Microsoft Licensing in M&A: EA Novation and Transfer Strategies
Executive Summary:
Microsoft Enterprise Agreements (EAs) require careful handling during mergers, acquisitions, or divestitures. Transferring or novating an EA to a new corporate entity – or splitting one for a spin-off – is a complex yet critical process.
Done correctly, EA novation preserves license rights and avoids compliance gaps, while proactive planning can optimize costs for CIOs and CTOs navigating mergers and acquisitions (M&A).
Read Microsoft Licensing in M&A: Consolidating Tenants and Contracts – Best Practices for Handling Microsoft Licensing When Companies Merge or Split.
Why Licensing Matters in M&A
When companies merge or split, Microsoft licensing doesn’t automatically follow the organizational change.
An EA is a contract tied to specific legal entities. Without proper adjustments, a merger could leave the new combined company using licenses it isn’t legally authorized to use, or a divested unit without the licenses it needs. Software vendors (including Microsoft) closely monitor M&A activity and may initiate audits during these transitions.
The goal is to ensure the new structure stays compliant and to prevent costly true-ups or penalties. In one notable case, a company faced hundreds of thousands of dollars in fees for using software after a merger without a proper license transfer.
The message is clear: don’t let licensing be an afterthought during mergers and acquisitions.
EA Novation and Transfer
EA Novation refers to the formal transfer of an Enterprise Agreement – along with its associated rights and obligations – from one legal entity to another.
In an acquisition, this might mean assigning Company A’s EA to the acquiring Company B, so B becomes the new customer on that contract. License transfer is a related concept, involving the movement of specific license entitlements from one organization to another (for example, transferring certain Windows Server licenses to a spun-off business).
Microsoft’s volume licensing policies permit transfers in the context of mergers, consolidations, or divestitures without special permission, provided that the licenses are fully paid and perpetual.
In other words, if you bought perpetual licenses under an EA and have completed all payments, you can transfer those to another entity as part of an M&A deal by following Microsoft’s documented process.
However, subscription-based licenses (like Microsoft 365 seats or any unpaid, ongoing EA subscriptions) cannot be transferred – the new entity will need to acquire its own subscriptions or negotiate a new agreement.
Understanding this distinction is crucial: an EA novation can move contract ownership, but it doesn’t magically convert non-transferable licenses into transferable ones.
Read Microsoft Licensing in M&A: Transferring Volume Licenses and Cloud Subscriptions.
EA Novation in Mergers & Acquisitions
In a merger or acquisition scenario, CIOs and CTOs should first assess the existing EAs of all parties: When do they expire? What products and how many users/devices are covered?
It’s common for the acquired company’s EA to remain in effect under the original entity’s name for some time. If the acquired company continues as a wholly owned affiliate, Microsoft typically allows it to operate under its existing EA until the next renewal. But if that entity is being absorbed or dissolved, an EA novation is required so that the licenses and agreement carry over to the surviving company.
The process involves coordinating with Microsoft or your reseller to execute a Contract Novation Agreement (a formal document) where the transferor (selling entity) and transferee (acquiring entity) agree to shift the EA. Microsoft will update its records so that future renewals, billing, and compliance point to the new owner.
This paperwork requires careful attention, listing all the licenses being novated and the reason (e.g., merger, consolidation), and must be signed by both companies and Microsoft.
It’s wise to engage your Microsoft account manager early and schedule the novation close to the deal closing date to minimize the time spent in limbo.
Also, maintain proof of the completed novation (a countersigned form or confirmation email) in your records. In an audit, you may need to prove that those licenses were legitimately transferred.
Real-world example:
Company B acquires Company A, and both have EAs. Company A’s EA has 18 months left with 1,000 users licensed; Company B’s EA covers 5,000 users. Rather than pay termination fees or double up, Company B might novate Company A’s EA, becoming responsible for it.
They run two parallel EAs until they co-term at renewal. At renewal, the combined user count (6,000 seats) could qualify for a higher discount band (Level C or D pricing). In this way, planning the integration of EAs can directly save costs – a larger volume often means better pricing.
By contrast, doing nothing or canceling contracts haphazardly could forfeit price advantages or trigger penalties. The key is to coordinate EA timelines with the integration plan. Some organizations negotiate a short bridge EA (e.g., a 12-month renewal instead of the usual 3-year) to align with post-merger integration timing. This avoids locking into long commitments when your user count and needs are in flux.
Merging organizations can lead to complex licensing realignments; careful planning ensures that contracts and entitlements point in the right direction.
Splitting EAs for Divestitures
Divestitures – when a company sells off or spins out a business unit – create a mirror-image challenge. The departing unit (“NewCo”) needs to stand on its own feet with Microsoft licenses, and the parent company likely wants to reduce its license count accordingly.
Microsoft’s rules permit license transfers to an unaffiliated third party in connection with a divestiture, provided that the licenses are perpetual and fully paid. In practice, this means the parent company can transfer certain licenses to NewCo, so NewCo doesn’t have to purchase everything from scratch on Day 1.
Typically, one would identify which licenses (and how many) NewCo will need (for example, 300 Office licenses, 50 Windows Server licenses, etc,. that were originally under the parent’s EA).
The parent submits a Perpetual License Transfer Form to Microsoft detailing these entitlements and citing the divestiture event. Once Microsoft acknowledges it, NewCo can legally use those licenses.
Note that Software Assurance (SA) benefits typically do not transfer; the new company may lose any update and support coverage unless they negotiate for continuation or purchase SA again.
If the parent’s EA included subscriptions (e.g., Office 365 E3 subscriptions), those cannot be simply split off – NewCo will need to sign its own agreement (EA or Cloud Solution Provider subscription) for those services.
In many divestitures, the parent company and NewCo sign a Transition Services Agreement (TSA) allowing the parent to continue providing IT services (including software use) for a limited time (say 6-12 months post-close).
During that window, NewCo should procure its own licenses or EAs. This transition period is critical, as it gives NewCo time to negotiate a new EA (or decide on an alternative licensing program if it’s smaller) rather than rushing and potentially overpaying.
From the parents’ perspective, a divestiture is a chance to right-size their EA. If 20% of your users are leaving, you’d want to reduce your EA coverage by a similar proportion. Enterprise Agreements normally have strict rules about reducing counts mid-term (since you commit enterprise-wide). Still, they do include clauses that Microsoft will work “in good faith” to accommodate major organizational changes.
Practically, you should inform Microsoft of the divestiture and request an EA contract adjustment, as this may allow you to drop licenses at the next anniversary or avoid paying for unused licenses after the split. Any reduction should be proportionate and well-documented. The goal is to prevent the parent from paying for licenses that the spun-off unit is now using (or no longer needed).
It’s a negotiation – Microsoft may not automatically reduce your annual bill unless you ask. However, they often prefer to keep a good customer happy (the parent,) especially if the alternative is that those licenses get abandoned and Microsoft might risk losing the new spun-off company as a direct customer.
Cost and Compliance Considerations
M&A events can either increase or decrease your Microsoft spend dramatically – smart planning will minimize unbudgeted costs.
Here are a few scenarios and their licensing impact:
| M&A Scenario | Licensing Approach | Impact & Considerations |
|---|---|---|
| Two companies merge (both have EAs) | Keep EAs separate until co-term, or novate one EA to the other entity | Separate EAs maintain status quo in the short term. Novation aligns licenses under one owner sooner. At renewal, combining volumes could qualify for a higher discount level (e.g. moving from Level B to Level C pricing), yielding significant cost savings. Be mindful of overlapping products – plan to eliminate redundant licenses post-merger to avoid waste. |
| Large company acquires smaller company | Smaller company’s EA may be terminated or merged into acquirer’s EA | If the smaller acquisition doesn’t add much volume, the acquirer might absorb users into its existing EA. Microsoft’s EA terms say if a merger changes license quantity by >10%, they will work in good faith to adjust – use this to negotiate any needed changes. The acquired firm’s unused licenses might be repurposed within the new organization to avoid new purchases. |
| Company divests a business unit | Transfer select perpetual licenses to NewCo; NewCo signs a new EA or subscription for future needs | Parent can drop those licenses from its EA (with Microsoft’s agreement) to reduce cost going forward. NewCo will likely pay more per license on its own (smaller volume = lower discount tier). For instance, if NewCo has ~300 users, it may only qualify for Level A EA pricing or might use CSP – either way, potentially ~15-20% higher unit costs than the parent’s Level C/D pricing. Both companies should budget for any true-up or shortfall during the transition. A TSA can bridge the gap so NewCo isn’t immediately out of compliance. |
| Post-merger duplicate licensing | Rationalize and consolidate contracts at renewal | After integration, assess if you still need two separate EAs. Consolidating into one EA can simplify management and maximize discounts, but check for early termination penalties. If one EA has a year left and the other just renewed, you might wait to align them. Also, watch out for special commitments (like Server & Cloud Enrollment obligations) that might temporarily limit reductions – negotiate with Microsoft citing the organizational change. |
Compliance is another serious consideration. As mentioned, using software without a proper license transfer is a violation, even if it’s an honest oversight due to M&A chaos. Microsoft and other software vendors consider a merger or spin-off as a trigger event for audits.
To avoid unpleasant surprises, conduct an internal license audit during the M&A process. Inventory all Microsoft software deployments and match them with the licenses held by each entity. If Company A and Company B integrate, combine their license entitlements, and see if the total covers the combined usage.
Any gaps should be addressed immediately (you may need to purchase additional licenses or cloud subscriptions to cover new users). Likewise, any surplus licenses might be candidates for retirement or renegotiation to save costs.
Remember, if you find you’re short on licenses, it’s far better to proactively resolve it with Microsoft through purchasing or adjustments before an official audit – this way, you negotiate with Microsoft from a position of compliance planning, not as a penalty.
Recommendations
To successfully manage Microsoft EAs in M&A, follow these best practices:
- Engage Early with Microsoft: Inform your Microsoft account rep or licensing partner as soon as an M&A deal is on the horizon. Early communication can open up options, such as short-term EA extensions or bespoke arrangements, to bridge the transition.
- Audit and Document Everything: Perform a detailed license audit on both sides of the merger or on the parts being divested. Document all license entitlements, and keep copies of all EA contracts and transfer forms. This provides a clear starting point and evidence in case of future disputes or audits.
- Use Microsoft’s Transfer Process: If transferring licenses, use the official forms (e.g., Perpetual License Transfer Form) and follow through until you receive confirmation from Microsoft. Don’t assume an email or verbal okay is enough – get formal acknowledgment.
- Mind the License Types: Plan for subscription licenses (such as Microsoft 365) separately, as they cannot be novated. Budget for the new entity to subscribe anew or include those seats under an existing agreement – potentially via a rapid new EA or via CSP for flexibility.
- Leverage Transition Agreements: In divestitures, utilize TSAs to give the new company time to procure licenses. Define how long the parent will cover the child company’s licensing and ensure that the period is finite. Both sides should agree on responsibilities to avoid compliance gaps.
- Align EA Renewal with Corporate Plans: Try to align EA end dates with integration timelines. If a major merger is happening mid-EA, consider negotiating a one-year renewal instead of a full three-year term, so you can consolidate or adjust once the dust settles. Conversely, avoid signing a new multi-year EA right before a significant change, if possible.
- Renegotiate and Optimize: M&A is an opportunity to optimize contracts. Use the change to renegotiate pricing with Microsoft – a larger combined entity might secure deeper discounts or incentive funds. In comparison, a smaller spun-off entity could negotiate starter discounts or favorable terms (Microsoft might be keen to land them as a new direct customer).
- Seek Expert Help if Needed: Don’t hesitate to consult software licensing experts or SAM (Software Asset Management) consultants. M&A licensing twists can be tricky, and an experienced advisor can spot pitfalls, saving you from costly mistakes.
- Maintain Compliance Vigilance: Even after the initial transfer or split, continue monitoring license use in the new company structure. The first 12-18 months post-M&A are high-risk for unintentional non-compliance as systems integrate; stay on top of usage versus entitlements.
FAQ
Q1. What is an EA novation in the context of a merger or acquisition?
A1. An EA novation is the process of transferring an entire Microsoft Enterprise Agreement from one legal entity to another. Essentially, the acquiring or surviving company steps into the shoes of the original customer on the contract. This typically involves signing a novation agreement with Microsoft’s approval. Novation ensures that the new entity can continue using the licenses under the existing EA and assumes responsibilities such as payments and compliance under that agreement.
Q2. Can we combine two Enterprise Agreements after a merger?
A2. You can’t merge two contracts mid-term, but you have options. You may maintain separate EAs until one expires, or you might terminate one early (if Microsoft allows) and move those users onto the other contract via true-up. A common approach is to wait until renewal and then consolidate into a single new EA for the combined company. At renewal, Microsoft will calculate pricing based on the total number of users and devices, which may result in better discounts. Always coordinate with Microsoft before making changes – they can help structure the transition with minimal disruption.
Q3. How do we handle licensing for a divested business unit?
A3. For a divested unit, determine which licenses it will need and see if those can be transferred. If you have perpetual licenses (e.g., a Windows or SQL Server license with Software Assurance fully paid), you can transfer those to the new entity using Microsoft’s transfer process. The new entity will likely need to sign its own EA (if it has 500 or more users) or enter into another licensing arrangement for ongoing needs and any cloud services. It’s wise to allow a transition period where the parent company’s licenses cover the new entity’s usage (via a TSA) until the new entity is set up with its own licenses. However, after that period, the new entity must obtain its own licenses to remain compliant.
Q4. Do we need Microsoft’s permission to transfer licenses in M&A?
A4. Microsoft’s standard agreements pre-authorize transfers only in specific scenarios, such as mergers, acquisitions, divestitures, or to affiliates. In those cases, you don’t need special permission, but you do need to notify Microsoft and complete their transfer form to make it official. For any other scenario (for example, selling licenses outside of an M&A context), Microsoft’s consent is needed and is rarely granted. Always follow the formal process – if Microsoft isn’t formally notified, they may consider the transfer invalid, even if it falls under an allowed scenario.
Q5. What happens to Office 365 or Azure subscriptions if we sell part of our company?
A5. Cloud subscriptions under an EA (or Microsoft Customer Agreement) can’t be split or handed over like perpetual licenses. The divested part of the company will need to establish its own subscriptions. There are a couple of ways to handle it: (1) Coordinate a cut-over date when that new entity will start using its own tenant and subscriptions for Microsoft 365/Azure. (2) During a transition, the parent can keep the users on its tenant and subscription and charge the new entity via a TSA, but this should have a strict time limit. In parallel, the new entity should work with Microsoft or a licensing partner to sign a new agreement (it may be a smaller EA or a CSP arrangement) to establish the necessary subscriptions. Planning the migration of user accounts and data is also important here. However, from a pure licensing standpoint, budget for the new entity’s subscription costs as a separate line item.
Q6. Will Microsoft conduct an audit after a merger or acquisition?
A6. Although not immediately, M&A events are known to be triggers for audits. Microsoft knows that during company integrations or splits, license compliance can slip through the cracks. It’s common for them to reach out for a “license review” or initiate a formal audit within one to two years after a major merger or sale. To prepare, perform your own internal true-up. Ensure you can show accurate records of what licenses transferred or were acquired, and document any changes in usage. If you’ve been proactive and transparent with Microsoft about the changes, and addressed any shortfalls by purchasing additional licenses, you’ll be in a much safer position. In short, expect scrutiny and be prepared to demonstrate compliance.
Q7. The acquired company has a different discount level on its EA. Will that change after we acquire them?
A7. Not until you renew or renegotiate. Each EA’s pricing level (A, B, C, D) is locked for that term based on the original enrollment’s size. After an acquisition, you don’t automatically get to pay less for Company A’s EA just because Company B is larger. However, when it comes time to renew either contract (or if you sign a new combined EA), Microsoft will assess the total quantity of users and products to determine the new level. At that point, your combined size might qualify for a higher discount tier, which can lower costs going forward. In the interim, you can try to negotiate with Microsoft for price harmonization or use concessions, but typically, the big savings come at renewal time by consolidating demand.
Q8. What if the spun-off entity is too small for an EA?
A8. Microsoft’s EA has a minimum of 500 seats, so if the new company has fewer than that, it won’t qualify for a full EA. In that case, the new company might opt for a Cloud Solution Provider (CSP) program or Microsoft’s Open Value/MPSA for smaller organizations. CSP is quite flexible and may be ideal for a smaller outfit, as it allows for month-to-month adjustments. The trade-off is cost: per-user pricing under CSP could be slightly higher than an EA’s volume pricing. Another approach: if the spun-off entity is close to 500 and expects growth, Microsoft might still allow an EA (they’ve been somewhat flexible for near-threshold cases, especially if it involves keeping a customer). It’s worth discussing with Microsoft – they may offer a smaller EA or a custom deal to keep that new company in the fold.
Q9. How long does it take to process an EA novation or license transfer?
A9. It can take several weeks – sometimes longer – for Microsoft to process a contract novation or a license transfer form. The paperwork itself isn’t very long, but it is reviewed by Microsoft’s operations team for validation. Both the original and new customers need to sign, and then Microsoft signs last. We’ve seen cases where a simple novation took 2-3 months to fully complete due to form errors or processing delays. To avoid problems, double-check that all license details on the form are correct and complete. Have your Microsoft rep monitor the progress. Don’t consider it done until you have the finalized documents back. Plan for this lead time in your M&A timeline – you don’t want to be on day 1 after closing still waiting on Microsoft to officially move licenses over.
Q10. What are the risks if we don’t address the EA in an M&A deal?
A10. The risks are significant. If you ignore the EA and just let the new organization use software without a formal transfer, you could be in breach of your license agreement. This might mean: (a) Microsoft could terminate the agreement or refuse renewal, (b) an audit could find you unlicensed and impose back fees and penalties, and (c) you lose any negotiating leverage, potentially paying much more to resolve it under duress. There’s also operational risk: the new entity might suddenly lose access to critical software if a license issue arises. And for CIOs/CTOs, there’s reputational risk internally – nobody wants to explain to the board why an overlooked license contract cost millions post-merger. In summary, failing to address EA novation or splitting can derail IT integration, incur significant costs, and even lead to legal liabilities. Always include software licensing in your M&A due diligence and integration checklist to mitigate these risks.
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