Key Takeaways

  • Cooley partner Danielle Fortier notes that software carve-out negotiations rarely stall over proprietary source code isolation or repository duplication anymore.
  • Automated coding tools and generative AI have lowered the barrier to recreating codebases, turning raw software code into an easily reproducible asset.
  • Sellers now permit clean code forks and broad repository access inside Transition Services Agreements (TSAs), sidestepping the IP ownership disputes that defined historical deals.
  • Carve-out diligence friction has migrated away from software code separation toward enterprise vendor contracts, shared systems, and distribution assets.

The Erosion of Codebase Exclusivity

For years, private equity sponsors and corporate dealmakers treated proprietary source code as the crown jewel of any technology asset. Carve-outs required specialized technical auditors to inspect repositories, map dependencies, and draft restrictive licensing terms. Corporate parents guarded their code aggressively. Giving an acquirer access to shared components or granting rights under a Transition Services Agreement sparked long negotiations over contamination and intellectual property loss.

Danielle Fortier, partner at Cooley, notes how standard that posture used to be. “Back, you know, several years ago, and like for most of my career, when you're doing a software deal, the code was really like really really important, and like kind of the secret sauce of the business,” Fortier explains. Sellers operated under the premise that an unshielded codebase meant an existential risk to the retained enterprise.

The rise of automated development tools broke that assumption. Once writing, refactoring, and reproducing software became vastly cheaper, the fortress mentality around repositories collapsed. As Fortier observes, “I think just with AI, sort of the level of protectiveness around code has definitely changed.” Acquirers and sellers both recognize that proprietary code offers little protection if an engineering team can reproduce equivalent functionality in a fraction of traditional sprint cycles.

Trading Intellectual Property Fights for Commercial Moats

With raw code demoted, the definition of defensibility has reset across M&A pipelines. Sellers no longer treat software IP as their ultimate defensive asset. Fortier points to this candid reset in deal rooms: “I think people are more willing to say, well, like actually, you know, the source code's not really our secret sauce. Our secret sauce is our customer relationships and all these other things that we do.”

This change untangles one of the most stubborn friction points in carve-out execution. Historically, dividing a monolithic codebase between a parent and an offloaded division required costly clean-room development or complicated cross-licensing. Today, sellers willingly fork shared repositories and permit broader TSA access. As Fortier notes, there is “definitely less sensitivity around protecting the code, which makes entanglements on the source code front quite a bit easier to deal with than they used to be.”

The operational headaches have not disappeared; they have simply changed addresses. While code separation moves smoothly, corporate carve-outs still run aground on third-party vendor arrangements, shared ERP setups, and licensing enterprise SaaS tools. The technical software diligence that once consumed months of legal and engineering capital now resolves in weeks, leaving deal teams to spend their political capital negotiating commercial contracts, pipeline ownership, and customer retention.

Why It Matters

Software valuations are divorcing from pure technical intellectual property. Capital allocators no longer credit proprietary code with strong terminal value when AI tools make code parity an inexpensive target. Moats now sit entirely within sticky distribution channels, deeply embedded customer integrations, and private operational data. For M&A practitioners, this relocates deal risk away from software architecture and directly into commercial customer contracts and vendor assignability.