Value generation is one of the primary incentives motivating mergers and acquisitions. This objective is achieved by creating synergies, gaining competitive advantages, increasing market share, stimulating growth and influencing supply chains. Intellectual property (IP) promotes these goals. IP assets must be identified, negotiated, integrated and leveraged to effectively achieve the goal of value generation through M&A.
Identification of IP assets is a foundational aspect of the transaction. Virtually every organisation uses IP in its daily operations, across all functions, and these assets now are essential in organisations of any type. Therefore, it is essential to identify the IP assets that support the organisation’s business and understand how they are owned and used.
IP includes patents, trademarks and copyrights that are publicly discoverable. The target should disclose lists of IP assets, independently confirmed by the acquirer through public and subscription sources. The scope of IP and the forms it takes are varied, including non-public and/or unregistered assets. Non-published IP assets can be just as important as issued patents, registered copyrights and registered trademarks. The acquirer must investigate liability issues attendant to the IP. Due diligence is critical to locating the IP, understanding who owns it and uses it, assessing value as part of the deal valuation and the ongoing operation after closing, and informing the parties how to structure the transaction.
Structuring and Negotiating the Transaction
The parties may have an idea of the legal and organisational structure for their deal. However, only after thorough diligence can the transaction be finally designed and the deal documents structured to address the conditions revealed during due diligence.Where joint ventures are formed, the parties must consider patentability provisions particular to the country where the JV is formed. For example, patent laws of some jurisdictions make patenting easier where the same entity owns both a patent application and the cited prior art. In these jurisdictions, the parties may wish to have one entity own all of the patented technology, in which event additional licenses may be necessary to implement use of the patented technology.
Diligence may reveal a significant body of know-how or trade secret information to be transferred to the acquirer. This information may be unwritten, and consulting agreements must be negotiated to ensure effective delivery and transition of the unregistered IP assets to representatives of the acquirer. This information also may impact the labour and employment issues of the transaction.IP holding companies may own and exploit IP assets in ways that take advantage of tax laws. This strategy may be employed when creating the deal structure, in which case the relevant entities must be included in the deal documents. If holding companies are set up after the transaction, there may be additional tax consequences to consider.
The representations and warranties and the indemnity provisions of the transaction documents are extremely important. The acquirer gilds the reps and warranties while the seller offers few assurances. The acquirer must seek warranties of title and ownership. Additional IP representations and warranties, including enforceability, validity, and conduct of the prosecution of the IP assets, may be requested but such representations and warranties are risky. Targets tend to resist these reps or limit them with knowledgebased restrictions.Offensive and defensive claims by or against third-parties must be disclosed and explained in schedules and appropriate exclusionary language and/or indemnification language included. IP claims against third parties may be seen as a desirable right that the acquirer wishes to enforce or as a litigation problem to be avoided.
Integration and Exploitation
The IP assets must be integrated into the acquiring organisation to realise synergies, expand product lines, increase market share and gain competitive advantages. If the acquirer fails to integrate, the IP assets may be ignored or lost. Unfortunately, this defeats the value generation purpose of the M&A transaction. An integration team should be formed and tasked with responsibility for integrating the IP assets into the acquiring organisation and profitably leveraging these assets. The integration team should comprise cross-functional membership who can assess the use and value of the IP assets to the acquiring organisation and implement these assets across the organisational structure, including affiliates and subsidiaries. The integration team utilises its expertise to further evaluate, integrate, manage, and leverage these assets throughout the organisational structure and implement a plan for management and exploitation.
The IP assets should be integrated into the particular culture of the organisation. Members of the organisation must be educated and aware of the assets and their value. A cross-functional approach to IP protection is essential. Everyone from human resources to tax, sales, marketing and accounting should understand what IP is and what their responsibilities are for creating, protecting and maintaining the organisation’s intellectual capital. The IP assets should be inventoried and documented. The integration team can rely on the diligence investigation to determine the number, type, and quality of IP assets and identify those assets that drive value for the organisation. Certain assets may have value to a smaller division while other assets have value across the entire organisation.
The IP assets may be valued again post-closing. Valuations are dependent on the tax laws and the purpose of the valuation. Accountants legally can value IP assets differently based upon different circumstances. Once acquired, the IP assets must be protected and maintained. The integration team implements processes and policies for leveraging the IP assets into the fabric of the business or may hand this task to the intellectual property management team.
Regular reviews and pruning of the IP portfolio are essential to assess strategic significance in relation to the organisational operations and financial climate. Post-closing, it is critical to integrate the IP assets, know and understand the value of these intellectual assets and implement them throughout the organisation
The deal team must maintain a collective vision for the transaction, driven by the organisation’s goals and objectives. The deal team should include an IP attorney to advise during diligence, structuring and negotiation of the transaction. IP assets sometimes are undervalued in the transaction but a balance that achieves the overall deal goals must be achieved. No perfect formula exists for weighing the significance of all of the assets and issues that arise in the course of negotiating and executing a deal. The relevant industry and the needs and purposes of the organisations involved will help the parties bring balance to the transaction and appropriately focus resources and energies. In this process, however, awareness of the importance of IP assets to the business operation is essential to generating value from the transaction.