Maryland Bar Bulletin
Publications : Bar Bulletin : March 2007

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 Bar Bulletin Focus

Intellectual Property     

Why IP is Essential in All Stages of the M&A Process

In an era of increased corporate accountability, one of the most significant decisions a company can make involves mergers and acquisitions (M&A). Early on in the M&A process, the target's technology, products and markets are usually the primary focus of the investigation, while the assessment of intellectual property (IP) occurs much later in the due diligence stage. This is unfortunate because having IP considered so late in the M&A process can lead to considerable loss of value or, worse, failure to close the deal. Up-front consideration of the target's IP can have significant benefits and help ensure the long-term viability of the company that emerges from the acquisition. Below is a step-by-step review of the importance of IP assessment early on in the M&A process, as well as in subsequent stages.

M&A activity consists of the following successive stages: growth strategy identification, target selection and evaluation, negotiation, IP due diligence, final negotiation/execution of the deal and post-closing integration.

During the first stage, potential new business opportunities and future growth of the enterprise are explored. At this stage, acquiring new IP can enhance value by creating barriers for competitors trying to enter the market, ensuring freedom to operate, minimizing infringement risk via cross-licensing and facilitating joint ventures and strategic alliances.

IP also plays an important role in target selection and evaluation. As part of target selection and evaluation, the target's IP may highlight if and how value can be obtained as a result of combining IP portfolios. In certain instances, the buyer can obtain considerable value after closing of the deal by selling or licensing certain acquired IP assets. Often, the buyer can recoup most if not all of the purchase price through such post-closing money-making deals. Evaluation of the IP portfolio at this early stage also potentially identifies those deals that will ultimately fail to close because of freedom to operate issues or risk of infringement.

During the opening negotiation and pricing stage, the results of the target's IP assessment should be considered. More specifically, the potential value of the IP should be incorporated into the purchase price. This stage represents the most challenging aspect of integrating IP analysis into the early stages of M&A activity, because calculating IP value is not a trivial endeavor. Even though IP value may be difficult to quantify, it should still be considered as part of the pricing package. IP properly used in a negotiation can have a dramatic impact on deal valuation.

Traditionally, IP is first considered during the due diligence stage of the M&A process. Due diligence involves a complete assessment of the IP portfolio, and involves examination of the target's IP-related files, consultations with the target's IP counsel, examination of the target's exclusivity positions, freedom to operate, IP license agreements, enforcement problems and other relevant IP issues. At this stage of the game, previously undisclosed or unappreciated IP risks could be uncovered that in a worst-case scenario could prevent the closing of the deal. This, in essence, illustrates why it should be considered bad practice to wait until this late stage of the deal to first start looking into IP issues.

The fifth stage of the M&A process is final negotiation and deal close. At this stage, the IP-related terms and conditions of the agreement should be carefully worked out, and the IP portfolio should be carefully documented and organized. The amount of IP work required during this phase can be considerable, and adequate resources will be needed to handle the analysis properly. Extreme care must be taken to ensure that valuable pending IP rights are not impaired or lost during and immediately after closing, especially if the IP portfolio is large. Without the proper management of the IP portfolio, valuable IP rights could be unnecessarily lost during the hand-off to the acquirer.

Finally, for the acquirer, IP integration is an important part of the post-closing stage of the M&A process. At this point, the acquired patent portfolio should be carefully reviewed to determine which patents can potentially strengthen the acquirer's patent position and which do not. Considerable value can be obtained after closing of the deal by selling or licensing IP assets that do not strengthen the acquirer's patent position. The value of the combined IP portfolio can be further enhanced by acquisition or licensing of additional third party IP.

Clearly, competent and diligent evaluation of the target's IP portfolio early on in the M&A process, as well as in subsequent stages, can provide significant value to the acquirer or, better yet, prevent a bad deal from happening.

Gaby L. Longsworth, Ph.D., Esq., is an associate with the law firm of Sterne, Kessler, Goldstein & Fox P.L.L.C. She concentrates her practice in patent law. This article reflects the present thoughts of the author and should not be attributed to Sterne, Kessler, Goldstein & Fox P.L.L.C. or any of its former, current or future clients. The content is for purposes of discussion and should not be considered legal advice.

In an era of increased corporate accountability, one of the most significant decisions a company can make involves mergers and acquisitions (M&A). Early on in the M&A process, the target's technology, products and markets are usually the primary focus of the investigation, while the assessment of intellectual property (IP) occurs much later in the due diligence stage. This is unfortunate because having IP considered so late in the M&A process can lead to considerable loss of value or, worse, failure to close the deal. Up-front consideration of the target's IP can have significant benefits and help ensure the long-term viability of the company that emerges from the acquisition. Below is a step-by-step review of the importance of IP assessment early on in the M&A process, as well as in subsequent stages.

M&A activity consists of the following successive stages: growth strategy identification, target selection and evaluation, negotiation, IP due diligence, final negotiation/execution of the deal and post-closing integration.

During the first stage, potential new business opportunities and future growth of the enterprise are explored. At this stage, acquiring new IP can enhance value by creating barriers for competitors trying to enter the market, ensuring freedom to operate, minimizing infringement risk via cross-licensing and facilitating joint ventures and strategic alliances.

IP also plays an important role in target selection and evaluation. As part of target selection and evaluation, the target's IP may highlight if and how value can be obtained as a result of combining IP portfolios. In certain instances, the buyer can obtain considerable value after closing of the deal by selling or licensing certain acquired IP assets. Often, the buyer can recoup most if not all of the purchase price through such post-closing money-making deals. Evaluation of the IP portfolio at this early stage also potentially identifies those deals that will ultimately fail to close because of freedom to operate issues or risk of infringement.

During the opening negotiation and pricing stage, the results of the target's IP assessment should be considered. More specifically, the potential value of the IP should be incorporated into the purchase price. This stage represents the most challenging aspect of integrating IP analysis into the early stages of M&A activity, because calculating IP value is not a trivial endeavor. Even though IP value may be difficult to quantify, it should still be considered as part of the pricing package. IP properly used in a negotiation can have a dramatic impact on deal valuation.

Traditionally, IP is first considered during the due diligence stage of the M&A process. Due diligence involves a complete assessment of the IP portfolio, and involves examination of the target's IP-related files, consultations with the target's IP counsel, examination of the target's exclusivity positions, freedom to operate, IP license agreements, enforcement problems and other relevant IP issues. At this stage of the game, previously undisclosed or unappreciated IP risks could be uncovered that in a worst-case scenario could prevent the closing of the deal. This, in essence, illustrates why it should be considered bad practice to wait until this late stage of the deal to first start looking into IP issues.

The fifth stage of the M&A process is final negotiation and deal close. At this stage, the IP-related terms and conditions of the agreement should be carefully worked out, and the IP portfolio should be carefully documented and organized. The amount of IP work required during this phase can be considerable, and adequate resources will be needed to handle the analysis properly. Extreme care must be taken to ensure that valuable pending IP rights are not impaired or lost during and immediately after closing, especially if the IP portfolio is large. Without the proper management of the IP portfolio, valuable IP rights could be unnecessarily lost during the hand-off to the acquirer.

Finally, for the acquirer, IP integration is an important part of the post-closing stage of the M&A process. At this point, the acquired patent portfolio should be carefully reviewed to determine which patents can potentially strengthen the acquirer's patent position and which do not. Considerable value can be obtained after closing of the deal by selling or licensing IP assets that do not strengthen the acquirer's patent position. The value of the combined IP portfolio can be further enhanced by acquisition or licensing of additional third party IP.

Clearly, competent and diligent evaluation of the target's IP portfolio early on in the M&A process, as well as in subsequent stages, can provide significant value to the acquirer or, better yet, prevent a bad deal from happening.

Gaby L. Longsworth, Ph.D., Esq., is an associate with the law firm of Sterne, Kessler, Goldstein & Fox P.L.L.C. She concentrates her practice in patent law. This article reflects the present thoughts of the author and should not be attributed to Sterne, Kessler, Goldstein & Fox P.L.L.C. or any of its former, current or future clients. The content is for purposes of discussion and should not be considered legal advice.

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Publications : Bar Bulletin: March 2007