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Bulletin Focus |
Intellectual Property
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CIPO, Esq.: “Deal-Saver”
By Steven L. Tiedemann
According to some experts, 85 percent of the valuation of the S&P 500 is
represented by intangible assets, such as patents, trademarks, trade secrets
and copyrights (IP). However, there is no standardized method of valuing IP
assets in the Merger and Acquisition (M&A) process. In the most-sophisticated
and well-funded technology companies, an IP expert often serves as the company's
Chief Intellectual Property Officer (CIPO). CIPOs are responsible for the management,
and value maximization, of IP assets and the minimization of IP-related liabilities.
In short, CIPOs maximize shareholder value using offensive and defensive strategies.
When the company is sold (or is publicly traded), the CIPO hopefully has maximized
the value of the company.
In other technology companies, and in service, distribution and manufacturing
companies of all sizes, hiring a full-time senior executive to manage the value
of IP is not always an option. This presents an opportunity for the company's
private counsel, or in-house counsel, to perform these services and become
a more valued member of the management team. The fruit of such labors becomes
readily apparent to management, and to the company's investment banker, at
the time of a merger or acquisition of the company.
Although IP assets are recognized by management as valuable, balance sheets
are not likely to reflect all of this value. This differential between actual
and accounting value provides a great deal of room for objection, negotiation
and frustration during the M&A process. While Financial Accounting Standards
Board Statement No. 141 attempts to better value intangible assets during an
acquisition, generally accepted accounting principles (GAAP) do a poor job
of accounting for their full value. GAAP records intangible assets that have
been purchased at their original cost, rather than their current value. Balance
sheet values for internally-generated intangible assets can be even more misleading;
they reflect only the total of all expenses incurred to create the assets,
rather than their inherent value. Because of these accounting practices, the
value of many companies' intangible assets is left off their balance sheets.
Without better evidence of significant value, purchasers are unwilling to consider
fully these companies' intangible assets at time of sale. Without a full-time
CIPO, the seller's attorney can do plenty before and during the M&A process
to remedy this problem.
The seller's attorney should fill the CIPO role early during the M&A process,
which follows five stages for a buyer: (1) strategy formulation; (2) purchaser
selection; (3) negotiation; (4) due diligence; and (5) deal close. Historically,
IP value largely was ignored during this process and IP-related liabilities
were first addressed at stage four, i.e., during due diligence. While
it may seem foolish to address IP liabilities after the price and other important
terms have been established, in many cases, this is what is done. The proactive
attorney should, instead, during the first three stages focus on IP driving
value for the company and consider both IP value and IP-liabilities (including
potential future infringement litigation) during price negotiation. Thereafter,
the attorney should participate in the due diligence and closing stages of
the transaction, keeping a constant eye on IP value.
Experts performing IP valuations confirm each asset's: 1) specific identification
and description, 2) legal existence and legal protection, 3) private ownership
and legal transferability, and 4) tangible evidence of existence, such as a
contract, document, listing or registration statement. Thereafter, valuation
experts calculate the IP's economic value to the owner — the amount by
which it increases income or decreases costs. The seller's attorney must ensure
that sufficient evidence of each asset's existence and value is ready for presentation
during the first three stages of the M&A process, when company value is considered
and assessed.
Throughout the M&A process, the seller's attorney can do much to buttress
the value of each IP asset. Ideally, months before the client puts the company
up for sale, the attorney should help his client select a sophisticated M&A
Advisor/Investment Banker. The Investment Banker is skilled in making the deal
happen, structuring the deal financing and maximizing value to the client.
However, working closely with the expert knowledge of the IP attorney, the
investment banker can produce an even more persuasive Offering Memorandum for
a potential buyer, placing the IP assets in their proper context and with their
maximum value. Such disclosure, early in the sales process, means that the
seller only deals with purchasers that are prepared to consider IP value and
are ready to pay for it. IP issues, historically unearthed late in the due
diligence process, will be less likely to
"kill" the deal. Thus, the IP attorney can actually be considered the
"deal-saver".
When a client decides to sell, his or her attorney has many roles and responsibilities.
Adding the role of CIPO will result in more favorable sales terms for the client
and well-earned fees for the attorney.
Steven L. Tiedemann, Esq., is VP and General Counsel for Stronghold Advisors,
an investment bank/M&A advisory firm in Columbia, Maryland.
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