Software source code risk increases in line with M&A

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					Software source code risk increases in line with M&A
Fear of vendor bankruptcy is no longer the biggest driver in the software
escrow market; potential mergers and acquisitions activity within the IT
vendor community is the biggest cause for concern.

This is the opinion of Escrow Europe director, Andrew Stekhoven. Stekhoven
explained the switch: “For several years during and after the global IT and
software development boom, a fair number of users worldwide insisted on
protecting the source code used by their software vendors because they were
concerned that the software would be „orphaned‟ if the vendor‟s business
failed and it was forced to declare bankruptcy.

“They realised that, in the case of an „orphan event‟, the escrow agent would
release the source code to them and they would be able to use it to maintain
their systems and continue trading.

“Bankruptcy was a very real threat during those boom times because many
of the vendors – while very proficient at designing and developing software –
had few business skills, and seldom knew how to manage their rapid growth.
The failure rate was high.

“Today, however, the IT vendor environment is relatively stable with large
and small IT houses having survived up until now because they have very
good software products, and solid, viable businesses.

“But, the pendulum has swung so that the threat is not that the vendor could
go bankrupt but that it could be acquired by a competitor that has absolutely
no intention of continuing to support two competing software products.

“Instead, the purchasing company will select to hitch its wagon to just one of
the products and will abandon the other, forcing its users to disregard their
prior investment in their systems and cross-over to a new – and possibly not
wanted – technology.

“Just imagine. Your company selected software A over software B after a long
evaluation process because you believed A best met your business
objectives. Company B then acquires company A and simply advises you that
it will cease to sell and support software A. Or it will support software A but
only at a much-hiked maintenance fee.

“If you had insisted on an active escrow agreement between you and
company A, the source code for software A could be released to you by the
escrow agent and you would be able to continue trading without succumbing
to company B‟s demands, either maintaining your systems or retiring them in
a planned and responsible way.
“In our experience, the threat of an event that would trigger the release of
the source code to the user community is such that the vendor will
immediately return to the negotiating table. On this basis, the end-user at
least has a negotiating position and can politely say to the vendor „if you
don‟t remove your gun from my head, I will file for a release of the source

Escrow Europe, a corporate member of the Institute, is one of the leading
providers of active escrow services worldwide securing, verifying, updating
and retaining deposits of software source code and associated documentation
on behalf of users of both licensed and bespoke software products.

Escrow Europe are Corporate members of the Institute and Andrew
Stekhoven can be contacted on (083) 227-3340

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