I have stated this before. I am not a lawyer.
Neither am I an investment expert. Heck I ploughed money into Transocean two months before the Deepwater Horizon sank to the bottom of the Gulf and left a destructive oily mess all over the Gulf Coast.
So don’t take any stock picks from me.
But on a recent trip to the Midwest I met with a customer in an interesting predicament.
This customer, who I will not name, is in the process of preparing for an IPO, when investors will be offered the chance to buy stock in a newly listed company.
Right after the announcement was made public, Oracle informed them they needed to conduct a license audit.
At the conclusion of the audit, Oracle informed the company that they were out of compliance. That’s not surprising to anyone who follows these activities. What was notable about this case was the size of the claim from Oracle. It amounted to 16% of the company’s gross revenue for FY2015.
As as seasoned observers of these types of events know, the shocking revelation was quickly followed up with an offer, which essentially boiled down to: “move all of your Oracle processing to the Oracle Cloud, and we’ll call it even.”
This is a long term Oracle customer for whom their Oracle database systems form the heart of the transaction processing of the company. They have run a very well organized system for several years using their own choice of on-premise solutions designed to meet the organization’s needs.
And during the final preparations for an IPO, when the entire organization will come under increased scrutiny from investors, banks, industry regulators and the SEC, it is the worst time to consider ripping out the heart of the company’s IT systems and moving them fork-lift style to any new solution, cloud or elsewhere.
Yet that is exactly what this customer has chosen to do.
You might conclude that the customer concluded Oracle was right. That they were out of compliance. That the offer to move to the Oracle Cloud was generous.
An IT director shared with me his belief that executive management had concluded that whatever the legal or technical facts, the company could not afford pending litigation with a major corporate entity at such a critical time.
Being sued, or even the threat of it, can derail an IPO, as Jeremy Quittner at Inc. Magazine wrote back in 2014.
Executive management are paid to balance risk against opportunity, and to direct the company they manage in a manner that maximizes the growth potential to the benefit of investors and employees. It’s hard to argue in this case they did not do that.
Perhaps they did a cost-benefit analysis, and concluded the benefit of prevailing against the massive claim was not worth a delayed, possibly derailed IPO, or an initial offer price that was significantly below executive management’s expectation.
After the Mars v Oracle case was settled out of court, court documents located by audit defense specialists House of Brick, demonstrated that Mars spent almost four months assembling 223,089 pages of documentation to demonstrate to Oracle that they were never out of compliance for their Oracle licenses.
That is a lot of time, effort and money spent on non revenue/profit generating tasks.
It is important to separate fact from conjecture.
It is fact that the IPO was announced before the audit. It is fact that the claimed non-compliance represented a significant percentage of the firm’s annual revenue. It is fact that executive management elected to take the offered settlement and relocate their Oracle systems to the cloud.
The IT management firmly believes they were never out of compliance. One can only imagine that Oracle LMS firmly believes they were. It would be difficult to be objective on that one.
And it is pure speculation that Oracle LMS knew of the pending IPO when deciding to demand an audit. It is quite possible it was pure coincidence.
But if there is ever a time to leverage a license non-compliance revenue opportunity, during a customer’s IPO would be the time to do it.
If your company is talking about an IPO, make sure all of your software licenses are up to date and in compliance.
And if you need audit defense, do not hesitate to contact an experienced specialist such as House of Brick.