Most M&A transactions fail to meet expectations. When IP is involved, ways exist to improve the odds.
Recently, I was asked to speak to a Georgia Tech MBA class about IP Strategy–specifically about the inter-play of IP in M&A. A significant portion of my talk addressed how poorly existing due diligence and IP metric methodologies traditionally perform to predict the financial success of M&A transactions. There is no question that improvements are needed in this regard. For example, in 2006, Inc.com reported that 60-70 % of acquisitions fail and more than 90 % of acquired businesses lose value. These somewhat dismal results leave no doubt that acquiring companies need better sources of information to properly vet and select acquisition targets.
Having been involved in M&A transactions as a legal and business advisor over the years, I have developed unique insights on the the due diligence and IP metric processes from both sides of deals. In these deals, the highest (and presumably most expensive) advice of investment bankers and M&A attorneys directed the deal flow. Significantly, however, much like a real estate transaction, these advisors took their money at the close of the deal and left my client with the property. These advisors had no incentive to ensure the house was in good shape after they walked away with their compensation for effecting the deal. Instead, these M&A advisors are incentivized to get the deal to close, not to ensure that the purchaser is buying a property that is poised to generate the value that drove the deal to completion in the first place.
As someone who has worked both sides of M&A deals for my clients as a day-to-day advisor, I now believe one of the major problems with M&A’s, at least those involving IP, is that the acquirer fails to properly assess whether and how the target’s products or technology provide a durable competitive advantage. There is a big difference between a patent that covers the product that generates (or is predicted to generate) significant value after the acquisition and a patent that not only covers the valuable product and that is broad enough to prevent others from competing in the same product domain. In my experience, the latter is what matters, but the due diligence process primarily focuses on the former.
The good news is that it is is not hard to develop a point of view about the competitive effect of a target’s IP, which includes patents, as well as other forms. Those vetting the deal have to analyze not only the patent itself, but also the patents of others in the general area. This is not an infringement analysis; such a review is done in traditional M&A due diligence. Rather, this is more of a patent ecosystem-type approach to the patents relevant to the products supporting the business of the target company. The question then becomes:
Does it appear that other companies have worked or are actively working in areas identical to or similar enough to the products that are seen as important to defining a significant portion of the value of the target that is driving the decision to complete the deal?
If there are many companies with patent filings in the relevant areas, the potential acquirer should perceive a signal that other ways to solve the same consumer need e.g., other possible product designs. Such alternatives should demonstrate that, without other factors, the product may not hold a durable competitive advantage, the absence of which could likely result in the competitive, non-infringing substitutes entering the market. Of course, such substitutes will often lead to price erosion, a fact which will invariably result in a loss of profit margins for the seller of the product. If those profit margins were the numbers that drove the M&A decision-making criteria in significant form, the expectations of the acquirer will not be met. In this regard, it is not surprising that so many M&A transactions do not meet expectations.
I have written elsewhere about how to collect and analyze patent data appropriately, as well as having spoken on this subject to competitive intelligence professionals. I will likely do so again. The key is for business professionals to better understand what patents mean and the value they bring (or don’t bring) to a potential M&A target. I look forward to continuing the conversation with business people. Please feel free to contact me in this regard.
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The News is Out: We Now Have an Intangible Asset-Based Corporate Economy
(Ed. Note: A family emergency has been keeping me away from the office. The good news is that I have been catching up on my RSS feeds and reading some really interesting stuff, albeit a bit late. One of these interesting reads is a David Brooks piece dealing with corporate intangible assets. Since this was published Christmas week, others may have missed it, too. And, when pundits pick up on what you have been talking about for years, I means that the public is finally “getting” it!)
David Brooks’ Op-Ed in the December 22, 2009 New York Times raises some interesting points about our new intangible economy. In this piece, entitled “The Protocol Economy,” Brooks recognizes that we have moved from an economy that makes “stuff” –that is, a physical goods economy—to one that deals in “protocols.” (I think it would be more appropriate to call our evolving intangible economy a “process-oriented economy,” but I will go with Brooks’ characterization for this post.) The point of Brooks’ piece is to highlight the need of economics to transform its models in order to deal with this new reality.
Brooks’ states:
Protocols are intangible . . . .[A] nation has to have a good operating system: laws, regulations and property rights.” He goes on to say, in relation to the high cost of entry and often miniscule cost of copying a product that is the embodiment of an intangible idea, “[y]ou’re only going to invest the money to make that first [product] if you have a temporary monopoly to sell the copies. So a nation has to find a way to protect property rights while still encouraging the flow of ideas.
As an IP Strategist, I concur wholly with Brooks that laws have to be in place to allow those who invest in the intangible economy to recoup their investment. However, I believe that Brooks’ argument begs the question of what is needed for this new “protocol economy” because, in my experience, relatively few business professionals even recognize that the rules of economic engagement have changed so markedly in recent years. Breaking down Brooks’ assertion, he is advocating for detailed rules of the road when most people are still walking on dirt pathways.
Experts today agree that most, if not virtually all for some companies, of corporate value is in the form of intangible assets, which can exist in the form of intellectual property—patents, trade secrets, copyrights, trademarks– or as other, less recognized forms, such as contractual relationships, specialized employee knowledge and others. These assets do not exist just because experts say they do; rather, they must be identified, captured, protected and leveraged in order for any value embedded in them to be realized. Or, put another way, intangible assets cannot be measured unless they are managed.
So, while I agree with Brooks that the US and other countries need to focus more on intellectual property protection, I will choose to spend my time trying to demonstrate to people why and how they need to understand where their organization’s value lies and how to successfully capture it. In other words, experts and pundits can say it is so—I intend to make it so. Here’s looking forward to the Year of the Intangible Asset!
Posted in: Commentary, IAM, IP Strategists, Intellectual Asset Management, Patent Business Strategy, intangible asset management.
Tagged: business strategy · intangible ass · Intellectual Asset Management · Intellectual Property Strategy · IP Strategists · ip strategy · Patent Strategy