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Software buyers beware: Read the fine print

The possibility of your CRM software vendor being acquired requires you to take a long, hard look at protections in your licensing contract.

It's the nightmare scenario for a company tackling CRM: After a lengthy software selection process, a huge technology investment and a painful adoption struggle, your vendor up and gets acquired -- just as your CRM payout is starting to show returns.

It's the sort of thing that some PeopleSoft Inc. customers have fretted about since June, when Oracle Corp. announced its intention to acquire its rival.

For new customers, PeopleSoft offered an assurance program, promising to pay them a sum equal to two to five times their licensing fees if the company were acquired and its product line discontinued. PeopleSoft has credited the program with staving off some customer uncertainty in the wake of Oracle's bid.

Assurance programs aside, in this topsy-turvy period of CRM consolidation, what's to protect customers if their vendors are acquired?

Scott Nathan, an Ashland, Mass., attorney specializing in intellectual property and technology issues, said service-level agreements typically written into licensing contracts offer some peace of mind.

"Those prevent the software vendor from assigning their obligations to anyone else without [the] expressed written permission of [the] customer," Nathan said. Therefore, if a vendor is sold, its customers may need to sign off before any of their data can be shared with the acquirer.

Even when the acquisition simply means the transfer of stock ownership of the vendor, language should be included in the customers' original contracts that requires some sort of notice and permission, Nathan said.

Additionally, nondisclosure agreements offer some protection of corporate data. While parties usually sign a confidentiality agreement when negotiating a merger, having a nondisclosure agreement limits a vendor's ability to tell its potential buyer what it's doing for your company, Nathan said.

In some cases, it is important for CRM buyers to write in copyright protection for source code, no matter who the code actually belongs to. For example, if a large company has a number of applications that have been custom-built by its software vendor, those projects almost invariably include more than just the designs but also relevant proprietary data from the company.

"In that context, when there's an acquisition going on, you want to take care in documents to make sure that, at all times, the customer has access and control of their proprietary data," Nathan said.

Vendors in the midst of an acquisition often tout the lengths they go to in keeping customers informed of their plans. After a lengthy tug-of-war with several suitors, Vancouver, British Columbia-based Pivotal Corp. is being acquired by CDC Software Inc., a subsidiary of Hong Kong-based Chinadotcom.

"These things typically mean uncertainty," said Pivotal's chief financial officer, Divesh Sisodraker. "It's incumbent on the vendor to explain to their client what the real story is around the product road map and how leverage-able the existing contract is."

Sisodraker said a source code escrow account is one method of dealing with potential acquisitions that clients have undertaken. Additionally, the better a software vendor's financial position, the more likely a product will live on.

"[Buyers] really have to do their due diligence and poke around with a vendor," he said. "If you're a software company that is financially strong, you really control your own destiny. If you're acquired, you're acquired as an operating entity."

Sisodraker said that customers should do their homework on their vendor's financial stability. He recommends spending time understanding the product road map. In the case of publicly held companies, he said, it's a good idea to talk with investment analysts.

Generally, Pivotal uses a standard licensing contract, but the bigger the customer and the bigger the deal, the more negotiation is involved, Sisodraker said. For example, a large bank may have its own licensing-agreement form.

All the focus on CRM-related merger activity also seems to have customers more prepared.

"Two or three years ago, questions were far less insightful than the ones people are asking today," Sisodraker said. "When you look at the landscape and consolidation activity, people are digging into this issue."

An acquisition doesn't usually mean a company can simply get out of its contract. The real concern for most companies is support, maintenance and upgrades -- with ongoing support the most vital. Thus, any assignment of rights is the biggest issue and should be the subject of contract language, Nathan said.

An acquisition can, in fact, offer some positives for customers. For example, if a customer's permission is required to transfer rights, the customer has an opportunity to renegotiate the deal, Nathan said. Additionally, if support is inadequate because the vendor is overwhelmed with business, a new vendor may have the additional resources to support the product.


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