Introduction

One cold February morning (and in Canada, every February morning is cold), I was at my desk, typing away like a happy little monkey, when my Director strolled over with big news: our company was looking to buy another business in the US. As the Technology Contracts Manager, I was assigned to support the deal team. Heading south in February sounded great—until he clarified that south meant Buffalo. My Director had a cruel sense of humor.

At that point in my career, I had only a cursory experience with Mergers & Acquisitions (M&A) in the due diligence phase. Typically, M&A was lawyer territory, and I was a Contracts Manager. I assumed my work would begin after the deal was finalized and the companies had merged. However, involving Contracts Managers early in the M&A process is crucial to avoiding post-deal troubles.

Four Key Areas in Contract Due Diligence

Lawyers, often from outside counsel, are brought in by both the buyer and seller to conduct financial due diligence and negotiate deals. Part of this process involves reviewing existing contracts to assess and quantify the risks of merging two entities. Engaging subject matter experts in due diligence is essential, particularly in four key areas:

1. Human Resources

Nearly every M&A deal involves acquiring personnel. Contracts Managers supporting the HR category need to review employment contracts to assess risks associated with inevitable layoffs. For instance, in our case, the target company had unionized workers, necessitating an expert on US Labor Law to assess the risk of acquiring those employees.

2. Clients

If the business being acquired has existing clients, the acquiring company must review sales agreements to determine pricing, term, termination provisions, and assignment language. Some customers may not want to stay post-acquisition, so Contracts Managers responsible for sales agreements must quantify the risk of losing revenue from customers who can terminate their agreements for convenience.

3. Assets

Acquisitions may include facilities and equipment. If any assets are leased, Contracts Managers supporting Real Estate and Asset Management must review agreements to determine if these assets can be transferred or if the lease can be terminated.

4. Technology

The acquiring company needs to review supplier agreements, particularly software contracts, to determine pricing, term, termination provisions, and assignment language. Software suppliers often have specific provisions that prevent their licenses from being assigned to an acquirer without negotiation or an assignment fee. Technology Contracts Managers are vital in reviewing and negotiating these contracts.

The Role of the Contracts Manager

Good Contracts Managers are more than just paper pushers. They understand the goods and services in their category and have an in-depth knowledge of current supplier contracts. Their real value in M&A due diligence lies in their ability to quickly assess how new contracts will fit into the existing contractual landscape.

If you're a Contracts Manager brought in as a subject matter expert for due diligence, start by establishing a baseline for your organization's contractual terms and conditions, including standard warranties, indemnities, limitations of liability, and payment terms.

For IT contracts, engage your technology team to understand the proposed transition plan—what would stay and what would be replaced post-acquisition. This will help you identify potential risks and prepare a high-level negotiating strategy.

Engaging Suppliers During Due Diligence
In some cases, you may need the selling company's permission to engage key suppliers in the due diligence phase because of potential restrictions in the contract that could impact a merger or acquisition.

Here's a case study that illustrates this point:

Case Study: Negotiating with Suppliers in the Due Diligence Phase

A few years ago, we were asked to assist with due diligence for a company looking to make an acquisition with a large technology component. The buyer was a large data processor wanting to buy a competitor and consolidate the technology in its data center.

After some legwork, we collected and reviewed most of the seller's technology agreements. Many contracts had favorable assignment language, but a handful of large, mission-critical suppliers either had no assignment language or had sold a site license that couldn't be moved without the supplier's consent.

After discussing with our client, we asked the seller's executive to reach out to these suppliers with an NDA and a request to meet. Under an NDA, we informed these suppliers that their current customer might be acquired and the technology consolidated in the buyer's data center, which we represented.

Our client wanted to continue business with the suppliers but wasn't interested in repurchasing the same software to run in its data center. So, we discussed what options might be available if the deal went through. Some suppliers easily conceded, especially after we informed them that our client had competing software running in their data center, which could simply replace them post-acquisition. Others played hardball.

Regardless of the suppliers' positions, we quantified the risk and prepared a contingency plan for those who might want to leverage the situation.

Conclusion

Contracts Managers play a vital role in M&A due diligence. By understanding the existing contractual landscape and engaging subject matter experts, they can help identify risks and develop strategies to mitigate them. This proactive approach ensures a smoother transition post-acquisition and helps avoid potential pitfalls that could derail the merger.

In summary, the key areas Contracts Managers should focus on during M&A due diligence are human resources, clients, assets, and technology. By establishing a baseline for contractual terms and conditions, engaging with the technology team, and negotiating with key suppliers, Contracts Managers can add significant value to the M&A process.