The Power Play: How Intellectual Property (IP) Shapes M&A Success

Understanding how Intellectual Property (IP) shapes M&A success is integral to today’s business landscape. Intellectual property includes patents, trade secrets, copyrights, and trademarks that have quickly become the core assets of most organizations.

A company’s intangible assets and portfolios are the value-driving aspects that influence M&A deals. When targeting potential businesses for mergers and acquisitions, dealmakers typically start off by evaluating their IP. That’s the starting point for ascertaining if the transaction is viable.

Overlooking Intellectual Property can prove to be disastrous because it’s not just about arriving at the assets’ monetary value. But it’s also about verifying and transferring ownership legally and complying with anti-infringement laws.

For this reason, dealmakers should have on board expert legal counsels who specialize in intellectual property laws. You’ll need their advice and guidance to draft the transfer contracts and facilitate a smooth transition to the acquiring company.

How Crucial is This? Check Out These Statistics

The Office of the United States Trade Representative (USTR) reported that IP-driven sectors generated 41% of the U.S. gross domestic product (GDP) in 2022 and early 2023. Further, this vertical employed a workforce of 47.2 million.

The value of M&A deals worldwide has been an average of $1 trillion for eight consecutive quarters from Q3 2020 to Q2 2022. Interestingly, the artificial intelligence (AI), software, and IT industries have seen the maximum number of transactions.

As you’ll note, the focus is now on knowledge economies and technology and no longer on industrial economies. Dealamakers understand how crucial IP is for sustainability and long-term growth in an intensely competitive business landscape.

Enhancing a company’s technological capabilities is done by ramping up investment in in-house R&D and acquiring IP-based startups. Advanced technology helps develop better products and services to maintain a market presence.

More importantly, it ensures protection from cybersecurity attacks and hacking incidents. Cybercrime not only threatens the company’s Personally Identifiable Information (PII) and internal security, but also results in expensive disruptions. Not to mention fines and litigation.

Interestingly, robust IP is the differentiating factor in several other non-IT sectors as well. Some of them include telecommunications, media, medical tools and equipment, pharmaceuticals, and more. Investors and financial analysts are also keen on backing companies that are IP-based.

Valuing the IP Accurately

Valuing a company for acquisition is one of the first steps during due diligence and negotiation. But, evaluating an IP-driven company involves analyzing the intangible assets and then assigning a monetary value to them.

IP is unlike the other physical assets companies own that depreciate or appreciate over time. Further, IPs don’t have any reliable global standards or benchmarks against which you can measure their value. That’s because the pricing can be highly subjective depending on the benefits for the acquirer.

You’ll start by ascertaining the integrity and reliability of the targeted company. Several other factors can also influence the final pricing, such as the objectives of the M&A deal. Dealmakers must also estimate the projected profits and losses they hope to make.

The future lifespan of the asset, the period for which it will continue to generate value, and how the acquirer intends to deploy it–these are the factors that influence the pricing. Ultimately, the sellers and buyers must agree on a price that makes sense to them for the deal to happen.

That’s how Intellectual Property (IP) shapes M&A success. Though, it is not unusual for the IP value to exceed that of the company itself. Very often, companies come up for sale since they are unable to monetize their intangible assets effectively. You can also base your calculations on these methods:

Valuation Methods

Cost Method or Replacement Cost

This price is essentially the costs invested by the seller to develop the intangible assets. To calculate these costs, dealmakers must take into account the pricing of the machinery and equipment used in R&D. However, the costs should be estimated at their present-day value.

For instance, the seller invested $2,000 to acquire equipment, and it costs $2,500 today. In that case, the IP pricing will include this cost in addition to other expenses incurred.

Market Value

This pricing structure is reliant on similar IP clusters available in the market and their relative prices. However, using this technique is not exactly reliable since several variables go into estimating costs.

Comparing intangible assets exactly is not possible, and dealmakers must compile extensive data to arrive at a number. IP markets are typically dynamic, and rates can be subjective to user preferences, needs, licensing, and more.

Potential Earnings or Income Method

This price depends on the expected earnings the IP can potentially earn for the acquirer. Also called the intrinsic value, the price depends on several factors. such as the projected cash flows.

Then, you have the discount rate or the estimated price of funding the asset. The economic life of the Intangible Asset or the time frame for which it will earn premiums is also a factor.

Relief from Royalty or Deprival Value

This pricing structure is about the sum of total revenues the acquirer stands to lose without owning this IP. The buyer can also choose to estimate the costs they must incur to license the intangible assets from third parties.

Aside from these valuation methods, acquirers take into account other factors similar to conventional companies and startups. These criteria include the company’s financials, market presence and share, customer base, licensing and patenting, certification, and more.

Keep in mind that in fundraising or acquisitions, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

IP Due Diligence

Due diligence for IP-driven companies is far more meticulous since dealmakers must examine the assets in detail. They must analyze not just the potential value they bring to the table but also the possible risks they could contribute.

The most critical issue to deal with is clear ownership rights of the patents, copyrights, trademarks, and trade secrets. You’ll establish that the seller has the rights and certifications and work out how to transfer them through the proper legal channels.

When researching the ownership status, you’ll start by checking public domains. However, many private companies don’t list their IP data on the platforms, and verifying the information is not easy.

Although patents, copyrights, trademarks, and trade secrets fall under a single category of IP, their respective laws may be different. This is why you absolutely need assistance from a legal team specializing in managing IP asset analysis and transfers.

The rights to the intangible assets should be available to the buyer for current and future application and generating business. Without it, the merger may not drive enough value. That’s how Intellectual Property (IP) shapes M&A success.

Due diligence when transferring IP is especially critical if the assets involve sharing PII or Personally Identifiable Information. The company may have authorization from customers, vendors, and any other third parties to use their data. Before acquiring any assets, you’ll have to sign confidentiality agreements.

Remember that selling the company does not automatically transfer this authorization to the buyer. You may have to reach out to the entities and request permission to use their information.

Acquiring Companies With Patents

Analyzing the targeted company’s IP portfolio gives you an overview of the innovative capabilities of its team. Further, you’ll also work out its future growth prospects when estimating the proposed price. More than the number of patents, you must analyze their quality and if they are relevant enough to your vertical.

Interestingly, buying out companies that have developed IP and acquired patents is preferable. That’s because their innovations have a higher technological caliber than the IP you might ideate in-house.

Don’t forget to explore if the company collaborated with third parties when creating the IP. They may not be under any obligation to sign over their rights in case of an acquisition. You may have to reach out to them to get approvals separately.

Here’s another factor to keep in mind. Depending on the type of technology, unspecified IP clauses may give customers unlicensed rights to use and modify the IP. They may retain IP rights over the products for as long as they own and use them.

Situations like these may interfere with the clear ownership rights the seller transfers to you. These are other areas where your legal and due diligence team will focus before you initiate negotiations.

Not getting these factors in place influences how Intellectual Property (IP) shapes M&A success. The deal might just fall through.

Since IP value is relevant and contextual, you’ll need the services of expert teams to assess every IP and intangible asset individually. You’ll identify the benefits, vulnerabilities, weaknesses, and potential for profitability.

In addition to clear ownership titles, you’ll also check for the validity of the patents and if they can be transferred legally. Also, check for the anti-infringement laws backing the patents.

Deploying Artificial Intelligence AI tools to assist in the due diligence is recommended. You’ll shorten the time needed to research for information and sort the IP for classification.

Purchasing Trademarks

Don’t assume that acquiring IP like a patent also entitles you to trademarks, logos, and other defining assets. You’ll have to purchase these assets separately, so factor the costs into your negotiations.

Registering the trademarks is an important part of establishing and securing a brand’s identity. Such trademarks include logos, slogans, colors, and any other unique and differentiating features that make the brand recognizable.

Depending on the popularity of the brand name, these features can become assets in their own right. Companies may be open to selling them as a package deal or piecemeal to raise funding when they need it.

If you intend to purchase a company that owns trademarks, your due diligence includes verifying their ownership. You’ll validate the trademark rights and confirm exclusive ownership before you purchase the company.

Overlooking this step can result in the risk of expensive payouts and litigation in case of accidental infringement. Losses can run up to millions of dollars in damages, legal fees, and disruptions in the company’s operations.

Damage to the company’s reputation and bad publicity are other setbacks that cannot be counted in monetary terms. And that’s how Intellectual Property (IP) shapes M&A success.

Knowing how to value your company is crucial not just in acquisitions, but also for fundraising. Check out this video where I have explained in detail how it’s done.

Intellectual Property-Related Considerations During Negotiations

When negotiating IP-driven M&A deals, here are some of the core documentation your legal team will want to examine.

• Patent numbers, filing, issue dates, registration, and jurisdictions covered for both–patents and patent applications (Know that both are different types of intellectual property)
• Confidentiality agreements and invention assignments with employees and consultants who have participated in developing the IP
• Trade secrets and proprietary know-how
• Trademarks and any other differentiating assets, including website domain names
• Personally Identifiable Information (PII) compiled to build a database of employees, clients, and vendors
• Technology licenses for selling IP to third parties
• Technology licenses for purchasing IP from third parties
• Computer software and applications
• Accounts on various social media sites like Facebook, Twitter, Instagram, and more
• Pending liens, claims, lawsuits, or arbitrations for resolving IP infringement
• Contracts with third parties that provide them with indemnity in case of IP infringement
• IP created using open-source code from vendors who may have indirect claims on it
• Information about the source code or object code escrows deployed to protect the IP

How Intellectual Property (IP) Shapes M&A Success – The Takeaway

When negotiating strategic acquisitions, IP can prove to be the core asset that defines the seller’s and acquirer’s strategies. A robust IP portfolio can raise the seller’s bargaining leverage and thus push the transaction value higher.

Post-M&A integration success is also reliant on IP. That’s because the buyer must seamlessly deploy the IP efficiently into the surviving company and monetize it effectively. Dealmakers on both sides of the negotiating table must retain the services of expert counselors.

Trust in their expertise to guide the evaluation and analysis of the IP. More than accurate valuation, you’ll need assistance with defining and transferring ownership rights to avoid expensive litigation and fines. That’s how managing IP effectively can shape M&A success.

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