The Role Of IP In Mergers And Acquisitions

The news broke out on 23rd September, as we began preparing notes for this blog:

The makers of Toy Story 4 found out that intellectual property isn’t a matter to be toyed with. The comedy-drama film’s character, Duke Caboom, is allegedly an IP theft of the now deceased American stuntman Evel Knievel.

Suitably, K&K Promotions, Inc., the owners of Evel’s IP rights, have sued Disney and Pixar.

While IP infringement can have serious legal implications (as mentioned above), IP management during mergers and acquisitions gets even more complicated. In this blog, we will explore the theme in the context of Mergers and Acquisitions (M&A) in the past decade.

M&A: The Volume

The globally trusted statistical site Statista informs that the total value of M&A worldwide reached US$ 3.9 trillion in 2018. During the first three quarters of 2019, the total value of M&A deals at the global level amounted to US$ 2.49 trillion.

The seventh Deloitte report on global trends in M&A mentions that 63% of the survey respondents predicted a rise in M&A activities in 2020. Deloitte’s respondents consist of 1000 executives from big corporations and private equity investment companies.

Two of the top three mega M&A deals until 30 September 2019 happened in the pharmaceutical sector.

The merger of AbbVie and Allergan had a deal value of US$ 86.3 billion. The most expensive merger was that of Bristol-Myers Squibb and Celgene at US$ 89.5 billion.

The second highest deal value was US$ 88.9 billion for the merger of United Technologies and Raytheon. Though these companies are from the defence sector, the focus is on technology.

Intellectual property (IP) is at the center of all of these take-overs. That’s why we mention these M&A deals and the industries they represent.

Technology sector constitutes a core area of M&A. In 2019, a total of 3590 M&A deals happened in this sector.

The Growing Importance of IP in Mergers and Acquisitions

With technology occupying centre stage in business growth, there has been a steady shift from industrial economies to knowledge-economies. That’s why the growing importance of IP rights for business growth.

Financiers and industry analysts alike consider copyrights, patents and trademarks to be critical indicators of the success of R&D strategies employed by companies. The economic importance of the seemingly intangible IP rights becomes clear through the stock market assessment of companies.

A recent article in the Industry and Innovation journal studies 1250 multinational corporations from different industries across the world. The focus is on the IP rights of these companies as represented by their patents and trademarks filed between 2005 and 2012.

The authors establish how the valuation of IP rights influences the stock market standing of large MNCs at the global level. That is a pointer to the intimate connection between IP and M&A.

How IP Drives M&A

Companies today are increasingly more focused on acquiring technological capabilities to gain and retain a competitive edge.

Enhancing technological ability has two critical sides to it. On the one hand, it enables a company to build better products and offer improved services to the end-user. On the other, it protects businesses from cyber threats and the consequent disruptions.

Against this backdrop, IP rights have emerged to play a key role in the M&A processes of technology companies. It’s the same in other IP-intensive sectors like media, pharmaceuticals, and telecommunications.

Why IP Rights Deserve Due Diligence In The M&A Process

It is a legal blunder to assume that intellectual property (IP) rights transfer automatically when one company acquires another. General representations and warranties may not address IP related issues at all.

As an article in Forbespoints out, there are as many as 13 gap areas that need to be studied thoroughly to arrive at a realistic valuation of IP rights. Most of those gaps would not even strike anyone other than an IP specialist.

M&A processes involving private tech companies pose particularly critical IP issues. Information about the IP rights of private companies may not be available in the public domain. It is, therefore, critical that the buyer conducts extensive legal research about the selling of company’s IP rights.

Copyrights, patents, trademarks, etc. all fall within the IP bundle. A thorough review of each of these is vital before committing to an acquisition. This is where M&A advisors need to work in collaboration with IP counsel.

The acquirer needs to ensure that all the IP rights of the company to be acquired are usable for current and future business generation. An M&A deal is likely to turn out to be ineffectual otherwise.

The selling company also needs to evaluate its IP rights to determine the selling price.

The Complexity of Analyzing the IP Portfolio

A thorough exploration of a company’s IP portfolio is a complicated task that needs specialized expertise. Firstly, deciding on the valuation of IP rights is in itself a complex procedure.

There are at least three different perspectives to consider in determining the possible valuation of IP rights:

Replacement Cost

How much would the acquiring company need to spend to get a particular IP right at the time of the M&A process. To explain with a calculation, an equipment that cost US$1500 seven years ago may today have a depreciated cost of US$500 only.

However, to get that same equipment today might mean an expense of US$2200. This, then, is the replacement cost. Clearly, calculating that for an intangible asset like IP is not as easy as the example cited here. 

Market Value: A market value typically considers what a consumer is willing to pay for an asset. For instance, the seller may want to get US$200,000 for a plot of land, though potential buyers may be ready to pay only US$175,000.

The availability of similar plots of land at US$175,000 may be the basis of the buyers’ preference. The typical method of calculating the market value of IP is also to compare it with similar IP bundles.

However, that also is considerably more complicated than comparing the price of plots of land.

Future Value: This is the predictive value of any investment, which is always probable rather than certain. With reference to IP, future value calculation becomes even more of a knotty problem. 

By Way Of Advice

Whichever side of the M&A process you may be at, effective valuation of the IP bundle involved is critical. To ensure that you don’t lose out either as the seller, or as the buyer – it is advised to access expert IP counsel from global experts with multi-country experience.

-The Editorial Team

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