 1,500-yuan cash subsidy his factory offered, he chose to work through the holiday.

The Chinese economy has largely shaken off the gloom from the COVID-19 health crisis, with consumers opening up their wallets after months of hesitation. Growth is now set to rebound sharply this quarter, also helped by the low base effect of a year ago.

The country has successfully curbed the domestic transmission of the COVID-19 virus in northern China, with the national health authority reporting zero new local cases for the 11th straight day. Cities that were on lockdown have since vowed to push for a work resumption at full speed.

The official PMI, which largely focuses on big and state-owned firms, and its sister survey on the services sector, will both be released on Sunday.

The private Caixin manufacturing PMI will be published on Monday. Analysts expect the headline reading will dip slightly to 51.4 from 51.5 in January.

(Reporting by Stella Qiu and Ryan Woo; Editing by Sam Holmes)

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