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While much discussion centers on how CIOs will fare in mergers and acquisitions, their role in an ancillary event--the divestiture of a business unit--is rarely on the radar. Yet, these transactions are riddled with legal risks that can be costly if not addressed, and in the worst cases, can have serious operational impact.Outside IT counsel should be integrated into the corporate deal team, providing input during the negotiations. Just as important, the CIO can draw on the outside counsel's experience to minimize the potential for transition services to disrupt ongoing operations or introduce uncovered financial liabilities into the IT department's budget. Nonetheless, members inevitably will be challenged by the often thorny issues posed by a divestiture. The following steps can minimize snags during negotiations and ensure a smooth IT transition.
Identify and document the transition services: The buyer and seller must identify the universe of shared IT services and then determine which will be provided under the ITTSA. After completing the identification, the IT deal team should work with the operational staff to properly document each service. The level of detail required could be as simple as "continue to perform month-end processing of sales data and provide standard reports of results" or as detailed as specifying how each monthly sales figure is to be calculated.
Perform due diligence: From an operational standpoint, providing standard, day-to-day IT transition services for a divested business doesn't represent a challenge; the seller simply continues to do for the divested business exactly what it did prior to the sale. Legally, however, the change in ownership is important because the businesses will be unrelated. Software-license agreements generally don't permit a licensee to process work for an unrelated business, even if the business used to be an affiliate. IT service agreements, especially telecom contracts, often have similar restrictions. To avoid potential legal liabilities, costs, and risks, the party providing the services must get vendors' consent to perform transition services.
Identifying the vendors requires gathering all of the contracts that support the seller's IT operations, working with management to determine whether each contract relates to a transition service, and reviewing those that do. Only then can the team determine whether a contract permits the seller to perform transition services for the divested business.
Produce a cost model: An accurate set of prices for the transition services under the ITTSA will be needed. The finance and accounting representatives should generate a complete analysis of the costs associated with the services, taking into account the operational reality that some bundles of transition services will continue longer than others. For example, the buyer may be ready to provide network services to the business it's acquiring long before it's ready to provide midrange processing services. Therefore, rather than setting a single price for the entire set of transition services, the cost analysis should be detailed enough to assign separate prices for each bundle.
The team should also account for any long-term financial commitments that were to be allocated by internal chargeback or other methods to the business being sold. The CIO could face significant unbudgeted liabilities that can't be recovered from the buyer unless the pricing under the ITTSA takes these obligations into account.
Draft and negotiate the ITTSA: The ITTSA and related schedules need to be drafted, negotiated, and finalized prior to the transaction closing. ITTSAs aren't cookie-cutter agreements. They're tailored to the particular facts and circumstances of each transaction. For example, the company generating the first draft of the ITTSA will write it very differently if both parties are equally reliant on transition services performed by the other, rather than if one is much more dependent on transition services than the other.
Though each ITTSA is customized, there are key issues that a CIO should keep in mind in working through any transition-services arrangement.
The ability to change operations: A CIO must always balance the need of the recipient of transition services to continue to receive consistent services with the provider's need to make changes in its IT operations. Without this balance, the provider will be unable to respond to dynamic business requirements. In one approach, the provider agrees to give reasonable notice if a change in its IT operations will alter the way it provides the transition service. Meanwhile, the recipient must take reasonable steps to conform to the provider's changes.
Risk management: Even a well-drafted ITTSA arrangement can create business and legal risks. Where a risk can't be avoided, the ITTSA should be structured to permit the party that faces the brunt of the risk to take necessary actions to manage it. For example, the party that holds the licenses to software used by or for the benefit of the other party runs the risk that its right to use the software to support its own business could be terminated.
Plan an exit strategy: Planning for the eventual termination of each transition service should begin early in the process. The ITTSA should set out a procedure for developing plans for the orderly transfer of responsibility for each transition service from the party providing the service to the recipient. The timing of the transfer is largely determined by the recipient's readiness to begin performing the service. The recipient should produce the initial exit plans with the provider of the service giving input on their cost and practicality. There may not be any liability to the recipient for failing to produce draft exit plans. Still, the ITTSA should clearly state that the provider has the absolute right to stop performing a transition service upon expiration of the agreement, whether or not an exit plan has been produced.
Exit plans also reduce the risk that the parties may become comfortable and let the ITTSA turn into a semi-permanent outsourcing arrangement. This situation can create serious long-term problems, especially if extensions to the consents from third-party software licensors—which can be very costly—aren't obtained. An exit plan serves to make sure the parties don't lose sight of the ultimate purpose of the ITTSA: to separate the IT operations of the seller and the business being sold in as quick and orderly a fashion as is feasible.
Mergers and acquisitions are occurring at a brisk pace. More than ever, the CIO is playing a huge role in the process, as technology is often a key issue in the negotiations. Early and aggressive CIO involvement is most urgent when an agreement involves providing or receiving IT transition services.
Edward Hansen is a partner and Craig Garnett is a senior associate at Morgan, Lewis & Bockius LLP in New York.
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