RiskWatch: Technology Acquisitions & Diligence Concerns


18-minute listen

In this episode of the podcast, Vcheck Global spoke with Carrie LeRoy and Charles Walker who are partners at the law firm Gibson Dunn. We spoke about the pitfalls that exist for technology acquisitions and how these can be mitigated through holistic due diligence. We covered a number of areas that encompass the due diligence process when evaluating a tech acquisition and how effective due diligence will quickly identify and assess potential issues, allowing the acquirer to take the necessary actions to mitigate them and move forward with confidence. The risk issues we covered included intellectual property ownership, cybersecurity, and bribery and corruption risk from third parties, among others. In the sections below, we summarize some key takeaways from our discussion.

01:00 – The dangers in taking the legal due diligence process lightly

By not investing in a holistic pre-acquisition due diligence process that takes tech-specific issues into consideration, acquirers run the risk of wasting critical time and resources on other aspects of the deal only for it to fall through at the last hour. To have a successful acquisition, acquirers should have a diligence process in place to quickly identify what the potential issues are so that they have time to mitigate them rather than spending time on immaterial items.

03:30 – Intellectual property ownership issues that can arise if a founder is also a professor at a university

One issue that has been surfacing more frequently in tech acquisitions is founders who are also professors at universities. It is critical to confirm that the company completely owns the intellectual property rights to the work that has been done at those companies and that the university does not have any claim to the IP. A potential risk could be if a university has a policy that gives the university certain rights to that intellectual property.

04:26 – The importance of background checks in identifying risks that are the tip of the iceberg

Reputational due diligence plays an important role in identifying risk patterns and general company practices that relate to its reputation.  This could include identifying past intellectual property litigation or claims made in media as well as industry commentary on how the company and its founders conduct business.

06:46 – How background checks can help uncover past issues in a founder’s track record that could be indicative of future risks

In many instances, acquirers are buying companies from founders who have extensive track records and multiple past ventures. Identifying past risk issues such as business disputes and intellectual property litigation at those companies is key in understanding risk patterns that could be indicative of future risks if their current company were to be purchased.

11:37 – Why it is a mistake to think that tech is not a high-risk industry when it comes to corruption and bribery risk

Technology companies of all sizes can have global customers. Oftentimes, emerging tech companies will engage third-parties overseas to help them sell and market their products globally. If the acquirer has not conducted comprehensive due diligence into how those third-parties operate, they could be exposing themselves to violating anti-bribery and corruption laws. Before making any acquisition, acquirers should understand the company’s third-party risk compliance policies, potential exposure, and past issues.

14:30 – The importance of companies being upfront and transparent about any past risk events and remediation efforts ahead of a transaction

Deals can oftentimes be saved when a company is forthright about past incidents and the remediation steps that were taken. Conversely, deals can be killed or paused if the acquirer discovers a major issue that was not disclosed by the company because it creates an atmosphere of distrust and calls into question the general integrity of the company.

16:30 – How valuation is tied to a company’s ability to demonstrate that it is committed to compliance

Companies looking to be acquired should understand that valuation can be tied to their ability to demonstrate a commitment to compliance. These companies should have compliance policies and procedures in place to demonstrate their readiness as well as be able to show how past issues were identified and remediated.

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