MnA_Module_7

MODULE 7
MERGERS AND ACQUISITIONS AND INTELLECTUAL PROPERTY

7.1 How IP fuels Mergers and Acquisitions?

In today’s era, virtually every business uses computers, technology, domain names,
software, registered designs and has its own research and invention cell which creates profit,
value and rights for the target company. The target company’s value depends on the assets
and Intellectual Property (though the degree of IP value in the overall valuation may vary
from company to company and sector to sector).

Technology driven M&A transactions can lead to development and help in introduction of
new technologies and inventions, decreasing costs of R&D through allotting resources to
areas of great expertise. Intellectual property (IP) is also likely to be a key consideration for
acquiring companies operating in the tech space. IP is a crucial attribute as companies try to
get distinguished from the competition and place a prominent value on a target company’s
IP. IP will continue to motivate companies for acquisitions. Tech sector M&A activity is
likely to continue to flourish. Greater access to valuable IP, talent procurement, product
enhancement, disruption and expansion are just some of the primary motivators for the
resurgence of tech M&A. With interest rates at near historical lows, companies are
exploiting the situation and borrowing money to finance takeovers, which a few y ears ago
they might not have pursued.1

However, all is not hunky dory. Technology / knowledge transfer in M&A deals not only
brings value but also creates problems as far as Intellectual Property Rights are concerned,
as it differs from transfer of products in the following ways-

• Reversal of exchange of knowledge is not possible.

• Laws regarding knowledge protection vary a lot from country to country.

1 Tech Sector M&A on the rise, Financierworlwide.com, https://www.financierworldwide.com/tech-sector-ma-on-
the-rise-nov16/#.W_0_vOgzY2w. (last visited Nov. 2016)

• Assembling the necessary parts of knowledge required to develop future IP is a
complex task.

• Verificationof specific piece of knowledge used in certain cases is difficult.

7.2 IP Valuation

7.2.1 Why do we need IP Valuation?

Tangible • Can help in Capitalization
Benefits in • Mergers and Acquisition
• For Taxation purpose
M&A

Intangible • Credibility to the real worth and
Benefits stragedy developement.

• Indicator of effective utilization,
enhanced confidence.

Since IP is an intangible asset, its valuation is a critical affair in the process of due diligence.
Following are some of the important aspects to be considered for IP valuation-

• Particular industry,
• Market share of the IP owner in the industry,
• The lapsed and remaining life of registered IP rights,
• Pipeline of projects
• Level of competition in the industry
• Any pre-emptive rights to the IP owner;

• First mover advantage with the IP owner
• Profitability of the venture with use of the IP,
• Emergence and frequency of similar new technologies,

7.2.2 Methods of IP valuation-
7.2.2.1 Cost based method – The cost-based method is designed to evaluate the
future benefits of ownership by quantifying the financial amount required to obtain or
develop identical or similar IP asset in question.
7.2.2.2 Income based method – The income-based method assesses the asset on the
basis of current value of future net income stream that the assets in question are
anticipated to generate.The application of income method requires four variables, as
presented below –

o Total net income the asset is expected to generate.
o The time period over which the income is expected.
o The present value discount rate for the future income.
o The hazard of realizing future income.

How is IP Valuation Crucial in M&A Activity. The cinching of any Merger or Acquisition
involves three phases:
1. Pre-acquisition;
2. The Deal;
3. Integration;

7.3 How is Due Diligence Valuation carried out?

Diligent valuation of IP is crucial to any M&A transaction in certain industry segments due to
the divergence of information between the seller and the buyer. It starts with a Letter of
Intent(LOI) or a Memorandum of Understanding (MOU), in which the parties agree to exchange
essential information, documents, business plans, stipulating the schedule and deadlines. A
Confidentiality Agreement may be contracted if the IP involves certain trade secrets, protecting
Attorney-Client privileges.

Due diligence procedure plays a critical role in furnishing important information for both the
parties in an agreement of M&A. The computation of intellectual property and technology is a
prime determinant of the deal. There are various affairs in business which make the IP due
diligence inherently difficult and this creates troubles in the assessment of IP. Imperfect
framework or inapt business strategy implemented is among the topmost reasons the eventual
failure of IP driven M&As. Therefore, an analytical and comprehensive due diligence is
elementary in the success of such activities. It furnishes significant information related to the
prospects of future benefits, economic life, ownership rights and impediments of the assets.

Observed as functional filter, due diligence procedure should identify probable risks, capable of
harming inborn interests of the parties to the contract. The following questions may be included
in the due-diligence:-

• Is obtaining intellectual property assets the main motivation of contemplated transaction?
?

• What entities currently use given technologies or other IP,
• what is their position in relation to the acquirer and what other players in the market are

interested in the given technology?
• Is the respective industry prone to litigation about disputed IP or not?
• How sophisticated is the intellectual property policy of the target company?
• Is an asset purchase or stock purchase considered by the parties?
• What important objectives of the transaction may be identified?
• What is the level of concentration on the given market?
• How are the targeted intellectual property assets consistent with pursued IP business

strategy of the acquirer?

7.4 Non-Disclosure Agreement

It is presumed that all the confidential information is in shared in the due diligence stage, it is
pivotal for the parties undergo a non-disclosure agreement. This will secure the interests of the
parties if the agreement of merger or acquisition gets terminated in the future. As far as IP is
concerned, such deals provide safeguard to copyrights (software programs), inventions that were
not filed for patent yet, trade secrets, know-how, databases, list of customers, business methods.

A crucial requirement to safeguard the information under the non- disclosure agreement is that
the information should be kept confidential i.e. not in the public domain.

The preconditions for information which is suitable for protection are prescribed in the TRIPS
agreement which are:

• The information must be undisclosed, that is not generally known or easilyapproachable
to the people engaged in their respective field

• The confidentiality of information attributes it with definite value

• The holder of the information must have taken steps for security of information so that it
does not get exposed to public domain.

7.5 IP Benefits after the Deal

IP Benefits after the Deal, many companies are afraid to attempt to leverage their IP portfolio for
fear of losing their competitive advantage, starting a patent war or gaining a negative reputation
for using aggressive IP tactics. But by following a structured process, companies can generate
incremental value from theirIP portfolio—a potential goldmine no matter how small a part of the
deal— using a combination of business models:

• IP sale – Sell IP to the highest value user;
• Spin-off – Spin off IP assets as the seed for a startup in exchange for equity;

• Internal licensing program – License patents to obtain a variety of “currencies”;
• IP subsidiary – Set up a subsidiary to focus on patent licensing;
• Traditional patent pool – License essential patents along with others;
• Patent platform – License essential patents through a flexible patent platform;
• Donation – Donate patents to achieve strategic goals and gain taxadvantages; Funds and

Facilities for Investment in R&D Cells;
• Abandonment – Abandon un-leverageable patents to reduce costs. The most significant

of these leverage ideas is the tactic of “licensing” core Intellectual Property Assets by
companies to other firms, including competitors. This unconventional strategy would
generate enough incremental cash and other financial and strategic benefits to more than
offset the potential loss of market exclusivity caused by licensing.