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.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. 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
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
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.
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 TransferIn 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. 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 StrengtheningAn 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 PropertyWhenever 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
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.
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. 
So, in this method, there are three important elements that has to be kept in
mind before evaluating an IP.
- The identification has to be done of only the potential income which can
be the eventual result of the IP in question.
- The duration at which that IP will generate profit in the future is to be
also accessed in order to get an accurate value.
- 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
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
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. There can be numerous reasons behind the
failure of it but it most commonly comprises an improper operating framework and
execution after the transaction.
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
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
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4 September, 2020.
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Linkage between Intangibles and Intangibility,
(http://www.oeconomica.uab.ro/upload/lucrari/1620141/25.pdf, 2014), 283
- The Value Creation of Intellectual Property in Mergers and Acquisitions
- Biocon: Creating Value through Incisive IP Strategy
- Realistic valuations of intellectual property Methods and techniques for
valuing IP’ by Australian Institute for Commercialisation (2004),
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Management, Jan 2001M.J Hildebrand