In a world where digital technology has reached every possible corner, its base, software, has supported and accompanied this insertion through innovation, incorporation of new technologies and adaptation to consumer demands. As a result, at the business level, mergers and acquisitions (M&A) of software companies have become commonplace, as companies constantly look for ways to expand their portfolios, gain a competitive edge, or simply increase their market share. A key aspect of M&A is due diligence (DD). DD is a meticulous process of investigation and analysis that is undertaken before any significant decision or investment is made. It involves a thorough examination of relevant information, such as contracts, financial records, and operational practices, to identify potential risks and ensure informed decision-making.
However, there’s one critical aspect of DDs that is sometimes overlooked: open-source code audits. By failing to evaluate open-source software (OSS), which today comprises most of our software, a deal can be exposed to significant risks that can undermine the success of the transaction and the long-term value of the acquired assets. Next, we will discuss the value of an open-source code audit and the risks of not assessing OSS in an M&A transaction.
Understanding Open-Source Software
Generally speaking, open-source software refers to software whose source code is made available to the public under an open-source license which, allows anyone to view, modify, and distribute it. This collaborative approach has led to the development of countless powerful and cost-effective solutions, both within the scope of OSS offered free of charge and in commercial applications.
What is an Open-Source Code Audit
An open-source code audit is a systematic examination of the source code of open-source software. The audit helps identify vulnerabilities, ensure compliance to open-source licenses, and evaluate the overall trustworthiness and reliability of the software.
The Value of Open-Source Software Audits
In an M&A scenario, open-source code audits play a pivotal role in assessing the value and risks associated with the target company’s software assets. Here are some key reasons why they are essential:
License Compliance: Open-source software often comes with specific licenses that dictate how it can be used, modified, and distributed. Examples of these licenses include the GNU General Public License (GPL), Apache License, MIT License, and BSD License. Not managing to comply with these licenses can result in legal consequences, including loss of intellectual property rights, and damage to the acquiring company’s reputation. An open-source code audit helps to ensure that all open-source components are used in accordance with their respective licenses.
Security Vulnerabilities: Open-source software is not immune to security vulnerabilities. An audit can uncover potential weaknesses in the codebase, allowing the acquiring company to address them before they become critical security risks.
Intellectual Property Risks: It’s crucial to verify that the target company owns or has the necessary rights to use all the code within its software products. Open-source code audits can help uncover any potential intellectual property disputes or issues that might arise post-acquisition.
The Risks of Not Evaluating OSS in M&A:
Neglecting open source code audits in the M&A process can lead to various risks and consequences, including:
Legal Liability: The failure to comply with OSS licenses can result in lawsuits, fines, and the need to rewrite significant portions of the software. This can be a costly and time-consuming endeavor that can disrupt business operations.
Security Breaches: open-source software can leave the acquiring company vulnerable to cyberattacks and data breaches. Such incidents can have far-reaching consequences, including financial losses and damage to the company’s reputation.
Reduced Asset Value: If issues related to open-source software are discovered post-acquisition, it can reduce the overall value of the acquired assets and even lead to asset write-downs.
In short, open-source code audits are an essential part of the M&A process in the technology sector. They help mitigate legal, security, and operational risks while ensuring that the acquiring company can leverage the full potential of the acquired software assets. Failure to give due consideration to open-source audits as part of a DD can have serious consequences that go beyond financial losses, affecting a company’s reputation and ability to compete in the rapidly evolving technology landscape. As a result, companies engaged in M&A activities must prioritize open-source code audits to make informed decisions and maximize the value of their investments.