In today's dynamic world where companies continue to compete in the
market for survival and stability, exclusivity plays a major role in helping
them get an edge over others. Since the early 2000s, the market has witnessed a
global wave of mergers and acquisitions. In the year 2000 alone, global mergers
grew to almost $4 trillion.
The primary reason for a majority of mergers or
acquisitions for a long time has been the desire of Fortune companies to acquire
the latest technologies being developed by Startups. A merger, in its simplest
form, means combining two broadly equal companies' assets and the formation of a
new legal entity, while an acquisition is either a hostile or a friendly
takeover of one company by another by purchasing either a majority stake (≥51%)
or the entirety of its ownership stake.
M&A has been used as the fastest and
steadiest tool to grow companies and is a way to eliminate competition and
enhance profitability. During mergers and acquisitions, the most important
aspect the companies emphasize on is the intellectual property and its rights
owned by the target company.
Intellectual property, in simple terms, can be
defined as intellectual and intangible assets of the company, such as patents,
trademarks, trade secrets, designs, etc. More often than not, the primary
purpose of a merger or acquisition is to acquire the rights to exploit the
target company's IP.
This article evaluates how IP proves to be a major asset in
the valuation of the target company's market value and the issues that follow
while transferring such rights and ownership of the intellectual property.
M&A- a tool to survive the rising competition
Why do companies merge? The very purpose behind any merger or
acquisition is to grow, reconstruct, and maximize profits in order to keep up
with the company's standards in the global market. Moreover, mergers can also
easily expand their consumer base by eliminating competition and by sustaining
Developing new technologies and strategies in order to grow often
requires a lot of time and resources. M&A gives an easy way out by providing the
acquiring company control over all the tangible as well as intangible assets of
the target company. When companies merge, they not only tend to share their
assets but also their customer base, and this builds up goodwill, productivity,
and net worth for the companies.
One of the most significant horizontal mergers
in recent times is between Vodafone and Idea, leading to the formation of a new
legal entity, "Vi". The merger was an attempt to fight the dominance and the
competitive pricing policies of Reliance Jio. Vodafone India and Idea's
individual market shares were very low compared to Bharti Airtel and Reliance
Jio. After the merger, they saw a significant rise in their subscribers.
Vodafone-Idea Ltd merger has created a telecom giant and is expected to leave Bharti Airtel behind in the ongoing telecom competition. This is a classic
example of battling rising competition in an ever growing market.
How Does Intellectual Property Fuels M&A Transactions?
When two companies merge, all the tangible and intangible assets of
one company become part of the acquiring company's assets as well. Furthermore,
one of the most valuable intangible assets is intellectual property and its
rights. As already mentioned earlier, for decades, the primary reason for a
majority of mergers or acquisitions has been the Fortune companies' desire to
acquire unique IP, i.e., trademarks, patents, copyrights, trade secrets, and
Especially for technology and biotech companies, the company's IP
forms the core part of the company's assets. It is no news that IP is
increasingly driving M&A activities given that IP continues to constitute most
of a company's value. An example of the same would be the acquisition of InterTrust Technologies. InterTrust Technologies, founded in 1990 held a strong
business in digital market rights.
The business failed after certain initial
success. But on the other hand, InterTrust had developed a strong patent
portfolio in the digital market rights. InterTrust was purely an IP holding
company when it was put up for sale. It didn't have any customers, assets, or
revenue. It only held patents and a patent infringement suit against Microsoft.
It was soon acquired by Fidelio, a joint venture by Sony, Philips and others for
US $453 million.
This is a clear example of a purely IP driven M&A. Across many
technology industries, merger is a pathway to capture top innovators,
scientists, knowledge and to buy a collection of legal rights on the IP assets.
This practice is not just limited to tech firms; it has rapidly spread to
companies growing for decades purely on their own innovations and product
developments for the following reasons:
Reduces research and development costs:
In today's growing market with new technologies continuously being
developed, acquiring already existing technologies rather than spending a
fortune on labor costs is the easier option to increase the productivity as
well as assets of the company.
Diversification to various sectors:
A strong IP portfolio of the target
company helps the acquiring company when it is aiming to expand and enhance its
IP portfolio into diverse sectors. Acquiring pre-existing resources while
exploring new sectors in the market is not only cost-efficient but also provides
a more diverse portfolio to the acquirer.
Adds Value to the company portfolio: While merging or acquiring, the
purchaser becomes vested with all the intellectual property of the selling
company and all the goodwill attached to it. Which directly adds value to the
acquiring company. For example, Walmart did not change the trade name or the
corporate name of Flipkart specifically because of the goodwill attached to the
name (trademark) of Flipkart. Moreover, the acquisition of Motorola by Google
Inc., giving it complete control over Motorola's patents, is an apt example of
value addition to a company's asset portfolio.
Transfer of technology: Technology transfer between parties to the
merger or acquisition is another significant role IP plays in M&A transactions.
It helps parties utilize their joint assets and resources in the form of
intellectual property to their full extent and allows proper exploitation.
Valuation Of IP Portfolio
Valuation of intellectual property rights simply means arriving at a
fair value for a company's intellectual property that can be monetized and can
leverage the ultimate selling price. Putting a value on the IP asset becomes
necessary in order to sell, license, or enter into any commercial transactions
based on IP. Especially when the merger includes acquiring the IP assets of the
target company, determining the monetary value of the IP portfolio of the target
company becomes extremely important.
- Methods of valuation of IP assets:
There are primarily three methods of valuing intellectual property
assets, which are as follows:
- Income Method:
It's the most commonly used method to value IP. This method relies on future
revenue expected to be generated from the IP as against its present value.
This approach significantly focuses on every parameter that is related to
earning capacity of an IP. The most accurate estimations can be made based
on past revenue generated by the IP.
- Market Method:
This method depends on market behavior and third party
transactions of similar IP taking place in the market. IP valuation is
influenced by prices paid for other similar transactions. This is slightly less
reliable as it is subject to accurate and effective information for sound
comparison and can only be relied on if correct data is available.
- Cost Method:
This method uses the principle of evaluating the cost
incurred in creating the IP. This method is usually used when the IP does not
produce any economic benefits. This method is further divided into two kinds of
methods. Replacement cost method and reproduction cost method. In the
replacement cost method, the cost incurred in creating the same IP is
calculated, and in the reproduction cost method, the cost incurred in generating
IP with similar properties is calculated.
- Due diligence before acquiring IP assets in M & A:
Due to the information gap between the parties, due diligence is
critical for IP transactions. It all starts with a Memorandum of Understanding,
where both parties agree to share information, plans, trade secrets, and other
documents. A non-disclosure agreement should be signed if the IP contains any
trade secrets or customer information. Due diligence is used to calculate the
technological, legal, and financial elements of the target company.
diligence of IP not only benefits buyers, but it also benefits sellers by
reassuring them that they're not paying to keep some unused IP and informs
sellers of any potential risk or issue regarding IP that may inhibit sales. In
addition, the due diligence analysis should look into whether a target company's
trademark rights have any territorial or product market restrictions. True due
diligence is carried out by legal and financial experts in the form of a
This report is duly made after a thorough check on various
factors of the existing IP as mentioned below.
- IP asset identification
- IP asset assessment
- Third-party assertions
- Examination of suspected infringements
- IP term and territory check
- Risk of unsound due diligence
Intellectual property assets, particularly in fast-expanding high-tech
businesses, can be particularly challenging to value effectively in mergers and
acquisitions. Failure to conduct a thorough IP Due Diligence Report has resulted
in the demise of several acquired companies. Undoubtedly, intellectual property
is one of the most widely cited causes of M&A failure, as made evident by the
"Winner's Curse," in which the acquiring firm ends up paying more than market
rate for the target firm during the bidding wars and subsequently fails to
achieve even a minimum return on its investment.
This is often a result of
unsound due diligence where target firms are highly overvalued because of their
knowledge assets. An example of faulty due diligence leading to a M&A blunder
would be the 1998 takeover of Rolls-Royce. For a hefty US $780 million,
Volkswagen acquired the facility, the auto designs, and a variety of tangible
assets like premises. Soon they came to know that the Rolls-Royce trademark was
controlled by Rolls-Royce PLC and that it had transferred the trademark to BMW
for US $66 million. As a result, Volkswagen owned the Rolls-Royce business but
couldn't use its name.
Key Issues Affecting M&A In Connection With Intellectual Property
Intellectual property issues are equally important factors to be considered in M
& A deals. There are a number of issues that should be addressed beforehand in
pre-transaction IP due diligence. In particular, private tech and biotech
companies often involve significant IP issues, essentially because they have not
been subject to the scrutiny of public markets.
The success of the sale depends on thorough due diligence of the selling
company's intellectual property. Some of the key issues that typically occur
during these transactions are briefly discussed below:
- Identification of IP:
Intellectual property includes various forms. But
the most significant assets include patents, trademarks, copyrights, trade
secrets, software, etc. The initial challenge in these transactions is to
identify the relevant IP essential to the growth and potential diversification
of the acquiring company's business. Once these relevant IPs are identified, it
becomes easier for investors and acquirers to evaluate and address any
complexity in transfer or any risk associated with the IP.
- Development and Ownership of IP:
It is common for companies without
proper representation during the transaction to discover uncertainties about
their key IP's ownership. The most basic method of verifying ownership is by
searching registration databases, depending on the registering authority. If the
IP has been jointly developed with another party, it may restrict the transfer
and the acquiring company may be mandated to share the ownership of the IP.
Another example of an ownership issue is whether the target company depends on
third-party licenses and if it'll survive the transaction.
- Representation and warranties:
Representation and Warranties are key to
protect buyers from potential breach. Buyers basically seek warranty in order to
make sure the selling company is not infringing on any other party's rights, and
similarly, no third party is violating the selling company's rights. It is a
common practice that if the buyer finds out any misrepresentation or false
warranty, the acquirer may no longer be obligated to consummate the transaction.
Moreover, the acquirer may also be entitled to seek compensation for damages.
Buyers will simply limit their liabilities to post-closing litigation and
claims, only exposing themselves to issues within the acquirer's knowledge.
- Open Source Software:
Often, when the target is a technology company, the
target's software is an essential asset for the acquirer. The use of open source
software by engineers to develop technology is common, and it often raises a
number of issues and risks associated with it. One example would be that the use
of OSS requires the source code for any modifications made to be generally
available to third party users. It also requires distributors to license its
software under the same conditions as the open source license. It acts as a
deal-breaker for an acquirer counting on the ability to exclusively exploit the
software. Open source audits done as a part of due diligence to analyze any risk
involved with the use of open source are an advised precaution.
Increasing Significance Of IP Over The Years
Investment bankers tend to separate the tangible and intangible properties of
the target company when evaluating its equity value, giving them a clear
perspective. Properties developed out of intellect are the pure form of gold in
the company's treasure trove. In today's modern era, IP accounts for 80% of
total assets acquired by any company. Buildings, equipment, cash, inventory, and
land are examples of a company's tangible assets.
On the other hand, intangible
properties of a company include patents, brand value, customer data, software,
logos, etc. Between 1985 and 1995, there was a significant shift in corporate
strategy, with most companies opting for intangible assets over tangible assets.
The following graph depicts the significant increase in intangible property
valuation over time, including patents, trademarks, designs, trade secrets, and
Figure 1: Intangible assets account for 80% of total assets in the
When it comes to mergers and acquisitions, intellectual property is
the most critical factor to consider. Mergers and Acquisitions are beneficial to
a company's operations and capabilities, but they are incomplete without
obtaining the acquiring company's intellectual property rights.
intangible, the purchasing company's intellectual property rights aid in the
company's growth, diversification, and expansion.The acquisition of a company's
IP assets is critical to its survival, and it must be done with thorough
diligence. Otherwise, a business's IP portfolio might become a burden for an
- Intellectual Property Assets in Mergers and Acquisition by Lanning Bryer and
- Law Relating to Intellectual Property by Dr. B.L. Wadehra
- 13 Key Intellectual Property Issues In Mergers And Acquisitions :
- India: Value Estimation Of Intellectual Property: Techniques, Methods
And Parameters: https://www.mondaq.com/india/trademark/943398/value-estimation-of-intellectual-property-techniques-methods-and-parameters
- The evolving role of intellectual property in M&A transactions by Nader A
- Gaurav Mishra and
- Dhwani Vyas