How IP acquisition unlocks huge value in Technology M&A?

Introduction

  1. More businesses are acquiring technology capabilities to compete against emerging technology landscape ,protect themselves from digital threats/disruption and at the same time use technology as a driver to build better products and services for the end customer.
  2. One of the key components in acquiring a technology IP is to understand how the underlying technology is used to build quality products which provides high utility/value to the customer. Intellectual property is a critical factor that differentiates successful companies.
  3. Technology companies that leverage its IP register their IP/ patents to protect from usage of their products by competitors without their permission.Intellectual property plays an important role in Pharma industry in drug discovery.In technology, leading companies register their IP when coming up with a platform or a offering that cannot be replicated easily.

IP as a Strategic driver for M&A

  1. IP as a Strategic rationale is a key driver for M&A activity primarily in industries like technology, Media, Telecom and Pharma.
  2. Companies in the above sectors look at acquiring IP to either integrate it to their existing IP/product or to get access to the additional license revenues and the customer base.For instance; Audi, BMW and Daimler acquired HERE Technologies which provides map services similar to Google maps.HERE technologies have registered their patents and IP on research areas that would be used for location identification for assisting autonomous vehicles and Self Driving cars.Audi, BMW and Daimler acquired HERE and made it available to all car manufacturers and suppliers.The rationale was, there would be a risk that other company can acquire HERE IP and demand license fees from other car manufacturers interested to enter into Autonomous vehicles which could increase the overall cost of the vehicle.

IP Valuation in M&A

  1. Once the acquirer has decided how the target company’s IP would support his strategic objectives, the next step would be study the target business in detail to get an assessment of how much value does IP contribute to the overall value of the seller.In addition, the target might have a portfolio of IP offerings and the acquirer might not require the entire IP register.The acquirer needs to make a decision whether he wishes to acquire only the IP business or the entire business of the target.
  2. After deciding the transaction structure, the next step would be to value the IP.There are three ways how IP can be valued:

Replacement cost – This is basically an estimate, how much investment the buyer needs to make to come up with an IP similar to that of Target firm.This method is not used widely as it does not take into account the time to market and the customer base that uses the target IP.As technology changes at rapid pace, the acquirer stands to lose a significant revenues as well as market share on the time spent to build a similar IP.
Market Value – This is primarily to compare the Target IP with companies having a similar IP and how those IP is valued.This method can give an estimate to the acquirer, but generally the purchase price for such transactions include the mark up and synergies.The rationale for each IP acquisition vary with different companies and the synergies they arrive at is different which would make the valuation based on this approach flawed.
Future Value – This approach is widely used and is similar to a Discounted cash flow method.The acquirer needs to look at the license revenues and the stickiness of the customer base along with switching costs for the customer in using other IP.These inputs would help in arriving at an accurate estimate of the value of the IP.Once the cash flows are projected accurately, they can be discounted at a suitable rate to arrive at the Present value of the firm.
The license and royalty revenues from IP acquisition needs to be forecasted and the investment by the buyer can be capitalized to gain additional tax savings.

Due Diligence for an IP acquisition

  1. Due Diligence is a very critical activity for the acquirer to come to a conclusion that the acquired IP can generate projected cash flows and that the buyer does not face any risk in the IP acquisition.
  2. The acquirer needs to confirm whether there are any encumbrance issues with the IP and whether the target has registered IP.This should be cross referenced with Registered IP, Copyright and Patent database maintained by the local state centrally.
  3. The target needs to have complete ownership on the IP and should acquire rights post acquisition to protect the IP from companies that do not pay license fees to use the IP.
  4. The acquirer also needs to do a complete audit of the target IP to identify the risks of owning the IP.In many cases, the IP use Open source methodology, which can prevent the acquirer from enforcing the usage of IP by its competitors.In addition, the relevance of IP in market and its demand for future should also be investigated.
  5. Any risks identified in the IP due diligence stage needs to be recorded and the buyer needs to seek protection from the buyer in SPA agreement.In cases, where there are infringement issues, there can be reductions in Final purchase price or in worst cases, the deal can be aborted.
  6. A representation and Warranty insurance can be obtained by the buyer at the time of SPA signing to protect itself against future claims.The policy would come to force at the closing of the deal.All the covenants provision between signing and closing needs to be followed by seller so that there is no change on the status of the IP post signing.The IP ownership from seller to buyer needs to come into effect at the closing.

Curious case of Rolls Royce

  1. An interesting case study of inadequate due diligence is when Volkswagen acquired the assets of Rolls Royce.Volkswagen acquired all the assets required for car production, but was not allowed to use the Rolls Royce logo as there was a limitation on this which was overlooked by Volkswagen during due diligence.
  2. Prior to this acquisition, BMW had acquired the access to use Rolls Royce logo in its cars.
  3. This case study reiterates the importance of due diligence to unlock value from the acquisition. The buyer should involve IP specialists in due diligence to ensure the due diligence is comprehensive and identifies the key risks from the transaction.

Post close activities in IP Acquisitions

  1. Post closing, it is recommended that the buyer does an audit of the acquired IP again.The buyer also needs to update the central databases of IP and patent on the ownership changes so that buyer obtain all the necessary rights for protection in future.
  2. To realize IP synergies, the buyer can use the acquired IP along with its proprietary IP to design a new IP that can be sold to customer base of both entities.In this case, the new IP needs to be registered by the acquirer.
  3. The buyer can also do additional investments on acquired IP to build digital services around it which can be sold to the customers.

Conclusion

  1. M&A as a growth strategy to acquire IP is a powerful way to increase revenues, gain entry to new markets, access new customer base along with access to new technological capability.
  2. For the acquisition to be successful, due diligence is critical to confirm if the target has complete ownership of the IP, whether the target has registered the IP and possess all the rights and if the buyer can completely leverage the acquired IP for its commercial use without any limitation or constraints.


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