Intellectual property (herein referred to as IP) is an incorporeal
property that is invented or created by human intellect. These properties
are intangible in nature and possess right in rem' meaning a right
against the whole world. It gives rights against the creativity and labour
of the inventor or creator. There are different types of IP that exist, such
as copyright, trademark, patents, etc. They are a central asset to the
technology or biotechnology companies and form a greater part of their
The product value, brand value, or the innovation portfolio of a company
plays a pivotal role when it comes to the management of assets of the
company. These assets are equally important and somewhere of more value when
compared to other assets of the company.
They form a greater part of the
strategic developments of a company in the domestic or international market.
The IP are also one of the various reasons for which different companies go
through the process of merger or acquisition as it strengthens their market
share, promotes improved and efficient management.
The laws pertaining to
creation, use, and also to prevent exploitation of such property are called
intellectual property laws. In India, specific provisions are enacted in the
patents Act 1970, The Copyrights Act 1976, The Trademarks Act 1999, The
Designs Act 2000, etc. for the protection and management of such assets.
Merger and acquisition (commonly referred to as M&A) act as a tool for
reconstruction of the companies to maximize their wealth for the
stakeholders and also create a hold for themselves in the global market. A
merger is nothing but consolidation of two firms into one firm which can
work in a more efficient manner to maximize profits and achieve desired
goals. On the other hand, acquisition is considered as takeover of one
company by another company by purchasing its majority of ownership stake.
general terms, such stake is or above 50 percent which gives them control of
management to the acquiring company and giving the importance that
intellectual property plays it requires due diligence in creation,
management and transfer of such asset to avoid any kind of exploitation.
Benefits of IP in Acquisition or Merger
Protection of IP asset portfolio
IP Policies on Acquisition, Exploitation, Monitoring, and Enforcement
Value addition to the firm's portfolio: One of the major
advantages of an IP asset acquisition or merger is that it adds value to the
asset portfolio of a company. In order to attain consistent growth in the
market it is necessary that companies should evaluate whether the current
portfolio meets the requirements to fulfill their current business
objectives. Innovating something new is not possible every time in this
dynamic and inconstant market environment, therefore companies must look for
new opportunities and offerings by way of acquiring existing innovation by
other company for expansion of its product portfolio and lead in the market.
This shall be done by implementing IP policies and solutions in order to
identify novel innovations which can add up to the speculated growth of the
Acquiring unique capabilities: The companies have always
wished to have a stronghold in the market. They always want to have a
dominating position in the market against their competitors. One of the
major tools used for this is the acquisition or merger of unique
innovation or capabilities of their competitors to have an edge over
others. It changes the whole outlook of the company and creating a
unique and efficient business model for the new company.
Transfer of technology: Another fruitful benefit of Acquiring
an IP asset is that it allows for the transfer of technology from one
person to another in the marketplace due to which free flow of an IP
asset maintained. This also leads to proper exploitation of the IP asset
and it is utilized to its full extent.
Diversification:The acquisition or merger also helps in
exploring and enhancing different zones in business. It facilitates
entering into a different field of business. As it is more convenient to
enter into a business through pre-established resources it reduces the
cost of operation and creates a diversified asset portfolio for the
company. It opens new doors for more deals, benefits, and acknowledgment
in the market.
Growth:The very basic objective to implement any corporate
strategy is to promote growth and development which further leads to
maximization of profit to achieve its desired goals. The acquisition or
merger of an IP asset contributes to the growth prospects of the company
by acquiring new and competent technology. It makes sure that the
product portfolio of the company is updated as per the current demand in
the market, A company must evaluate its existing intellectual property
asset portfolio to determine whether it meets the requirements and is in
line with the business objectives.
The IP portfolio is a substantive part of a company's strategic
policymaking, building a strong IP portfolio helps in protecting the vital
asset of the company and churn out revenues in the long term. The main
objective of the company is not merely to acquire intellectual property
rights, but also to manage and safeguard it in such a manner that it is
utilized to its full extent and is not misused by other competitors in the
In order to manage the IP assets of a company, a proper policy
framework should be implemented in the organization structure of the
company. In order for better management of the IP assets, companies should
create separate policies on Acquisition, Exploitation, monitoring, and
A policy on acquisition should contain the best package of
protection for the IP assets and due caution and proper due diligence shall
be exercised while acquiring any IP asset leaving behind no ambiguity in the
ownership rights or any formal rights of the company. Next the company
should make specific strategies to exploit the assets and utilize their
capabilities to the full extent of their policy on exploitation.
This can be
done in various ways such as commercialization of IP assets, sale of an IP
asset or through any licensing and franchising agreement with the other
companies. A policy of monitoring should also be in place to keep a check on
and track the progress of technological developments or new technology that
can be utilized for the benefit of the company. Also, it helps in monitoring
infringement of the formal rights of an IP asset, if any.
policy on enforcement should be made for the losses that may be incurred by
the existence of counterfeited goods in the market and the high costs
involved in some IP disputes and also for the compliance of the law.
Measures before acquiring an IP asset
It is an exercise performed by the companies to assess the potential of
their IP assets and also impart comprehensive knowledge of the actual value
and further assess the risk of a company's intangible assets. As the
organization structure of business is reorganized in any acquisition or
merger it leads to a necessity of conducting such an assessment of risk and
do a stress test of the IP assets. If the due diligence of IP assets is not
conducted properly it can result in undervalue tor overvalue of the assets
which can defeat the very purpose of acquisition of IP assets in the first
The due diligence is performed through various means and through the
process of due diligence is tailor-made to the requirements of the business
transaction however these are general checks which can be performed in every
Valuation of IP portfolio
- Identification of IP assets: The IP portfolio consists of
various intangible assets such as patents, copyright, trademarks, trade
designs etc. These assets are to be identified and treated differently
from other assets.
- Verification of Ownership of IP: One of the crucial purpose
for which the process of due diligence is so stressed upon is
identifying the true owner of the asset, and whether the said is
disputed or not. The true owner of the asset can be traced through
series of questions, ownership or registration documents filed with the
authorities. The ownership should be properly investigated so that easy
transfer of assets can take place within the process of acquisition or
- Third-Party claims: The third-party claims should also be
scrutinized while investigating the ownership of the asset as sometimes
third person rights are accrued unknowingly, however proper disclosure
of such right should be made by the owner of such an asset prior to the
- Evaluate possible IP infringements: While carrying out the IP
due diligence operations, it is important to check whether any third
party is infringing IP right or there is any company that might infringe
a third party's rights. In any of the case mentioned above, it may give rise to any
dispute in the future.
- Term and territory checks: Another important check which also
has to be made while conducting due diligence is territory and terms of
the IP asset. Some assets are strict to certain regions or contains some
terms and conditions for the use of the asset. Such terms should be
clearly defined and no ambiguity should be present.
The valuation of the IP asset in determining the monetary value of the
asset. There are various factors that should be taken care of while
evaluating a property of IP assets such as standard of value, the purpose of
valuation, the method of valuation and also the nature/strength of IP asset.
In order to utilize the IP asset to its full extent, value determination of
an asset is the first and foremost thing that should be undertaken. It helps
to speculate the profits which can be earned if the asset is acquired and
further facilitates the other processes such as financial reporting,
licensing and franchising, optimizing taxation policies, making any
investment in research and development etc. The two common methods used for
the valuation of an asset are income method and market-based method, in
which the price of a similar asset in the market is compared with asset and
in the later one valuation is done on the basis of the amount of financial
income that IP is expected to generate.
Intellectual property assets are the intangible assets of the company which
plays a vital role in the growth of a company and adds up a great value to
the asset portfolio. It is one of the reasons for which IP assets are
acquired and companies go for the reconstruction process such as merger and
acquisition. It helps to create a diversified asset portfolio, acquire new
capabilities, explore more options in the market which speeds up the growth
rate and further facilitates in achieving the desired corporate goals. For a
successful acquisition of an IP asset, proper due diligence and valuation of
IP asset should be conducted to avoid any uncertainties or defects.
Dark lock had said that:
"The only thing you really own is what you create,
and the only thing you can create without needing someone else to give you
raw materials first, is intellectual property".
It is a crucial asset for a
company and they should be dealt with utmost caution in order to achieve
maximum profits. They should be protected and monitored through the
implementation of strict policies and should be utilized in such a manner
that they satisfy the cost which is borne to acquire them.
Written By: Anmol Mishra
- 6th semester, Amity Law School Noida