Microsoft Licensing in M&A: Consolidating Tenants and Contracts
Mergers, acquisitions, and divestitures present complex challenges in Microsoft licensing. CIOs and CTOs must navigate the consolidation of Microsoft 365 tenants, aligning Enterprise Agreements, and transferring licenses without incurring compliance risks or unnecessary costs.
This advisory outlines best practices for streamlining licensing when companies merge or split, ensuring a smooth integration or separation while optimizing costs and minimizing audit surprises.
The Hidden Licensing Challenges in M&A
M&A events trigger hidden IT challenges – and Microsoft licensing is a big one. When two organizations combine, they often inherit overlapping Microsoft contracts, duplicate licenses, and separate cloud tenants.
Without proactive management, this can result in double payment for software, contract conflicts, or compliance gaps. Similarly, when a company splits, determining which entity keeps which licenses can be just as tricky.
These scenarios require careful planning: failing to consolidate and rationalize licenses can result in substantial unbudgeted costs or even a surprise audit.
In fact, Microsoft is known to scrutinize companies post‑merger, so getting your licensing house in order early is critical.
Read Microsoft Licensing in Mergers: Consolidating Microsoft 365 Tenants Without Double Licensing.
Review Existing Microsoft Agreements Before Merging
Start with a contract review. Both organizations likely have Microsoft agreements, such as Enterprise Agreements (EA), Microsoft Customer Agreements, or Cloud Solution Provider (CSP) subscriptions, possibly with different end dates and terms.
Evaluate all active contracts and understand their rules around corporate changes.
For example, Microsoft’s standard Enterprise Agreement includes a clause that if a merger or acquisition changes license quantity by over 10%, Microsoft will “work in good faith” to accommodate the change under the current agreement.
Leverage this: engage Microsoft early about adjustments if your user count or IT footprint is expected to change drastically.
Check the Microsoft Business and Services Agreement (MBSA) to see if one is in place – it defines “affiliates” (usually those with more than 50% ownership).
If the acquired company qualifies as an affiliate, you may be able to bring them under your existing umbrella agreements more easily.
Also, review any enterprise-wide commitments (like company-wide Office 365 or Windows licensing) in your contracts.
If you acquired a company with, say, 300 new Windows Servers and you have a Server & Cloud Enrollment requiring Software Assurance on all servers, that acquisition could trigger a large true-up. Knowing these obligations in advance helps avoid nasty surprises.
Importantly, identify any contractual concessions or special pricing the acquired or divested entity had. One company might have negotiated discounted pricing or flexible terms – strive to preserve those in the combined contract.
Don’t assume Microsoft will automatically grant the same deals to the new larger entity; you’ll need to ask (and negotiate). Above all, involve your procurement and legal teams to spot any contract termination or transfer clauses related to M&A.
In some cases, if a company is acquired, their Microsoft agreement might be terminable or mergeable – but this is not automatic. Plan for a period when you might be managing multiple Microsoft contracts concurrently, until you can consolidate them at renewal.
Read Microsoft Licensing in M&A: Transferring Volume Licenses and Cloud Subscriptions.
Consolidating Microsoft 365 Tenants and Cloud Services
Technical tenant consolidation is a major undertaking in many mergers. Each company often has its own Microsoft 365 tenant (encompassing Azure Active Directory, Exchange Online, Teams, etc.).
CIOs should decide early whether to merge into a single tenant, typically desirable for unified collaboration and administration.
Consolidating tenants reduces duplication (you won’t have two sets of admin overhead or overlapping licenses for one user) and helps users work under one roof. However, it requires meticulous planning and migration.
To merge tenants, you’ll likely migrate users, mailboxes, SharePoint sites, and data from one Microsoft 365 tenant into the other. Microsoft doesn’t provide a one-click “merge” button – it involves moving data and users, often with third-party tools or Microsoft’s cross-tenant migration capabilities.
Plan a phased migration to minimize disruptions to your business. For example, migrate email and OneDrive data over a weekend, department by department. During the transition, manage licensing carefully: a user being migrated should ideally only consume one license at a time.
Coordinate the cutover to ensure that you can reassign or move licenses, rather than paying for two licenses for the same user in both tenants for an extended period.
It’s best to consolidate into the tenant tied to the surviving or larger entity’s Microsoft agreement, if possible. This way, all users will eventually be covered under one subscription contract.
After migration, promptly decommission the old tenant – meaning shut down or “turn off the lights” on the acquired company’s tenant to stop any ongoing licensing charges. Also, remember to migrate any Azure services or Power Platform applications tied to the old tenant’s Azure AD.
A thorough tenant consolidation not only streamlines IT operations but also puts you in a position to leverage volume licensing more effectively within a single environment.
Read Microsoft Licensing in M&A: EA Novation and Transfer Strategies.
Optimizing and Transferring Licenses Post-Merger
Once the dust settles on a merger, one of the biggest opportunities (and risks) lies in the combined software asset pool. Perform an internal license audit (Effective License Position) as soon as possible.
This means inventory all Microsoft software and cloud subscriptions from both entities and compare them against actual usage. You will likely find overlapping licenses – for instance, both companies might have 100 Office 365 E3 licenses for their marketing teams, but now, as one company, you might only need 180 instead of 200.
By consolidating those, you can reduce excess and save money. On the other hand, ensure that newly added systems or users from the acquired side are properly licensed under your agreements to maintain compliance.
License transfer rules apply here. Microsoft generally allows transfer of perpetual licenses (e.g., on-premises licenses bought outright) when companies merge or split.
Still, subscription-based licenses (like Microsoft 365 subscriptions or Azure subscriptions) cannot be “transferred” – they remain tied to the original tenant/contract.
In practice, for perpetual licenses (Windows, Office, server CALs, etc.), you can fill out Microsoft’s Perpetual License Transfer form to officially move those licenses to the surviving organization.
Do this for any volume licenses the acquired company owned, so that you have formal documentation that you now own those entitlements.
Keep records of these transfers, as they won’t automatically show up in your Volume Licensing Service Center – you may need proof later in an audit.
For cloud subscriptions, a different approach is needed: you can’t reassign a subscription contract, so instead, you migrate the users/services and then gradually terminate the acquired company’s redundant subscriptions. Coordinate cancellation with contract anniversaries or renewal dates to avoid penalties.
For example, if the acquired firm was on a CSP (monthly) subscription, you can simply stop those after moving users to your tenant.
If they had an EA with annual true-ups, you might have to wait until the EA’s anniversary or negotiate a one-time adjustment. In any case, don’t double-pay for overlapping services longer than necessary.
Optimize the combined license portfolio by standardizing on common license editions (maybe upgrade some users to a higher tier or downgrade if over-licensed).
This is also an opportunity to reduce duplicate software – for example, if each company has separate Project or Power BI licenses, consider whether volume bundling or shared use can help cut costs.
Real-World Example: By merging two Office 365 license pools, organizations often unlock volume discounts. For instance, imagine Company A had 1,000 Office 365 E3 users and Company B had 500, each on separate deals.
Individually, Company B might be paying a higher per-user rate due to smaller volume. Post-merger, with 1,500 users under one agreement, the unit price could drop significantly.
Read Microsoft Licensing in M&A: License Carve-Outs in Divestitures.
The table below illustrates a hypothetical scenario of the cost benefits when consolidating licenses:
| Office 365 E3 Licensing | Company A (1000 users) | Company B (500 users) | Combined (1500 users) |
|---|---|---|---|
| Approx. unit price per user/month | $20 (EA volume discount) | $22 (smaller contract) | $18 (higher volume tier) |
| Annual licensing cost (est.) | ~$240,000 | ~$132,000 | ~$324,000 |
| Resulting annual cost difference | – | – | ** ~$48,000 savings/year ** |
In this example, consolidating contracts yields approximately $ 48,000 in annual savings due to better volume pricing. While figures vary, the principle remains the same: combining license agreements typically improves discounts and eliminates redundant spending.
Choosing the Right Licensing Model During Integration (EA vs. CSP)
During a merger, IT leaders should reassess which Microsoft licensing model best fits the new organization’s needs.
Many enterprises traditionally use an Enterprise Agreement (EA), a three-year contract that offers volume discounts.
But in a dynamic M&A scenario, flexibility can be just as important as price. The key question to ask is: Do we stick with a long-term EA for cost savings, or switch to a more flexible model while we integrate?
Sticking with or Renewing an EA:
If one of the merging companies has an EA with deep discounts (e.g., the, the highest tier pricing due to its large size), continuing that EA could result in significant savings per license.
EAs also bundle Software Assurance benefits, which can be crucial if you rely on perks like version upgrades, Azure Hybrid Benefit for servers, or training vouchers.
On paper, keeping the status quo is straightforward – you know your annual bill. However, beware of rigidity: an EA locks you in for three years. If you’re in the midst of a merger, your combined user count and needs may change significantly within that timeframe. You could end up over-licensed (paying for redundant users or systems you retire).
Also note, Microsoft has been nudging smaller enterprises away from EAs toward other models, so if your combined org isn’t huge, a sprawling EA might not be the best fit going forward.
Switching to a Cloud Solution Provider (CSP) model:
CSP is Microsoft’s more flexible, pay-as-you-go approach, typically billed monthly or annually with no long-term multi-year commitment. Many merging companies choose CSP at least for the transition period.
The advantages: you can true-up or true-down monthly, adding 500 new users one month, then removing 200 the next if plans change, without long-term contract penalties.
This agility is gold during integration: for example, as you consolidate tenants, CSP lets you seamlessly move users between tenants or adjust licenses without waiting for an EA annual true-up. It’s also simpler to pivot if you decide to reshuffle which Microsoft services the new company will use.
The trade-off is slightly higher per-seat costs in some cases – you might pay a bit more per license than a heavily discounted EA rate. And CSP doesn’t automatically include Software Assurance on on-prem products (though you can purchase some through other programs if needed).
In practice, many enterprises adopt a hybrid approach in M&A: for instance, extend an existing EA for 12 months (instead of a full 3-year renewal) to maintain discounts, but use CSP or shorter-term agreements to license incremental needs during the merger.
Microsoft can be surprisingly open to offering a custom “bridge” contract – a one-year extension or an interim agreement – if it knows a major merger is underway. Don’t be afraid to ask your Microsoft account rep for flexibility here; the goal for both sides is to keep you licensed without overspending. Ultimately, choose the path that gives you breathing room to reorganize.
If locking in a three-year EA now would cover a stable, known environment, great – but if the organization will be in flux for a year or two, a more flexible model can prevent paying for unused licenses.
After the integration is complete and you have a clear headcount and product roadmap, you can always revert to an EA or long-term agreement to regain volume discounts.
Handling Licensing in Divestitures and Spin-Offs
M&A isn’t only about combining – sometimes it’s about splitting a company apart. Divestitures (spinning off a business unit into a new independent entity) create their own licensing challenges.
The departing unit will eventually need its own Microsoft tenant and contracts, but this will not happen overnight.
The best practice is to establish a Transition Services Agreement (TSA) for IT, which legally allows the divested entity to continue using the parent company’s IT resources (including Microsoft software) for a defined transition period (e.g., 6 months or 1 year). At the same time, they get their own infrastructure sorted out.
During that transition, the divested users can often still sit in the parent’s Microsoft 365 tenant and use the parent’s licenses. Microsoft generally permits this temporarily because the divested business was part of the original license count.
However, this grace period is not indefinite – that TSA timeline or internal policy usually binds it. Both sides should agree on a cutoff date when the new entity will secure its own Microsoft agreement and migrate off the parent tenant.
Plan early for this separation: the parent should identify which licenses (especially perpetual ones) need to be transferred to the new org versus retained.
Suppose the spin-off will continue using certain on-premises software that the parent had licensed. In that case, you can formally transfer those perpetual licenses to the new company (again via Microsoft’s transfer process).
Volume Licensing programs like EA and Open allow transfers in the event of divestiture without Microsoft’s consent, but you must notify Microsoft with the transfer form. For cloud subscriptions, the new entity will need to start its own subscriptions – there’s no way to split a portion of an Office 365 subscription and allocate it to them.
This often means migrating users and data to a brand-new tenant for the new company. Coordinate the cutover to minimize downtime. Sometime,s the parent company might even purchase a short-term CSP subscription on behalf of the new entity to cover them until they sign their own deal.
A key tip: don’t leave the spin-off in licensing limbo. By the end of the transition period, they either need their own EA/CSP contract or a continuation arrangement; otherwise, both companies could be in breach of licensing terms.
Microsoft typically won’t pursue compliance action during the agreed-upon transition, but if a divested unit continues to use the parent’s licenses long after separation, it’s trouble. So treat divestiture licensing like a project with a hard deadline – include it in the separation checklist alongside data migration and HR matters.
Recommendations
- Inventory and Audit Early: Catalog all Microsoft licenses and contracts from both entities as soon as an M&A deal is on the horizon. This early audit prevents surprises and identifies overlapping licenses to cut or compliance gaps to fill.
- Engage Microsoft with a Plan: Before negotiating, do your homework. Come to Microsoft with a clear plan (desired contract terms, combined license counts, timeline of integration) rather than simply reacting to their offers. This keeps you in control of the narrative and often yields more flexible options (like short-term agreements or special pricing).
- Consolidate Tenants Strategically: Aim to merge Office 365/Azure AD tenants into a single tenant for the new organization, but do so carefully. Use phased migrations and consider interim solutions (like cross-tenant collaboration setups or temporary dual licensing) to maintain business continuity.
- Leverage Flexible Licensing During Transition: If uncertainty is high, opt for CSP or short-term agreements to avoid overcommitting. You can always enter a longer EA after the organization stabilizes. Conversely, if you need to renew an EA mid-merger, negotiate for an opt-out or adjustment clause or a one-year term.
- Preserve License Value: Don’t let licenses go to waste. If you are retiring systems due to redundancy, see if you can reassign those licenses elsewhere in the organization. For any on-premises software no longer needed, consider reharvesting licenses for other uses (within contract allowances) before deactivating or terminating agreements.
- Handle Divestitures with a TSA: In a split, formalize a transition period where the child company can legally use the parent’s licenses. Mark that end date clearly and work backwards to ensure the new entity has set up its own tenant and signed its own Microsoft agreement in time.
- Document Everything: Maintain meticulous records of all license transfers, contract changes, and Microsoft approvals related to the M&A. This documentation is your defense if Microsoft audits the new environment or if any licensing compliance questions arise later.
FAQ
Q1: Can we transfer Microsoft 365 cloud subscriptions from the acquired company to our own contract?
A1: Not directly. Cloud subscriptions, such as Microsoft 365, are tied to the original tenant and agreement. In a merger, the typical approach is to migrate the acquired users into the acquiring company’s tenant and then cancel or let the old subscriptions expire. Essentially, you replace their licenses with your licenses – there’s no official Microsoft process to “merge” two subscriptions, so it’s done through migration and re-assignment.
Q2: What should we do with the acquired company’s Enterprise Agreement?
A2: Review its end date and terms. Often, the simplest path is to keep the acquired company’s EA active until it expires, thereby avoiding penalties, while gradually moving users onto the primary EA. At the next renewal cycle, you can consolidate by signing one new EA that covers the combined organization (or moving them to your EA if timing aligns). In some cases, if the acquired EA has only a year left, you might negotiate an early termination or fold those licenses into your agreement, but get Microsoft’s approval in writing. Always communicate changes in license quantities to Microsoft as required by the contract.
Q3: Is it better to remain on an EA or switch to CSP after a merger?
A3: It depends on your priorities. An EA offers volume discounts and fixed pricing, but with less flexibility, whereas CSP (or Microsoft’s newer subscription models) offer the agility to scale up or down. Many companies in flux choose CSP for a year or two so they aren’t over-committed during the integration; this avoids paying for unused licenses if headcount or IT systems change. If you do stick with an EA, consider asking for a shorter term or an adjustment clause, given the merger. The best approach may be a hybrid one – maintaining an EA for core, stable licenses and using CSP for variable needs during the transition.
Q4: How do we handle licensing when splitting off a business unit?
A4: Treat a divestiture like a mini-M&A in reverse. Set a Transition Services period during which the spin-off can use the parent’s IT and licenses. During that time, assist the new entity in establishing its own Microsoft tenant and contract. Transfer any perpetual licenses they’ll need using Microsoft’s transfer form (so they legally have those entitlements). For cloud services, plan a migration of their users and data to a new tenant that the spin-off controls, ideally by the end of the transition period. Coordination and clear timelines are key – both companies should know exactly when the new entity will “go live” on its own licenses.
Q5: What are the risks if we don’t consolidate our Microsoft licensing after a merger?
A5: The risks include paying far more than necessary (maintaining two sets of licenses for one combined company), compliance issues (licenses assigned to the wrong entity or over-deployment), and operational headaches. For example, if you keep two separate Office 365 environments long-term, some users might need accounts in both, meaning double licensing. Microsoft could also audit the merged company and find inconsistencies (especially if one side had compliance gaps). Additionally, you miss out on potential volume discounts as a single customer. In short, not consolidating leaves money on the table and opens the door to legal and IT complications down the road.
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