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Role of Intellectual Property Rights in Mergers & Aquisitions

Intellectual Property refers to the creation of a property that holds importance and value by the means of application of intellect or labor of the mind. In the present era, the concept of Intellectual Property Rights (IPR), revolves around the recognized types of it, namely, Copyrights, Patents, Trademarks, Trade Secret, Geographical Indicators and Designs, etc.

The purpose of recognizing these rights is to give the intellectual products created by individuals or groups protection in the competitive world so that it can protect them from getting copied or misused.[1]The things that make an intellectual property very valuable lies in the exclusivity that is attached to the right which a person holds. It simply means that an unauthorized person cannot use it even if the information is easily available in public domains after an IP getting registered. Mergers and Acquisitions on the other hand is the concept of combined synergy that is created by combining two or more entities in one to achieve organizational and corporate goals.

IP in the present world has made a battleground for the corporates to climb the success ladder when it comes to competition and profit-making edge. Therefore, it will be nothing wrong with saying that the Intellectual property valuation has become one of the most important things in the Mergers and Acquisitions world. According to an analysis of the companies in the Fortune 500, the tangible assets that were represented turned out to be around only 25% in 1995[2]. It can be inferred from this fact that the intellectual property secured by these corporates were playing a very important role even before 25 years of the present boomed era of Intellectual Properties.

The role that is played by the intellectual property in a Mergers and Acquisitions transaction is extremely vital and huge. It can be witnessed from the fact that since the last 2 decades many Mergers and Acquisitions transactions have been made only for having an access to the IP of the competitors.

For instance, Google's acquisition of Motorola mobility in 2011, in which Motorola was having many Patents on Open Sourced Operating System Android which was major competition for Google in the same business and therefore, the company acquired Motorola Mobility in 2011. The argument that the acquisition was made just for obtaining the Patents was further made sure when after three years Lenovo acquired Motorola from Google but it secured the Android Patents of Motorola Mobility for itself and not included in the acquisition transaction.

Intellectual Property And Value Creation In Mergers & Acquisitions

It is a fact from various studies that the Intellectual Properties of a target company adds on to the overall value of an acquirer company in different aspects. The main benefits derived from an acquirer usually revolved around Research and Development, Innovation, and Knowledge sharing aspects of the company.

The practice of M&A often becomes a normal practice in companies dealing in areas that requires a lot of aforementioned aspects as it becomes a major factor determining the sustainability and profit-generating ability of the firm. As a result of cut-throat competition in the market and the need for consistent innovation and development, the companies tend to move towards acquisitions of those intellectual properties which are held by corporates which further results in the creation of synergies and expansion of the target market.

In a study conducted by Lund University School of Economics and Management Department of Economics, they used unique patent-M&A data which was collected over 10 years ranging from 2006 to 2016. They created 4 hypotheses and mathematically calculated if an IP results in an increase in the value of shareholders and the acquirer company’s value after the transaction or not[3]. Therefore, they proved the fact that Intellectual Property does create value for the corporates in M&A transactions.

As mentioned above there are various ways in which Intellectual Property can add value to the corporation after an M&A transaction.

Some of them are mentioned below:
  • Technology & Information Transfer

    In an M&A transaction, when a company acquires another company, the transfer of technology also takes place between them. It becomes such an important factor for a transaction that some M&A transactions are done just to have access over the technologies of the competitors or to have a competitive edge over the market. An example which can be taken is of the company BIOCON, a very reputed company in the pharmaceutical industry which has made its way up to the top. BIOCON has made many acquisitions and joint venture transactions only for the purpose of Patents so that they do not have to put there R&D department in those areas where the results are already established by other corporations.[4] M&A in the pharmaceutical industry is mostly done for acquiring Patents only and therefore it can be said that Intellectual Property does create a lot of knowledge and technology transfers in Mergers and Acquisitions transactions and expands the probable benefits at large.
     
  • Market Strengthening

    An Intellectual Property plays a very vital role in strengthening the market position of a company. When an M&A transaction happens in consideration with the market, it can give a boost to the acquiring company in terms of profits and some cases can also result in the creation of monopoly until and unless it is not against the competition laws of a country. For instance, we discussed earlier in the case of Google, where Google acquired Motorola mobility just for its Patents on Android and managed to secure it even after Motorola was again acquired by Lenovo. The only major competitor at that time standing against google was Motorola in the Android business globally. Therefore, such an acquisition which was done solely for the purpose of patents was done in order to gather the market in one place and strengthening its positions in the mobile and software market.
     
  • Diversification Generated By Intellectual Property

    Whenever an M&A transaction takes place, the already settled corporate Intellectual properties play a very vital role in providing the acquiring company a chance to diversify its business aspects and explore the market through the resources generated by the target firm. In other words, an M&A transaction will work as an opportunity to continue a new business on pre-established grounds with fewer efforts in the areas such as innovation, Research, and Development, and knowledge sharing respects as the target firm has already obtained the required IP in that particular course of business which will, in turn, facilitate the acquirer to flourish what has already been started with bigger resources and opportunities.
     
  • Overall Growth And Development

    Acquisition of an IP of a corporate company will eventually result in the expansion of the existing IP portfolio of the acquiring firm if it is done in the right manner and after proper due diligence which will be explained in the latter part of the article. An expanded IP portfolio will create more opportunities for the firm with exclusivity and innovation which will then bring more profits to the company as a result of which the overall development of the company will be flourished.

Intellectual Property Valuation

In order to evaluate the full potential along with the value represented in terms of numerical figures of an intellectual property portfolio of a company the necessary procedure that has to be followed is known as the IP Valuation Process. An intellectual property without proper valuation will not be able to fetch out the desired results for either of the sides of a transaction and therefore, it becomes extremely important for the acquirer to conduct proper due diligence and for that purpose a correct valuation of intellectual property is also required to be a must.

The benefits that can be derived from the valuation of the IP can be various, some of them are as follows:
  • It can assist in knowing the market share of the target companies before an M&A transaction takes place.
  • It can also display the pre-emptive rights if any is held by the IP owner of the target firm.
  • It will also show the level of competition in that particular market as well as the position at which the target firm is standing in that field in relation to its competitions.
While the benefits derived by the valuation of intellectual properties are huge, the method of valuation also becomes very important. The success of a corporate who is making its decisions on the basis of the evaluated IP portfolio of a target company also depends on how the valuation has been done.

Intellectual Properties can be evaluated by 2 different methods. The two methods of valuation of IP are (a) Cost-based Method & (b) Income-Based Method

Cost-Based Method
This method is the most common method which is used in the case where the transfer of assets is associated as in the case of Mergers & Acquisitions. In this method, the materialistic value of the total tangible factors of producing that IP is considered to be the actual cost of that Intellectual Property. In other words, the cost-based methods calculated the total materialistic expenditure which is incurred by the producer in order to obtain that IP including the costs like labor cost, material cost, overhead cost, redevelopment information as well as the profits and other incentives of the producer.[5]

Income-Based Method
The income-based method of IP valuation is for calculating the value of the intellectual property by calculating the probable amount of income it can generate in the future. The point that has to be noted is that here the ‘income’ means the total cash flow. [6]

So, in this method, there are three important elements that has to be kept in mind before evaluating an IP.[7]
  1. The identification has to be done of only the potential income which can be the eventual result of the IP in question.
  2. The duration at which that IP will generate profit in the future is to be also accessed in order to get an accurate value.
  3. The risk that is associated with the forecasted income over a period of time is also to be accessed properly in order to get an accurate value by using this method of IP valuation.

IP Due Diligence And Its Impact On M&A Transactions

Due diligence refers to the prior inquiry or investigation into the future prospects as well as the present situations of the company before getting into a Mergers & Acquisition transaction between two companies. This exercise of inquiry plays an extremely important role when it comes to evaluating the benefits and risks along with the cost of the transaction in M&A. A due diligence exercise involves a series of steps that can be performed in no specified manner.

In a normal Due Diligence exercise, an acquiring company might look into the legal conditions, finances, employment-related issues, compliances related to labor laws, environment laws along with the Intellectual property that the target firm is holding at the time of the transaction. While on the other hand, the target firm also conducts due diligence at the time of a merger or a friendly takeover. Therefore, the process of due diligence and intellectual property portfolio maintained by the target company is something of utmost importance as it will expose the buying company to the potential liabilities and risks which might be associated with the present portfolio of the target company.

It is only possible after a proper valuation of the IP, that a due diligence exercise can be performed perfectly. Easier said than done, an IP due diligence is a very difficult task as can be witnessed from the instances of failure of many IP driven M&A transactions.[8] There can be numerous reasons behind the failure of it but it most commonly comprises an improper operating framework and execution after the transaction.

Conclusion
Once a successful M&A transaction is done, it can bring many opportunities for the acquirer by exploiting and using the IP portfolios of the acquired company. In an era where corporates are often afraid of losing the exclusivity of use of patents and are busy in the corporate war of success in relation to the number of IP holdings, an exchange of IP portfolio can actually open the doors of opportunities for the firms by combining their resources through M&A transactions.

Keeping in mind that the process has to be initiated with the proper framework and correct evaluation of the due diligence. Therefore, it can be concluded that an IP portfolio of a company plays a very important and vital role when it comes to Mergers and Acquisition

End-Notes:
  1. Intellectual Property, (https://www.inc.com/encyclopedia/intellectual-property.html) accessed on 4 September, 2020.
  2. Adriana Tiron Tudor, Ştefana Dima, Bogdan Dima, Raluca Valeria Raţiu, The Linkage between Intangibles and Intangibility, (http://www.oeconomica.uab.ro/upload/lucrari/1620141/25.pdf, 2014), 283
  3. The Value Creation of Intellectual Property in Mergers and Acquisitions http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=8878762&fileOId=8878779 PDF
  4. Biocon: Creating Value through Incisive IP Strategy bioconblog.com/2017/03/02/biocon-creating-value-through-incisive-ip-strategy/
  5. Realistic valuations of intellectual property Methods and techniques for valuing IP’ by Australian Institute for Commercialisation (2004), http://www.ausicom.com/filelib/Realistic_Valuations_of_IP_-_RG.pdf
  6. Ibid
  7. Ibid
  8. The Intellectual Property Due Diligence: A Critical Component of Risk Management, Jan 2001M.J Hildebrand

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