Corporations and private equity firms both believe that the importance of IP in M&A deals is set to increase over the next five years, according to a study published yesterday. Conducted by mergermarket and sponsored by CRA International and K&L Gates LLP, M&A Insights: Spotlight on Intellectual Property Rights reports that, in addition, IP is seen as being equally or more important than other assets by 85% of corporate respondents and 72% of private equity respondents.

Other highlights include:

• Respondents differed in their views about IP valuation. When asked how often they value IP assets, 32% of corporate respondents report that they always explicitly value IP assets. On the other hand, 44% of private equity respondents say they value IP assets less than a quarter of the time.

• The majority of all respondents (80%) believe that the most common consequence of insufficient due diligence is the failure to properly identify IP risks. However, corporate and private equity respondents differ about the causes of insufficient due diligence. A majority of corporate respondents (56%) believe that insufficient time is the main challenge in due diligence of IP assets, followed by lack of sufficient resources (46%). Private equity respondents (50%) cite the failure to link identified legal issues to the valuation models as a main challenge.

• During due diligence, surprisingly few respondents indicated the importance of understanding proprietary information and all related policies as a critical need. Only 32% of corporate respondents emphasized its importance while no private equity respondents identified it as a vital part of the valuation process.

• Respondents from both groups tend to evaluate IP assets in the initial stages of an M&A transaction. 42% evaluate IP assets while identifying potential targets and 44% evaluate IP assets during due diligence, but only 14% do not evaluate IP assets until negotiations begin.

• Respondents ranked patents highest in importance to M&A transactions. Several respondents from both groups suggest that patents can present challenges post-transaction, challenges which should be factored into the deal value.

I have to say that I find all this surprising. Not because IP in M&A is not a hugely important issue, but because so many corporations and private equity firms seem to agree. When talking to VCs, for example, I have heard so many times that IP is for the lawyers and is just a matter of ensuring all the rights are held where they are said to be held; while the people that are responsible for M&A inside businesses usually seem to have a pretty similar opinion – at least that’s what people working in IP departments in those businesses tell me. Well, maybe this survey indicates that things are changing.

However, what is also clear is that valuation remains a major issue. “The survey reveals a disconnect within the M&A community. On the one hand, it indicates consensus on the increasing importance of IP assets in M&A transactions. On the other hand, many M&A practitioners point out that traditional M&A valuation models and tight time pressures simply do not allow them to properly address IP valuation and risks,” says CRAI’s Dan McGavock. That disconnect clearly points to an opportunity, which is why CRAI got involved with the project in the first place, I guess.

Back in the very early years of IAM, we ran an article from Andrew Watson, who is now with ipVA. In part of his piece, Andrew explained the kind of leverage a knowledge of IP could give the acquiring party in a transaction. It made sense then and it makes sense now:

Imagine the IP smart acquirer coming up with a list of patents that appear to be infringed by the target company’s products. Imagine the poor general counsel trying to explain to his CEO that he really has no idea whether these are infringed or not, imagine the patent attorneys trying in short time to undertake a technical review of the alleged infringed patents. Imagine the range of possible financial liabilities flowing from the alleged infringement including legal costs, triple damages in the United States, and the threat of permanent injunctions.

To achieve negotiating leverage this is a potent and potentially powerful tool in the right hands. And the fact that the technical analysis is subjective only adds to this power. To counter such a strategy one needs a story and one needs to be able to speak the language and understand the motivations of the acquirer who wants to exploit this advantage.

Sectors

Patents, IP business, IP finance, IP valuation