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Intellectual Property
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Why IP is Essential in All Stages
of the M&A Process
By Gaby L. Longsworth
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.
