The Relevance of IP Analysis in Technology-

Driven M&A TransactionsEdited by Osama Asif

 David Rockford

IEOR 190G – Patent EngineeringProfessor Tal Lavian

From Ideas to Assets - Chapter 23, pp. 497-509

Mergers and Acquisitions

• Transactions involving company mergers and acquisitions (M&A) are growing in frequency and size as well as the volume and value of intellectual property (IP) rights associated with them.

• Transactions involving M&A grew approximately four-fold between 1992 and mid 1999.

• Research found that intangibles contributed to 70-80% for market IP values.

Key M&A Problems and Solutions

• Companies that fail to secure a solid grasp of their Intellectual Property assets and competitive position put themselves at a severe disadvantage.

• Better analysis of IP attributes at key points during the M&A process should enhance the likelihood of more successful technology-driven deals.

• Using IP mapping, assessment, and valuation tools should assist in the M&A process.

Intellectual Property

Intellectual Property: • Increases opportunities for companies to extend and monetize their

patents and brands.• Creates the need for greater innovation given shortening technology

cycles, increased IP litigation, and significant growth in business process patents.

• Is a motivating force in M&A activity and raises the likelihood of successful deals.

• Allows for companies to add IP as corporate and valued assets for overall IPO valuation.

 Understanding the relative importance of IP (patents, trademarks, and other proprietary rights) is an integral part of successful M&A strategies.IP attributes should enhance the likelihood of more successful technology-driven deals.

M&A Trends and Implications

For U.S. public companies, data over the past year indicate that IP contribute on the order of 70-80 percent of market value making it difficult to ignore IP in M&A transactions.

Strong Growth

The number and value of M&A transactions has grown significantly in recent years. The reason behind these trends include:• Globalization• The effects of favorable accounting treatment from

pooling transactions on boosting returns on invested capital performance.

• The need to accelerate innovation (due to dynamic technology change and shortening technology cycles) and fill product gaps through technology-driven transactions.

Technology Focus

• Technology-intensive industries are prominent in M&A activity.

• Of the top 15 industries (ranked by transaction value), almost half were technology-intensive industries (e.g., software, electronics, aerospace, drugs, etc.)

• Pharmaceutical industries are prominent because they are constantly innovating and inventing patents

M&A Transaction Example

A $17 billion transaction involving JDS Uniphase E-Tek Dynamics and SDL. There was a high degree of overlap for selected technology areas which indicates potentially good technology synergy in a deal. This is good for both companies in some senses.  The complementary nature of these two companies technologies (IP) was a driving force in M&A. Helps add valuation of firms.This provides a perspective of how respective patent portfolios might fit together to drive a deal.

Identifying and Executing the Transaction

IP tools and processes have a great deal of relevance for the following areas of the M&A process• Identifying targets for technology-driven

deals.What is the target of the deal?• Due diligence (evaluation of assets and liabilities)

on the quality/risk of the IP portfolio to be acquired.

• Post merger assessment as to the optimal use of all the newly acquired IP.

Identifying Targets

On technology-driven deals, the catalyst is typically to fill a gap relative to the acquirer’s own technology and/or brand portfolio relative to expectations of potential demand for certain parts of an existing or emerging product space. Additional motivations include:• Desire to acquire greater R&D expertise• Enlarge the patent arsenal to enhance the ability to cross-license and

therefore enlarge a company’s number of strategic options.• To leverage significant brand IP across more product categories.

 Two major IP analytical considerations:• Identification of the strategic technology gaps in the acquirer’s portfolio

relative to expected demand.• Strategic assessment of the relative advantages of acquisition versus in-

licensing, self-funded R&D investment, alliance, or related strategy.

Filling a Technology Gap

Gap Analysis:• Identifying emerging technologies and the

strategic implications therein. What is popular and why?

• Monitoring customer’s needs and/or wants to be informed of the market forces. Market data is crucial in these areas to value market demands.

• Map out existing and emerging technologies for the particular product spaces.

• Determine the breadth and legal status of the target’s patent portfolio and how it might fit with that of the acquiring company.

Potential Company Assessment

Software has been used to link patents to products so a more complete assessment can be made of which patents are in use commercially and in what products. The ranking of the quality of a company’s patent portfolio can be based upon each patent’s frequency of citation by other companies and the extent of linkage to cutting-edge scientific research. This is of course still best estimates at most, it must be stressed that intangibles can always affect the market valuation. Assessment of potential market demand (growth patterns, new competitive entry, profitability) can help narrow the list as to which open research areas are particularly attractive from both demand and potential return perspective. Financial modeling tools (using advances on traditional discounted cash flow techniques) are often used at this point to assess the value proposition

Transaction Strategic Variables

Strategic Variables in M&A:• Identification of the potential players relative to

each scenario, and the competitive position and bargaining strengths available. Typically, acquirers like to know the field of industry or patent for which they acquire. 

• Risk and investment preferences of the acquirer• Size of the market opportunity and timing very

crucial in market analysis.• Extent of market change and uncertainty

Evaluating Opportunities

In this time of short technology cycles and globalization, having a process in place can facilitate consistent, ongoing, and quick evaluation of opportunities. IP analysis monitors technology cycles in the following ways:• Trending patent activity by area of technology identifies

the players and their relative strengths.• Trending the acquirer’s IP portfolio as a method to

gauge its R&D investment preferences can be valuable in negotiating licenses or joint ventures. This helps in joint-collaboration in research and development also.

• Trending the patent activity is a good indicator of the technology and innovation life cycles. It means that their is substantial value inherent to the IP that is attractable in the open market.

Target Company Assessment

Once a company identifies its target, develops its strategic approach, and generates interest, the focus shifts to evaluating the assets and liability of a company (referred to as ‘Due Diligence’). Important step in USPTO analysis of patent also.

Existing Approaches

Existing approaches of evaluating include:• “Relief from Royalty” method: looking at

comparable licensing deals for particular technologies and applying the associated royalty rate to the expected sales stream related to the technology being valued and then discounting back (risk adjusted) to a lump-sum value. Most predominant system in technology industries.

• “Cost to Recreate” said technology

New Approaches

New approaches of evaluating include:• Treat partially developed technology as a

call option (look at its revenue stream expected to accrue).

• Use financial option pricing methodology to evaluate the value of the technology in the current state. Maybe a legitimate way to find true valuation of IP.

Ideal Due Diligence

Combining existing approaches and new approaches, more robust technology valuation results can be generated. This way you do not lose sight of any metrics or paramaters of standards. 

Patent Quality

Patent mapping (the identification of the number of times a patent is cited, as well as the number of countries where the patent is legally protected) can provide indication of value, relative strategic strength of a patent, as well as projected continued innovation. Analysis of the Patent Portfolio provides:• Information on the rate of innovation of the target company.• The remaining useful lives on the core patents, ownership issues, and/or

constraints associated with the patent estate (e.g., previous joint venture restrictions).

• The degree to which the target’s patent estate overlaps and/or complements that of the acquirer.

 Patent Mapping and other research tools sheds light on both companies’ patent quality (e.g., extent of citation by competitors, degree of scientific linkages) and the extent to which changes in technology cycles may impact the value of the core patents going forward.

Post merger Integration

Once the deal is consummated, the next crucial step is successful and expedient integration of the newly acquired assets. This step, referred to as post merger integration, is a critical success factor for any merger or acquisition.Allows for successful and smooth transition into a new field or direction of industry.

Preparing for Post merger Integration

For Technology Driven Deals:• First a need to identify all the relevant patented

and unpatented technologies that have been acquired and then to pool or map the assets according to the acquirer’s existing classifications. This process identification, filtering, assessment, and categorization helps identifying the strategically relevant IP from the less important assets acquired in the transaction.

Alternative IP Management

• Licensing: Evaluating opportunities for technologies to be out licensed to others.

• Spin-Outs: Bundling technologies that may not be suitably aligned with the strategic direction of the company and creating a spin-out product or company.

• Patent Donations: Donating technologies to qualified institutions for a tax write off.

• Other Alternatives: Tax free swaps, joint ventures/alliances with other companies, or abandonment.

The Whole Picture

Intellectual property is very important in M&A transactions. Using IP tools such as mapping, assessment, and valuation tools can greatly enhance potential returns and reduce risks involved in M&A transactions.Using these metrics, potential returns can be greatly increased and potential losses can be greatly diminished through proper assesment tools and procedures.