Merger Drain

Merger partners cannot shift licenses to a new parent to avoid termination fees.
Marie LeoneSeptember 1, 2001

Most everyone knows that consolidation-related IT savings rarely live up to the premerger hype. Once touted as a benefit of mergers, the integration of information technology systems and the elimination of duplicate ones often costs more than it saves in the short term. Add one more IT cost to the merger money pit: Lawyers say companies have failed to notice early-termination fees linked to software licenses. “Multi-billion-dollar merger deals can carry $10 million worth of software license termination fees,” says Rob Kiesel, an attorney with Schulte Roth & Zabel, in New York. “And smaller deals often carry proportionate penalties.”

In general, software vendors restrict transfer of assignment, so merger partners cannot shift their licenses to a new parent company to avoid triggering termination clauses. As a result, companies are left with few alternatives save to pay the fees. Due diligence isn’t even enough. The payout is usually the aggregate fees of thousands of small IT contracts, making it virtually impossible to review all the nonmaterial pacts before the merger is approved. Flexible contracts are one answer, but they carry higher up-front costs. — Marie Leone