In popular lore, the catchphrase “Follow the money” has come to mean that if you really want to find out what’s going on, pay attention to how, when, and where money is being exchanged. Keeping that advice in mind, we offer here the latest news on the ‘software license troll’, a chilling market phenomenon we have been closely monitoring since launching our firm in June of 2020.
As part of our market surveillance and thought leadership, we recently published an article in Westlaw Today where we demonstrated how the weaponizing of software license agreements is fast becoming an investment opportunity for private equity investors. And where there’s easy money to be made, the trolls are bound to show up.
From our Westlaw Today article, a reminder of what constitutes this special breed of troll:
While it may not be history repeating itself, there is a certain rhyme and reason to a new trolling phenomenon in the business world — the software license troll. With the ubiquity of software licensing and the uncertainty caused by new technology, many software vendors are devising troll-like auditing and licensing scripts that borrow heavily from the opportunistic blueprint forged by their patent troll forefathers.
Often backed by venture capital and cloaked by arcane mergers and acquisitions, software license trolls are weaponizing the software audit process and squeezing millions out of unprepared targets. Because they operate almost entirely outside of the court system and under strict confidentiality provisions, the risks presented by the software license troll are often undetectable to the public. These risks coupled with a plentitude of targets makes the impact of the software license troll much more dangerous.
In the article, we highlighted Quest Software and Micro Focus as our top two examples of software license trolls:
Both have pushed auditing disputes into litigation. Micro Focus sued Express Scripts and was sued by Cox Communications, and Quest sued Nike and was sued by Fairview. Included were allegations that the vendors wildly overstated deployment based on users having access to software regardless of whether they were using it and allegations that the vendors swapped out less favorable licensing agreements through inadvertently executed "click wrap" agreements.
Our third and final example was OpenText, Canada’s largest software company:
Mirroring Micro Focus and Quest's post-acquisition behavior, OpenText appears to treat its licensees similar to how a disconnected private equity firm treats theirs. OpenText has joined the ranks of vendors most likely to audit, most difficult to work with and most consistently extractive of audit revenue. One industry analyst commented that OpenText's auditing practices are so "over-the-top aggressive" it seems as if they don't "care about maintaining a long-term relationship with customers."
A software license troll is, more often than not, backed by venture capital. Below are the acquisition histories of the three software companies that we categorized as “software license trolls.”
Quest. Founded in 1987, Quest was acquired by Dell in 2012. Four years later, Dell was acquired by Elliott Management and Francisco Partners which subsequently rebranded the collection of entity as Quest.
After the rebranding, Quest built out a robust software compliance team and gained notoriety as an aggressive auditor. Quest was again purchased by private equity in 2021 — this time by Clearlake Capital Group LP.
Micro Focus. Founded in 1976, Micro Focus had $3 billion in 2020 revenue and has acquired over 40 different software companies including The Attachmate Group in 2014 and Hewlett Packard Enterprise's software branch in 2016. Around the time of the Attachmate acquisition, Wizard Parent LLC (consisting of four investment groups, including Elliott Management Corporation and Francisco Partners) became the parent corporation for Micro Focus.
Most recently, Micro Focus was considered a "notorious vendor in SAM circles" and a "high risk" by FisherITS.
OpenText. Over the last several years, it has spent over $4.79 billion on 27 acquisitions, the latest being the $860 million acquisition of Zix. While not under private equity control and due to the fact that it is "acquiring a non-complementary suite of software products," at least one investment analyst has noted that OpenText operates as "more of a private-equity firm" than software platform.
OpenText joins the ranks of vendors most likely to audit, most difficult to work with and most consistently extractive of audit revenue.
Clearlake Capital, another venture capital group, reportedly acquired Quest for a whopping $5.4 billion while just five years earlier, it was acquired for a (mere) $2 billion by Francisco Partners and Elliott Management. While the parties involved have not officially acknowledged the price, mind-blowing profits were certainly made in a ridiculously short amount of time.
Micro Focus, on the other hand, was acquired by OpenText for around $6 billion including debt. While there appears to be some indication that Micro Focus had faltered over the last couple of years, the bottom line is clear – it was still purchased for a 99% premium. This acquisition makes OpenText’s current enterprise value hover around $12 billion with Micro Focus accounting for roughly half of that – a massive addition to OpenText’s portfolio.
These serial transactions reflect that major private investors have come to realize that there is significant money to be made by acquiring software licensing agreements as a third party and leveraging them against unsuspecting customers who now must deal with parties having little to no interest in long-term business relationships. Put differently, software licensees will increasingly face new risks and exposure. Beeman & Muchmore will continue to monitor this market phenomenon and keep you apprised.
Published on November 17, 2023
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