Given the tremendous economic adversity inflicted by the COVID-19 pandemic and the unprecedented burden placed on businesses, one would expect M&A activity to have spiked over the past year. However, this surge in business consolidations has yet to manifest for a couple of reasons suggested by Deloitte practitioners in a recent analysis.
The very commercial uncertainty that is causing businesses to fail also discourages risky ventures, while governmental assistance has offered valuable "life support" to many operations most disrupted. As a result, cautious hesitancy has prevailed so far among those businesses that would otherwise pursue consolidations, but one that some academics believe will soon give way to a swell of M&As. As vaccination programs gain momentum, subsidies abate and infections diminish, economies and borders will reopen, allowing business confidence to grow in a new post-COVID environment.
The foremost concern for every prospective investor is always to identify a suitable investment target. In some cases, the solution is naturally derived from sound business practice, for instance, when two competitors merge or a large player seeks to expand his business through an acquisition. A broader perspective for potential investment targets is key to discovering the hidden or not-so-hidden gems in other circumstances. In combination with market data and general societal trends such as sustainability, Intellectual Property (IP) data can serve as a great indicator of where best to cast one's net.
Our upcoming webinar will reveal how IP can contribute to a successful deal in every stage of the investment cycle, how an optimized IP function increases the ROI, why the IP value matters in an exit scenario and much more.
IP data is largely publicly available and can make technology leaders and "hidden champions" visible if analyzed and used correctly. Moreover, it can indicate "white spots" within the IP landscape. These are sectors that are not yet densely occupied by other Intellectual Property rights (IPR) applicants and are therefore more accommodating of expansion. If market and technology trend forecasts are also favorable, investing in companies active in such white spots is often auspicious as they can stake their claims in the IP landscape. The exclusivity they then enjoy through IPR protection redounds to their investors.
Through a technology assessment, attractive technologies, such as solid-state batteries or automotive fuel cells, can be parametrized, and advanced IP searches are carried out to reveal the most relevant players within the respective fields. This task is anything but trivial as a massive amount of data needs to be analyzed in a customized way to produce the desired insights.
Taking this roster of actors, a further qualification according to a key performance indicator (KPI) set and filter methodology generates a long list of potential targets to be assessed in more detail with an eye toward an investment proposition.
It is a widely known and oft-repeated fact that IP assets account for the greater part of many companies' value, particularly for startups. Consequently, meticulous checks of an investment target's IP portfolio are indispensable for each investment deal or M&A. As such, thorough IP due diligence is a common exercise in the negotiation phase. This typically sheds light on the legal strengths and risk factors behind a company's IP portfolio.
An example of such a risk factor is patent scope: Do the patents fully cover the actual product or technology in the relevant markets? Enforceability is also an essential factor: Can an infringement be detected to enable patent enforcement? There is a world of difference between a tangible product that can be bought on the market and analyzed and a production process that is deeply embedded in the alleged infringer's machines and factories. Finally, the portfolio's validity is one of the most crucial factors in any risk assessment. A portfolio consisting largely or only of patent applications carries enormous risk potentials for value losses in case the patents are not granted in the end.
A technology landscaping should complement every IP due diligence to give an overview of the position of the investment target and its technology within the competitive environment. A dense competitive landscape entails high risks of IP-related attacks such as infringement charges or invalidation attempts. Furthermore, it is more challenging to achieve Freedom to Operate (FTO) for future developments in populous fields. Companies active in white spots usually will not face a lot of competitive disturbances aside from new entrants. Comprehensive IP protection is, in this case, of the essence to impede such new players' market entry.
A prospective investor needs a clear view of and ready access to all relevant information concerning IP and competitive risk potentials before making an investment decision.
Once a deal is done, it is in the investor's interest to maximize the return on investment, the ROI. If a significant portion of the investment target's value is created through intangible assets, assessing and improving the target's IP practices is pivotal to optimizing the ROI.
To this end, Dennemeyer IP Consulting has developed the IP Performance Assessment service. This standardized methodology comprises three workstreams. Firstly, the subject's IP efficacy is scored based on selected KPIs and then compared to a suitable industry benchmark for an accurate status quo. Secondly, to generate a more nuanced perspective, an interview-based audit of the IP department consisting of about 350 questions provides a qualitative view of internal practice, allowing strengths, weaknesses and areas for improvement to be identified. Lastly, an outside-in and inside-out analysis contributes insights into IP customer perceptions, heightens internal awareness of IP and highlights improved collaboration opportunities.
In comparison to industry standards, the detailed report on the target's IP function also contains a roadmap of measures to enhance the competitiveness of IP practice toward IP excellence. Maintaining initiative and an attitude of engagement after the ink is dry is the best way for investors to maximize their ROI.
Inevitably, investors and their targets sometimes go their separate ways. However, determining a fair market value for the involved assets is important in any exit scenario. According to official standards, an IP valuation helps both the seller and the buyer find an acceptable transaction price and strengthens the seller's relative negotiation position.
In an exit scenario, the income-based valuation approach is most suitable as it is based on future earnings expected of the IP portfolio. A particular form of the income approach is the relief from royalty method, which enjoys special recognition with tax and accounting authorities.
This method calculates the value of patents, know-how and trademarks based on the hypothetical royalty payments the IP owner would have to make to an independent third party if the IPRs were licensed under market conditions instead of owned outright. A further advantage of this approach is that it illustrates the assets' economic value in IP-relevant legal, technological and competitive contexts.
As we have seen, IP plays an essential role throughout the investment and M&A processes. The IP-based target search identifies suitable opportunities in the initial research stage, while IP risk factor analyses assist in due diligence. After a deal is reached, the optimized IP function generates value during daily business, ensures successful post-merger integration and augments ROI.
With a fully consolidated IP portfolio, the investor and target can smoothly leverage synergies, streamline their workforce and exploit economies of scale. Even when things go wrong, IP is a means to calculate the value in an exit scenario. Therefore, investors and investment targets must understand the relevance and usefulness of IP along every step of the path, wherever it may lead.