How to Acquire an Open Source Software Company 2.0

Open source technology has added a complex variable to relevant parties calculating the M&A equation

May. 15, 2007 05:30 PM

These days, executives realize that there are “new school” ways of acquiring a company with a software asset.” For all of the immeasurable benefits it has brought to the development community, open source technology has added a complex variable to relevant parties calculating the M&A equation. Open source code, the general reuse of open source, and proprietary software components in software development have further complicated the process of acquiring a software asset.

These days, closing a deal that includes a software asset is not much different than shopping for a car. On the outside, the streamlined exterior and highly finished shell might look very glamorous, but the question needs to be asked: “Would you buy a car without first looking under its hood?” Purchasing any software asset demands that due diligence be paid to evaluating the integrity of that software’s code. It is in the best interest of the acquirer to make sure that the asset they are acquiring complies with all intellectual property and licensing requirements. In other words, you want to be sure that the amalgam of parts used to build the engine, assembled in piecemeal fashion, meet the criterion set for passing vehicular inspection.

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Virtually all companies that develop software are now working in a “mixed-IP environment.” The reuse of internal and externally available source code by developers is inevitable. Most software architects use a “component assembly” approach to creating this hybrid type of software. It usually involves using a combination of third-party code, open source code, and proprietary code. However, such uncontrolled re-use of available source code introduces the need to assure that the code is used in accordance with applicable licenses.

Manually evaluating software developed through a “component assembly” approach is the “old school” way of performing due diligence. This approach can prove to be an exhausting and time-consuming exercise. The typical parties normally involved in the M&A of a software asset can potentially spend many hours trying to decipher what is in the code and what are the relevant licenses that apply to the code. For legal teams, auditors, and executives involved in such an M&A deal, time is of the essence.

All software carries licensing obligations, which may not be onerous, but companies are required to abide by them. In a mixed-IP environment, the volume of licenses to be understood and tracked can quickly become a challenge, especially if those licenses and their many different obligations conflict with one another.

Without insight into the composition of software and licensing restrictions, software assets can be laden with serious intellectual property problems. If license conflicts arise too late in the M&A transaction, it can lead to costly code reviews or redesigns for internal development teams. License violations can also cause embarrassing public and investor relations nightmares for companies.

With the onset of the Free Software Foundation’s release of General Public License (GPLv3.0) on the near horizon, now more than ever companies need to be able to quickly evaluate the code they are acquiring, and be able to distinguish usage rules from GPLv2.0 and v3.0.

Given the time-sensitive nature of M&A transactions, acquirers need a software-compliance management solution that streamlines the due diligence process. Furthermore, such a solution needs to provide the acquirer with a snapshot analysis of the software asset that they are acquiring. At the same time, the system also needs to be able to protect the source code and other intellectual property of the acquired party’s asset. The solution needs to be able to keep the two parties involved in the transaction separated, while providing each the information it needs to continue the process.

Essentially, such a solution needs to be able to move quickly, maintain confidentiality, and match the pace of the due diligence process. Also, all relevant participants in these types of transactions must be able to easily interpret the information produced by such a solution in a user-friendly format.

Both large and small companies have a need for this type of compliance management solution. Many large companies are typically involved in multiple transactions per year that could potentially involve licensing issues in software they are looking to acquire. If detected too late in the transaction process, these types of licensing issues could force the acquirer to renegotiate the value of its acquisition. Consequently, a company could save millions of dollars by investing in a software compliance management solution that would mitigate the risk.

Likewise, a small software company wishing to be acquired could certainly benefit from deploying such a solution. The company would need to rely on being able to utilize the solution to quickly review their code and remediate all issues prior to any potential transaction. In an era when many enterprise open source assets are being rapidly acquired, small software companies have a strong need for a solution that offers the ability to employ this functionality in record time.

The reality facing the industry is that software reuse is better, faster, and cheaper. By the same token, it is now harder to track and manage embedded code used in the development of a software asset. The risk of being in violation of certain license restrictions is heightened for a purchaser acquiring a software asset, when that asset originates out of a “component assembly” approach. A software compliance management solution that allows for both parties in an M&A transaction to mitigate the risks and reap the benefits is sorely needed in this age of mixed-IP environments.

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About Douglas Levin
Doug Levin is the founder, member of the Board of Directors and former chief executive officer (CEO) of Black Duck Software, serving in these roles since December 2002.

Previously, Levin was CEO of MessageMachines (acquired by NMS Communications in 2002) and X-Collaboration Software Corporation (acquired by Progress Software in 2000), two VC-backed companies based in Boston. He also worked for Microsoft Corporation for eight years.

Levin has an advanced degree in International Economic from the College d’Europe in Bruges, Belgium and a BA from the University of North Carolina at Chapel Hill. He was awarded CEO of the Year in 2007 by the Massachusetts Technology Leadership Council.

He is considered an expert on technology start-up and emerging company formation.