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Buying and selling technology businesses BANKER


The value of a technology business lies in intangible assets such as intellectual property rights (IPR). Therefore due diligence undertaken by the buyer will need to reflect:


OF THE YEAR AWARD


1 The Nature of Technology Assets Due diligence will focus on analysing IPR rights to establish ownership, usage rights, litigation risks and required consents, and generally ensuring that such rights can continue to be used unencumbered post- acquisition. It is therefore extremely important to identify and investigate what the target:


• receives from third parties; • owns; • provides to third parties.


The IPR of a tech business normally falls within one or more of the following:


• IPR owned by the business outright (either because they have been developed internally or developed by third parties and the ownership transferred).


• IPR owned by the third parties and their use is licensed to the target.


• IPR which the target has shared ownership of (by joint development with the third party through a joint venture or development agreement or otherwise).


Above: Winner, Richard Povey of HSBC Right: Dominic Holland with Richard Povey and Sean Kelly of sponsor Lamport Bassitt


It is common for the development of a product and the identities of those responsible for its development to become blurred with time. It is crucial for the due diligence process to ensure that the “development trail” of the IPR can be traced.


In the UK, the rights to inventions made within the course of employment are generally owned by the employer (unless the contract of employment states otherwise). Conversely where a consultant develops technology for a company the consultant will own the IPR unless it is transferred to the company or the contract for services states otherwise.


Doubts as to ownership can be resolved by retrospective assignments, although the value and tax implications of such assignments must be considered.


The terms on which third parties license technology to the target have to be checked carefully. Key concerns include:


future challenge.


Any technology yet to be converted into marketable/saleable products should be commercially evaluated as part of due diligence.


2 Skilled Staff


“Know-how” is another crucial intangible asset of any tech business which resides in highly skilled staff. The valuation of companies increasingly directly relates to the number of skilled employees they employ.


The due diligence process must not alienate key staff. Employees are able to move easily to other employment, often to competitors, if they are unsettled.


Given personnel are likely to be key assets for a tech business, retention and incentivisation schemes are popular. A common method is to grant employees options over shares in the target. Such option scheme rules usually allow the early exercise of options on the sale or flotation of the company. Both buyer and seller may wish to reward employees for past efforts, but the buyer will not want such a reward to reduce employees’ incentive to continue working for the company and its future development post-sale.


Sponsored for the first time by law firm Lamport Bassitt, the shortlist for Banker of the Year saw three well-known names competing for the title.


3 Relationship Between Target and Seller Increasingly, buyers target IT divisions in a group, particularly where the target has outgrown its purely in-house function. The buyer hopes it can better integrate this type of business into its existing structure.


Last year’s winner Richard Povey from HSBC was hoping his deals success in 2011 would be strong enough to hold on to the trophy, while Nigel Gibson from Lloyds Bank Wholesale Banking & Markets, also a finalist at the 2011 awards, was hoping to snatch it away. Joining them in the top three was Andrew Clayton, who heads up the Financial Sponsors Team at RBS.


• The ability of the buyer and/or target to modify or adapt IPR.


• Change of control provisions will allow a third party to terminate an agreement/licence with the target.


Such issues may seriously affect the future use and exploitation of the target’s IPR and/or the buyer’s general ability to operate the business post-acquisition.


Increasingly important, particularly for patent applications, is whether the target’s technology could be open to


www.businessmag.co.uk


Povey has led his team through a number of high-profile deals, including LGC Group’s acquisition by Bridgepoint from LGV Capital in a transaction that valued the business at £257m; Kerridge Commercial Systems’ acquisition of Bourne End firm TIS Software; the HG sponsored buyout of Iris Software; the refinancing of management at Davies Group; and the purchase of Drury PSM, specialists in HR outsourcing, employment law advisers and health and safety consultants, by Alcumus Holdings.


Describing his dedication, one nomination said: “Richard acts as ‘lightning rod’ for any leveraged deal activity and brings to bear the full capability of HSBC as appropriate. Richard’s view and assessment is highly


regarded and he is trusted to deliver by the deal community – a real testament to him as an individual and the relationships he maintains with all concerned.”


In such scenarios, there may be a continuing relationship between the buyer and the seller through the ongoing provision of services to the selling group.


Typically buyers place far greater resource and emphasis on due diligence than post- completion warranties and indemnities, for fear of the latter affecting continuing service relationships.


Practical Issues to Consider When Carrying Out Due Diligence:


1 Confidentiality


Another nominee commented: “Richard and his team have had another very strong year in a very challenging market, delivering strong debt levels in the local area. I look forward to continuing to work with Richard and the team in 2012.”


He was also described as “the go to banker of 2011”.


Potential buyers must enter into suitable confidentiality undertakings.


2 Non-Solicitation


Sellers should consider including non- solicitation covenants within the confidentiality undertaking or in the heads of terms. This is significant for businesses dependent on key people or customers.


Although such covenants are inherently difficult to enforce, since it is not easy to prove that an employee or customer was in fact solicited, they should nevertheless be included.


The third contender, Clayton, has seen his team write some £225m of debt facilities across 14 private equity-backed transactions in the past year, and during the


THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – MAY 2012


Reading-based Gibson had a strong year, with deals including the provision of £32.5m of a £65m, five-year revolving credit facility for Albemarle & Bond Holdings plc, a portfolio of pawnbroking, financial services and jewellery stores which is set for expansion in the next 12 months. Other deals included significant funding to support a secondary buyout of Kee Safety International, a leading global provider of safety solutions; and the MBO of Leadbittter Group from its Dutch owner.


3 Managing the Information Flow Material disclosing the valuable elements of the business should be held back until a relatively late stage in the sale process when a buyer’s commitment is clear. Even then, a well-drafted non-disclosure agreement, signed by all parties before any documentation is disclosed, is crucial.


4 Access to Suppliers/Customers Sellers occasionally permit buyers access to customers and suppliers, but only under supervision. The shortcoming of this is that once identities of important customers are disclosed, policing contact is difficult. An alternative is to allow access to suppliers/customers at the final stage of the sale process or as a condition to completion.


5 Product Functionality/Technical Review A buyer will often wish to carry out technical analysis of the target’s products or systems. This is difficult for many businesses where a large part of the value of the technology assets lies in their confidentiality. Allowing them to be analysed can be disastrous if the transaction does not proceed.


qualifying period RBS completed some 35 deals. Among the deals he was nominated for was the secondary buyout of Salisbury- based Glenside Manor Healthcare Services by Bowmark Capital.


Sellers frequently propose that such analysis be carried out by an independent expert who may disclose conclusions (but not content) and who is bound by


confidentiality restrictions heavily favouring the seller.


Alternatively, this issue can be dealt with at the final stage of the sale process or as a condition to completion.


Taking to the stage to announce the results was Sean Kelly, head of commercial at Lamport Bassitt, who revealed that for the second year running Richard Povey had been voted the winner.


Lamport Bassitt advises a number of technology businesses on the South Coast and Thames Valley on acquisitions / disposals as well as commercial agreements and other matters.


Details: Oliver Kelly 023-8083-1902


oliver.kelly@lamportbassitt.co.uk www.lamportbassitt.co.uk


“We are grateful for the support we receive from the wider professional community and most importantly the management teams who continue to come to us with great business plans and strategies.”


Povey said later: “I am delighted to receive the award again this year and am very grateful to those who have nominated me. I am very lucky to be part of a great team in the Thames Valley Corporate Centre and we have once again had a very successful year, supporting a number of private equity invested transactions in the region, with both Autologic and Davies also shortlisted in the deal of the year category.


SPONSORED BY LAMPORT BASSITT WINNER Richard Povey of HSBC


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