Organizations view events such as mergers and acquisitions (M&A) as disruptive to business operations but SAP sees these events as opportunities to drive S/4HANA migrations, regardless of whether it is optimal for the customer. In M&A situations, the companies involved often throw about optimistic words such as “efficiencies”, “synergies”, and “future benefits”. But what SAP is really thinking is more along the lines of “acquisition budgets”, “revenue opportunity”, and “audit”.
All IT vendors know that these events usually come with a huge pot of money (i.e., transformation fund). SAP could not only take advantage of this budget in the short term but could also use this opportunity to position itself for future, sustainable revenue. If you are an SAP customer who is on the M&A path and have not yet committed to moving to S/4HANA, be aware of these three key situations that SAP may try to exploit.
1. Two SAP Customers Merge (or One Acquires Another)
If your company uses SAP and acquires another SAP customer, it would logically follow that SAP software could be used across the combined entity as an appropriate use of affiliate assets. However, use restrictions in SAP’s standard business terms specifically prohibit this unless it is otherwise agreed to in writing by all parties. By using SAP software without special terms, the combined entity would violate SAP’s standard business terms which can result in significant noncompliance fees if audited.
This is also the case where one company may license their software under a single metric (e.g., number of employees) and is merged with a company licensed under standard metrics (e.g., users). Merging these two license models will certainly require a holistic licensing restructuring via a negotiation with SAP.
The key takeaway from these scenarios is that any combined use of acquired or merged SAP assets requires a new SAP agreement and that agreement will not be free. In fact, this is a prime situation for SAP to position the use of the combined software as a need to move to S/4HANA.
2. M&A Involving an SAP Customer and Non-SAP Customer
In some cases, a company that is not an SAP customer is acquired by, or merges with, a company that is. In this scenario, the number of required SAP users may exceed the number of licenses available for a particular product. Even if this is intentional because the objectives of the merger include efficiency targets or the desire to consolidate legacy IT systems, this puts the organization out-of-compliance with SAP’s licensing terms.
Regardless of the future benefits an organization promised to its shareholders, SAP will use its ability to conduct an audit so SAP’s shareholders benefit now. SAP will not limit its compliance audit to users either. They will take this opportunity to look across all your use metrics such as sale/service orders, employees, etc., and they may even raise the issue of Digital Access (formerly known as Indirect Access).
SAP understands that organizations cannot put the objectives of a merger in jeopardy by getting sidetracked by a long, drawn-out audit which may impact their use of business systems. This is an opportunity for SAP to present a migration to S/4HANA as a means of “solving” an audit and eliminating the risk of business interruption. This is especially the case when there is a material gap in use and entitlements and/or a significant time lag before the new organization efficiencies result in a more compliant status.
3. Delayed Mergers or Acquisitions
Large mergers or acquisitions often don’t conclude until months or sometimes years after they are publicly announced. This can be due to regulatory delays, shareholder fights, or political meddling. Delays such as these provide SAP with an opportunity to preemptively modify terms of agreements, so they benefit once an acquisition is complete.
Even when SAP already enjoys the protections described in our first two examples, it is not unheard of for SAP to require the inclusion of language in another transaction that specifically prohibits the use of SAP software for exactly the type of use that was hoped for by merging two legacy SAP systems.
For example, Company A may have a large number of professional user licenses and Company B may have a large number of sales and service order engine entitlements. In this scenario, Company A and Company B could pool their resources in a new SAP solution configuration intended to run the new business. But it’s possible that in order to purchase new SAP functionality required immediately or to solve an audit, Company A is forced to amend their agreement such that Company B could never use any of Company A’s assets if acquired. Though such a scenario is extreme, it should not be ruled out entirely as it is a risk for SAP customers with any M&A activity given SAP’s aggressive targets for S/4HANA adoption (especially in the cloud).
What Measures Can You Take When Considering S/4HANA and Facing M&A Activity?
- Read Your Agreements
Familiarizing yourself with the terms and conditions of the acquirer and the acquired entity’s agreements is a solid first step in understanding what risks are lurking when looking to combine companies and/or SAP assets. A third-party advisor can assist in reviewing your current agreements to help you understand what is contractually possible with SAP and recommended strategies to drive an orderly move to S/4HANA.
- Leverage Existing Commercial Terms
Given the nature of SAP’s business and contractual practices, it would be rare for SAP to not financially benefit when their customers undergo M&A activity. However, an informed customer, with an understanding of how other clients have used existing or negotiated commercial terms, can leverage existing terms to drive a more predictable and transparent move to S/4HANA.
- Look for Leverage Beyond Lawyers, Guns and Money
Starting the conversation with a pack of lawyers poring over agreements regarding your organization’s concerns about the merger or acquisition is not the only place to start the conversation. Likewise, raising the temperature between yourself and SAP with threats regarding SAP’s future at your company is rarely effective. Lastly, throwing money at a perceived challenge with SAP’s approach to your merger and acquiescing to their S/4HANA push is not the best answer, either.
If your future state technology platform is based on SAP, proactively engage and set expectations to establish a level of transparency with SAP. Developing and elevating executive relationships with SAP and establishing credibility will further enable you and your team to drive the conversation and agenda. Finally, positioning your company as a valued customer and brand in your industry who is willing to further commit (at the proper time and appropriate level) to investments in SAP will make for more constructive M&A discussions in the short term and productive S/4HANA migration discussions in the long term.
Mergers and acquisitions are always a time of organizational tension and uncertainty. But with the right approach and relevant market intelligence on SAP’s contractual terms, you can increase transparency and lower the level of uncertainty. An experienced third-party advisor can create the framework for briefing your executive stakeholders and negotiating with SAP to drive the most favorable outcome for your company. Divestitures and spinoffs are a unique situation unto themselves so stay tuned for a future UpperEdge blog on this topic!
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