In the era of mergers and acquisitions, the value of the company increases greatly if its Intellectual Property has been protected. This adds to the value of the company and may increase the value during a merger or acquisition. This is a major reason for the protection of Intellectual Property by a company
Intellectual Property has taken the whole world by storm. Companies are protecting, exploiting and maximizing benefits from their IP. Companies such as Microsoft, Apple, Coca Cola, Samsung and several leading pharmaceutical companies and business houses have created a strong brand value, which is almost synonymous with the company itself.
Even in an M&A (Merger & Acquisition) deal, divestment deal and other ancilliary transactions, we hear about and remember the deals only on the basis of the brand value. Thus, companies rightly invest a major chunk of revenue in IP and reap maximum benefits from the transfer and sale thereof.
Intellectual Property (IP) assets are often a key consideration in many of today’s mergers and acquisitions. Acquiring Company needs to be work out on key issues & challenges related to IP since even minor slip in IP diligence can result in a total loss of value, making the entire transaction moot
Companies/firms can expand / grow in two ways viz. internally and externally. Internal efforts of expansion can be slow or ineffective compared to external efforts which include mergers, acquisitions and Takeovers. In mergers & acquisitions, combinations of two companies will yield a more valuable entity than the value of the sum of two companies if they were staying independent.
Merger & Acquisition deals between companies may occur as a result of complementary capabilities between them. For instance, a small pharmaceutical company might have a new drug but no sales or marketing capability. Conversely, a large pharmaceutical company might have unused capacity in a large sales force due to a gap in the company pipeline of new products. It may be in both companies’ interest to enter into a deal to capitalise on the synergy between them. Thus Mergers can be classified as Horizontal, Vertical or Conglomerate, Reverse Merger, Triangular Merger, Downstream Merger, Upstream Merger, De facto Merger or International Mergers eg. Lipton India with Brooke Bond, Bank of Mathura with ICICI Bank, BSES Ltd with Orissa Power Supply Co. are examples of Horizontal Mergers. Reliance and FLAG Telecom group is an example of a Vertical Merger.
Godrej Soaps Ltd. with Gujarat Godrej Innovative Chemicals Ltd. is an example of Reverse Merger, L&T and Voltas Ltd is an example of a Conglomerate Merger. ITC Classic Ltd. with ICICI Ltd. is a Negotiated Merger. ICICI Ltd., the parent Company merged with its subsidiary company ICICI Bank is a Downstream Merger. Bhadrachalam Paper Board with the parent ITC Ltd is the example of Upstream Merger. In all such types of Mergers, Intellectual Property plays a crucial role. Thus Intellectual Property (IP) influences the choice of customers, employees, investors and government authorities. Such influence is crucial for commercial success and creation of shareholder value. One can also observe that even non-profit organisations have started embracing brand as a key asset for obtaining donations, sponsorships and volunteers.
Intellectual Property (IP) assets are often a key consideration in many of today’s mergers and acquisitions and thus play a crucial role in such types of deals. IP is an intangible assets and includes trademarks, patents, copyrights, designs, trade secrets, confidential information, know how, domain names etc. IP is valuable because it enables companies to create and hold monopoly on unique products or services.
In such types of deals, the acquiring party should obtain equitable rights over IP, hence while drafting basic agreements, one needs to give proper weightage & importance to IP. The Acquiring Company should consider the following points before entering into a M&A:
How the markets are configured, structured, concentrated on the basis of IP particularly trademarks, copyrights, patents?
How the IP is placed in the Market Pattern?
IP portfolio of Acquired Company.
Whether it is created by the Acquired Company?
Whether it is purchased/ acquired/ assigned/ licensed to Acquired Company? If yes, whether proper ownership is recorded before the proper authority?
Jurisdictions where the IP is registered, maintained and / or valid.
Status of the IP before various authorities of various jurisdictions.
Whether the said IP is fully exploited?
Whether IP is being used effectively?
Whether IP is licensed or assigned to some other party?
Whether IP rights are challenged or threatened by others?
Potentially patentable inventions.
When the Patents are expiring?
Potential or actual trademarks, copyright works and the like.
Identifying staff know-how or trade secrets.
What are the documentation/record keeping standards like?
What risks are involved with trade secrets/know how?
Key personnel liabilities.
Potential or existing litigation/opposition issues.
Are there any obligations or encumbrances on the IP?
These questions are merely illustrative in nature, whereas an IP expert can work out the key issues and challenges according to the terms of deal. Once the acquiring party is satisfied with the above questions, then proper Agreements/Documents need to be executed and accordingly Right of IP needs to be transferred to the name of the Acquiring Company. The said activity needs to be done on a timely basis; else it could be difficult to protect the ongoing validity and enforcement of Intellectual Property rights and also the identity of the actual owner. It is particularly recommended for well-known and extensively used trademarks. Once the proper recordal change is effected, the new owner is able to prosecute litigation & record updates of IP regularly.
For example, enforcement of patents/trademarks can only be carried out under the authority of the owner of the records or its exclusive licensee. If prompt injunctive relief is required, an undesired delay will result from a necessity to record the transfer of rights. Furthermore, the right of the patent/trademark owner to obtain damages for acts of infringement, which occurred before the transfer documents were recorded, may be defeated in certain jurisdictions.
Therefore, a delay in recording the transfer can delay the date when the license agreement becomes effective; this, in turn, can delay manufacturing and/or sales. The resulting loss of royalties may not be recoverable. In a number of countries, a license agreement must be approved by government authorities and, in the license agreement submitted for such approval; the record owner should appear as the licensor.
Delay in recording thus delays approval, with consequential loss of royalties. The Acquiring Company will encounter enormous difficulties when confronted with the maintenance, sale, enforcement, hypothecation, licensing and/or use of the Intellectual Property rights. For example, proof of use (where required for maintenance of existing trademark registrations) may not be accepted when used by the current owner unless that party is now reflected as the “record owner”. In most of the Jurisdiction, separate documentation is required for Recordal change. In order to reflect the new owner of the patent, trademark or copyright as the “owner of record”, it will be necessary in most jurisdictions for counsel to prepare separate assignment documents for each jurisdiction in which such rights exist.
In some jurisdictions, a certified copy of a “general” worldwide assignment may be acceptable. Intellectual Property statutes exist in most countries of the world and provide a mechanism for the recordal of a change of ownership at a central registry. The form and substance of these documents vary from jurisdiction to jurisdiction, which underscores the advisability for the preparation of separate documents for each jurisdiction. Such documents must be filed and recorded at the respective local registry. Furthermore, several multi country registrations systems exist such as the Patent Cooperation Treaty or the Madrid Agreement, which have special requirements which counsel must be familiar with in order to properly record a transfer of title.
The above illustrates that even a minor slip in IP diligence can cause a chain reaction of sorts and result in a total loss of value, making the entire transaction moot. Hence, while IP remains the most valuable part of a transaction, it is also the trickiest.
Valuation of IP
Valuation of IP assets is a true representative of enterprise resources. Thus acquisition of IP through M & A can be profitable for many industries for its portfolio expansion or providing growth opportunities in the new market scenario and consequently increase the value of its business
In mergers and acquisitions, IP can be especially difficult to accurately value, most notably in rapidly evolving high-tech industries. Understanding the factors that create value in Intellectual Property assets and the role such assets play in both domestic and international mergers, is vitally important to anyone involved in the merger and acquisition process.
Valuation of the said IP assets is a true representative of enterprise resources. It tells about the status of affairs of the enterprise. Different types of IP assets are treated differently for valuation and it all depends on R & D productivity, expiring patents, generic competitions, high profile products etc. The valuation steps may also allow for some rationalisation of the portfolio, especially if there are several pieces of IP being maintained that are not aligned with the current and/or future commercial direction of the business.
Valuations of IP are quite important where a lot of possibilities are hidden. It is necessary to analyse some recent IP valuation in emerging markets as well as in India by various practical methods and accounting standards such as:
Royalty Relief Method
Brand Contribution Method
Brand Earning Multiple Model
Future Discounted Cash Flow Model
Apart from this, some other points also need to be considered such as analysing historical performance, forecasting, estimating continuous value, estimating Cost of Capital amongst others.
In the era of mergers and acquisitions, the value of the company increases greatly if its Intellectual Property has been protected. This adds to the value of the company and may increase the value during a merger or acquisition. This is a major reason for the protection of Intellectual Property by a company. It may be noted that Intellectual Property negotiations are amongst the most ferocious and strong in a deal and any disagreement on the same can be a deal-breaker point.
IP helps the Acquiring Company to highlight itself in a well established market and taking control over the functioning of the processes, which builds the IP. IP helps to highlight the presence or dominance of Acquiring Company in the new area of market. Acquisition of IP through M & A can be profitable for many industries for their portfolio expansion or providing growth opportunities in the new market scenario. The Acquiring Company successfully increases the value of its business. New earning streams are generated by stretching the IP into new categories and markets.
Thus, it can be seen that having a sound IP portfolio will increase the Company’s negotiating power and can almost instantly plummet the new entity to the top league due to the power of the Brand.
A successful deal resulting in a win-win situation justifies all the stringent IP diligence and negotiations. Hence, the way forward for all companies, big or small, is to maximise its IP protection, value and exploitation.
Disclaimer – The views in this article are the author’s views based on research and it does not reflect views of the Company.