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Papula-Nevinpat IP Seminar
THE RELATION BETWEEN IP VALUATION AND COMPANY VALUATION IN M&A
TRANSACTIONS
8 November 2016
Eng. Andrea Tiburzi
1 © 2016 - Barzanò & Zanardo
Agenda
• Who am I?
• Introduction
• The main message
• Strategy analysis
• Value extraction
• Examples from real life
© 2016 - Barzanò & Zanardo2
Preliminary remarks: unaccounted value
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Google takes over Motorola for 12.5B$, valuating Motorola patent portfolio 5.5B$
Microsoft will pay 3,79 B€ for Devices & Services division and 1,65 B€ for Nokia patents, for a total amount of 5,44
B€ cash
Samsung paid Apple 1.05 B$ for the infringement of three patents
• Currently, most part of the corporate value is represented by intangibles. This value is not represented in accounting data
• Transferring a company, or part thereof, explicitly or implicitly, directly or indirectly, a measurement of intangible assets is carried out
0,00%
20,00%
40,00%
60,00%
80,00%
100,00%
120,00%
Apple Inc. AlphabetInc.
HermesInt. SCA
LVMH SE BMW AG SiemensAG
Tangible BV Intangible BV
Preliminary remarks: problem
© 2016 - Barzanò & Zanardo
What is the driver for a CEO or a consultant in tackling or analyzing IP rights valuation in M&A transactions
4
Essential concepts: value creation
5 © 2016 - Barzanò & Zanardo
Company strategy
Funding:Equity, Debt
Tangible and Intangible assets (separable and not separable)
ENTERPRENEUR
Entrepreneur:CEOBoardSole investorManager(s)
When does IP rights value emerge?
• M&A transactions
• Bankruptcy proceedings
• Tax issues
• Loans/debts
• Basel 2/3
• Management information
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DISCONTINUITY AND
INFORMATION PURPOSES
6
Main message
7 © 2016 - Barzanò & Zanardo
StrategyAsset (includ.
IPRs)Funds
ENTERPRENEUR
FREE CASH FLOWS
COMPANY VALUE
PREMONEY POSTMONEYOPERATION
Main message
© 2016 - Barzanò & Zanardo
IP rights do not have an ACTIVE market
Any financial valuation isPOTENTIAL
IP rights value is related to the (company/strategy) context
8
Work framework
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INTANGIBLE VALUATION
MODEL
Company strategy analysis
Company analysis
Marketing and technical analysis
Legal analysis
Strategy
• A correct strategy analysis allows to understand the role of the IP rights in the value generation logic of the company
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Objectives
Competitiveenvironment
Competitive advantages Logic
Explorer/Exploiter business unit
Wall street well known proverb
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Revenue is vanity, profit is sanity,but cash is reality
M&A valuation methods: DCF
Discounted Cash Flows models are based on discounting future cash flows at an appropriate
discount rate
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Financial valuation methods: DCF
© 2016 - Barzanò & Zanardo13
Company value proportional to the generation of future cash flows
Co
mp
an
y
fin
an
cia
l v
alu
e
WA
CC
0
200
400
600
800
1000
1200
1400
1600
1 2 3 4 5Explicit estimation period
Discount rate
TerminalValue
Cash flow estimates
WACC system of equations: no comments, just to
scare you!
llMarket
p
l
mf
p
lfe
unleveredlevered
ARPrrrk
tE
D
3
2
3
1
3
2
3
1
11
14 © 2016 - Barzanò & Zanardo
ed kED
Etk
ED
DWACC
1
Company valuation and IP valuation
15 © 2016 - Barzanò & Zanardo
CASH FLOW
+ CF - income activity
+/- CF - working capital variation
- CF - capital expenditures
= Free Cash Flow from Operation
From company valuation to IP rights valuation
Ex
tra
ctin
g t
he
con
trib
uti
on
to
th
e ca
sh
flo
w f
rom
th
e IP
po
rtfo
lio
to
be
va
lua
ted
Differential logic
Market comparative
criteria
Residual criteria
VALUE
16 © 2016 - Barzanò & Zanardo
Scholars
• Differential logic: differential cash flows, differential income (ROS, EBITDA, EBIT),
differential margin (EBITDA indices / Sales, EV/EBITDA), premium price, cost savings,
multiples method (EBITDA/Sales, EBIT/Sales), cost losses, estimates of the damage that
the company undergoes losing the availability of IPRs
• Comparative criteria: comparable transactions, relief from royalty approach,
multiples implicit in the negotiations
• Residual approach: it estimates intangible differential profit as the residual profit after
subtracting to the normalized company profit the tangible and financial asset profits
• Others: real option, scenario analysis
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Case 1
• Leveraged buyout by a US private equity fund
• Italian target company active in the food
• Very strong and popular brand
18 © 2014 - Ing. Andrea Tiburzi
19
Bank
Cash
BondsFamily Private
equity fund
TargetCo (Trademark)
100%
NewCo
65%
NewCo2 Lux
35%
FamilyManagement
€
© 2014 - Ing. Andrea Tiburzi
100%
Case 1
Bank
Cash
BondsFamily Private
equity fund
65%
NewCo2 Lux
35%
Family Management
TargetCoInverse merger of NewCo and
TargetPledge on the trademark +
allocation of goodwill
20
Case 1
© 2014 - Ing. Andrea Tiburzi
21
NIC
Go
od
wil
l
NIC
Goodwill
T.MARKAllocation of the goodwill
and the value of the trademark
porfolio
© 2014 - Ing. Andrea Tiburzi
Allocation of the merger differences
Case 1
Case 2
• Parties:
– Company active in the chemical process industry (ChemCo) with technologies for the production of biodegradable plastics. High profit margins but production saturation problems
– Oil company (OilCo) also active in the production of industrial chemicals, with a large production site in a structural loss due to low-margin products
22 © 2014 - Ing. Andrea Tiburzi
Case 2
23 © 2014 - Ing. Andrea Tiburzi
JVCo
ChemCoPlants (in production saturation)
•know how
OilCo
Plants
CASH
50% 50%
Contribution of a company branch (double tax suspension). evaluation licenses and know-how
Share capitalincrease
Exclusive agreement
•Patents and trademarks licence
“It is money that generates the brightestideas”
F. Fellini
24 © 2016 - Barzanò & Zanardo
And if it was just the opposite ...?
Thank you
Eng. Andrea Tiburzi
Rome Office
Tel.: 06421771
© 2016 - Barzanò & Zanardo25
