Co-authored with Logan Laux of Verdant Advisers.

Have you ever wondered about the process of buying or selling an OSS or BSS company? Are you potentially even thinking of buying or selling an OSS/BSS / telco / tech company?

It’s not an event that happens very often, but given the amount of fragmentation in the OSS/BSS industry, M&A (Mergers & Acquisitions) happen more often than you may realise. We’ve been increasingly involved in M&A projects, as matchmakers bringing buyers and sellers together, in recent times.

More specifically, we’ve been involved in a number of Due Diligence (DD) projects recently, so we thought we’d share some of the learnings.

Due Diligence is the process that’s used in an M&A transaction (or investment transaction) to gather and analyse detailed information about a target company (the company being acquired or invested in). They’re a very important event in the timeline of any company, so they need to be done well to optimise outcomes for all parties involved.

There are three primary examples of DD where we tend to become involved:

1. Representing the Buyer of an OSS/BSS supply company – whereby we provide expertise to a company that wishes to acquire the target company. In this scenario, we conduct a DD that ensures the buyer is more fully informed about the target prior to making a purchasing decision
2. Representing the Seller of an OSS/BSS supply company – whereby we provide expertise to the organisation that wishes to divest the target company or assets. In this scenario, we help to assemble the relevant collateral from which buyers make informed purchasing decisions
3. The third example is to conduct buy or sell-side of a due diligence on a Network Operator that has an OSS / BSS suite. In this scenario, the OSS/BSS is a vitally important element of the company’s operations, but forms only a sub-set of the overall scope of the deal

The DD for each of these examples is slightly different, with different objectives.

This article will discuss the participants in a diligence process, the diligence process itself, the aspects of a business that diligence will concern (particularly for OSS/BSS companies), and how to successfully complete a diligence process from the prospective of the selling company.

Overview of the Due Diligence (DD) Process for OSS / BSS Deals

A DD is an opportunity for a buyer to ‘look under the hood’ of the company they’re intending to purchase, and diligence is performed prior to closing a transaction.  It allows the buyer to ensure there aren’t any issues that pose great risk to the buyer after a transaction becomes official.  This is particularly important for software companies such as OSS/BSS platform providers, since the buyer sees most of the transaction’s value in what is largely an intangible asset, such as the technology / Intellectual Property (IP). 

Simply stated, diligence also allows a buyer to understand what exactly it is they are buying (the good and the bad – or the SWOT/R, the Strengths, Weaknesses, Opportunities, Threats and Risks), and how to transition, integrate and run the business once they own it.  

Participants in an OSS/BSS Due Diligence (DD)

There are usually several groups of participants in the diligence process.  From the acquiring company’s side, you can expect to see representation from the following groups:

• Finance
• HR
• Technical / Engineering / Operations
• Sales and
• Management
• In-house counsel

From the target company’s side, the group is usually smaller and will tend to only include:

• Management
• Finance/HR and
• Technical resources are most common

Often times a seller does not want its whole organisation to know that the company is for sale. Other times, they need key resources available for business as usual (BAU) activities, whilst still being able to provide competent and coherent answers to questions from the buyer’s teams.  

Beyond these core groups, companies that sell a specialised software product like OSS/BSS may require the participation of subject matter experts (SMEs) such as software code reviewers, security analysts and OSS/BSS functionality / data / process reviewers.  This offers the buyer a deeper level of understanding and risk analysis.  Finally, M&A advisors/bankers, and lawyers (on both sides of the transaction) will be involved in the diligence process. 

Typically the seller’s M&A advisors lead the process, the selling company provides the documentation and written responses, and the lawyers follow the process to determine how to craft the legal documentation that governs the transaction. They also ensure appropriate governance and probity is maintained throughout the process.

The OSS/BSS Due Diligence Process

The diligence process is typically a two-phased one:

1. The first phase consists of a preliminary diligence, which is done so that a buyer can write an appropriately detailed Letter of Intent (the “offer”).  Preliminary diligence is often a review of historical financial statements, a cursory look at the organisation’s structure and employee roster, a look at the sales & costs pipelines and assumptions that support financial projections, and a technical review of the OSS/BSS platform (and related technologies). The preliminary diligence is conducted to enable a Letter of Intent (LOI) to be signed and/or short-listing of candidate buyers. This phase may (or may not) include access to the seller’s experts to answer preliminary questions or request further information
2. After a Letter of Intent is signed, a much more in depth diligence takes place and is completed prior to closing (i.e. finalisation of the sale).  Shortly after signing the LOI, a buyer will submit a list of diligence questions.  The seller may have already populated a data room with the most likely data to be requested, but if not, the seller should be prepared to address these questions within a few weeks.  After the first responses have been shared, there’s usually 2 or 3 iterations of Q&A.  Most buyers will want to get a feel for the management team (and want to see the facilities), so a seller should expect to host on-site meetings. 

Sharing Information with a Data Room

As previously mentioned, the actual sharing of diligence information is handled through a virtual data room.  This is a cloud-based file sharing platform that offers robust security and access control, easy document organisation, and gives the seller the ability to see who has viewed the shared information.  An ancillary benefit of a virtual data room is that it serves as an archive for posterity, which potentially covers issues that may arise post deal.

What does the OSS/BSS Due Diligence Process seek to Achieve?

Due diligence focus areas are spread across organisational groups.  These would include finance, accounting, tax, sales & marketing, product, technology, legal, operations, HR and other general organisational groups. 

For software companies like OSS/BSS solutions providers, particular focus is placed on evaluation of:

• Coverage of OSS/BSS Functionality against a baseline such as TM Forum’s TAM, eTOM and ITIL
• Product mix
• Competitive advantages / disadvantages
• Roadmap
• Reliability and sustainability of processes
• Ability to integrate with other OSS/BSS products (e.g. the buyer’s existing products)
• Ability for the merged organisations to transition after close
• Market analysis (headwinds / tailwinds)
• Code quality
• Third-party code dependencies
• Development environments (eg CI/CD pipelines)
• Ability to provide ongoing support and meet SLA obligations to the buyer’s existing clients
• Cyber Security
• IP ownership rights
• Patents
• Team analysis including capability and tenure
• Fixed Asset Register (FAR) analysis
• Customer contracts (obligations, profitability, liabilities, transferability, etc) and
• Accounting practices. 

In most cases, a buyer is generally ascribing a high proportion of the company’s value to the software assets. However, there can be various reasons for the target’s attractiveness, including:

• Acqui-hires – using an acquisition to access a competent product development team
• Client acquisition – using the purchase to onboard the target’s clients, often with the intention of up-selling and cross-selling to them
• Revenues – providing the buyer with access to long-term, sticky contracts and high-margin recurring incomes from the target’s clients
• Patent Libraries – allowing the buyer to unlock access to important technologies
• Roadmap or integration fast-tracking – allowing the buyer to speed up their own time-to-market (TTM) to deliver OSS/BSS product or service offerings to clients

Regardless of the reason for acquisition, the buyer needs to ensure they understand any potential risks such as looming CAPEX (Capital Expenditure) injections or key client churn that they may be exposed to after closing. 

Buyers may want to ensure that no third-party can claim ownership of the software IP (this includes an analysis of customer contracts, where custom development work done for an individual customer may have conveyed ownership of that software component to the customer).  They will also want to make sure adequate protections have been in place to prevent others from copying or stealing the software code.  Finally, close attention is paid to accounting practices around revenue recognition of software, maintenance and support sales (is the seller following ASC topic 606, for example). 

The Seller’s Obligations during Due Diligence (DD)

A seller can expect to answer hundreds of questions in total. A seller’s responses would typically be provided in the form of a 1 to 2 sentence written response, often via the governance of the data room. It’s also common for additional documentation and reports to be created and provided to supplement the questions where necessary. 

Running a successful diligence process can determine whether or not a deal actually gets done.  There are likely more examples of deals that fell through during diligence than there are of deals that successfully closed.  An experienced team of M&A advisors, lawyers and technical subject matter experts (SMEs) can help ensure that the most common mistakes are avoided and that a proven strategy is in place to get through the diligence process without any ‘deal stopping’ issues. 

Key Take-aways for OSS/BSS Due Diligence (DD)

A few key points, particularly for OSS/BSS OEMs (Original Equipment Manufacturers), include the following:

• The DD is mostly a process of “lifting rocks” and dealing with whatever is encountered beneath them. Approaches and lines of questioning will evolve mid-flight depending on what is uncovered during the DD. The number and type of rocks lifted can be varied depending on the size of the deal and the depth of analysis needed by our client to satisfy their required level of confidence in making a buying decision
• Ensure the seller’s team is in place and prepared for the volume of work as it relates to answering due diligence questions.
• Remember that a buyer has very little information about the business being sold. On the other hand, the seller has almost perfect information on the business.  Part of the process will be an ‘education’ of the buyer, and another part of the process will be to ‘soothe’ the buyer if and when they discover something that they view as a meaningful risk.  It’s best to be prepared ahead of a diligence process to defend and explain any issues that are likely to arise.
• From a strategy perspective, it’s often better to “burn the grass” — that is to let buyers know about any major issues that may come out during diligence, before an LOI is signed (as that’s typically when a seller still has the most leverage).
• Be prepared to accept some of the risks uncovered by the diligence process. A buyer will use the purchase agreement to shift some of the risk they aren’t comfortable with to the seller.  This may be acceptable, because as stated before, the seller has much deeper experience with the business and its issues.  It’s often helpful to weigh the possible cost of a risk against the actual probability of that risk ever happening.
• Utilise the service of M&A advisors and attorneys that have real world experience with OSS/BSS / telco / tech company transactions (and industry-specific deal experience). There are industry-specific issues that are typical of most diligence processes, so knowing how to handle these challenges from past deals will serve the diligence process well
• Even better is to have M&A advisors that have real-world experience with:
  • Designing, building, implementing, integrating and operating OSS/BSS
  • Managing and running OSS/BSS OEM companies
  • Managing OSS/BSS transformation projects for clients
  • Post-acquisition transition planning and implementations

At Passionate About OSS, we are connectors (of companies, technologies, ideas, people, projects, etc). We also already have an existing stable of potential buyers and sellers to potentially connect you with. Whether you’re a buyer or a seller. please connect with us if you need any assistance with M&A activities that you are considering.

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