© Talal Abu-Ghazaleh Valuation 2007 Valuing your IP: What is it worth? Methods of Valuation: Which Type is Right for You? Amman, October 31, 2007 Prof. Dr. Ulrich Moser, TAGValuation Khaled Sewiti, TAGValuation

IP Valuation Methods Agenda Introduction to IP Valuation Basic Valuation Concepts Application of Income Approach Reasonableness of Valuation Result Appendix: Case Study

Introduction to IP Valuation

Basic Valuation Concepts

Application of Income Approach

Reasonableness of Valuation Result

Appendix: Case Study

1 Introduction to IP Valuation

Basics on IP Valuation Intellectual Property and Intangible Assets Subject Asset Purpose of Valuation Agenda

Intellectual Property and Intangible Assets

Subject Asset

Purpose of Valuation

Types of Intangible Assets Supplier Capital Favorable Contracts Innovation Capital Patents Know How Human Capital Assembled Workforce Sales Force Process Capital Organization Computer Software Customer Capital Customer Relationships Trademark Distribution Network Investor Capital Relationships Location Capital

Supplier Capital

Favorable Contracts

Innovation Capital

Patents

Know How

Human Capital

Assembled Workforce

Sales Force

Process Capital

Organization

Computer Software

Customer Capital

Customer Relationships

Trademark

Distribution Network

Investor Capital

Relationships

Classification of IFRS 3 / FAS 141 Examples of intangible assets to be valued separately For the valuation, usually an external appraisal is used Marketing-related intangible assets Trade marks Internet domain names Non-competition agreements Customer-related intangible assets Customer lists Order or production backlog Customer contracts Customer relationships Artistic-related intangible assets Plays Books Pictures Contract-based intangible assets Licensing, royalty agreements Leasing agreements Broadcasting rights Technology-based intangible assets Patented and unpatended technologies Software Databases Secret formulas, processes Starting point is a strict identification process!!

Marketing-related intangible assets

Trade marks

Internet domain names

Non-competition agreements

Customer-related intangible assets

Customer lists

Order or production backlog

Customer contracts

Customer relationships

Artistic-related intangible assets

Plays

Books

Pictures

Contract-based intangible assets

Licensing, royalty agreements

Leasing agreements

Broadcasting rights

Technology-based intangible assets

Patented and unpatended technologies

Software

Databases

Secret formulas, processes

Fair Values - January 1, 200X Goodwill E N T I T Y E N T I T Y Market Value of Equity Market Value of Debt Assets and Liabilities of an Enterprise Working Capital Tangible Fixed Assets Portfolio Proprietary Technology TM Patents Intellectual Property Rights Contracts Customer Relationship … Software

Valuation of Enterprise vs. Valuation of Assets January 1, 200X Goodwill E N T I T Y E N T I T Y Market Value of Equity Market Value of Debt Implications Asset to be valued is part of a portfolio of assets (= Enterprise) The portfolio of assets generates a cash flow Contribution of Subject Asset has to be Identified Working Capital Tangible Fixed Assets Portfolio Proprietary Technology TM Patents Intellectual Property Rights Contracts Customer Relationship … Software

Implications

Asset to be valued is part

of a portfolio of assets

(= Enterprise)

The portfolio of assets

generates a cash flow

Contribution of Subject

Asset has to be Identified

Purpose of Valuation License Purchase/Sale Transactions Debt / Equity Strategic alliance … Transaction Price Financial and tax purposes IAS/IFRS-/ US GAAP-Accounting (Purchase Price Allocation and Impairment Test) Communication internal external (capitalmarket) Portfolio Management Corporate Strategy Collateral Business Intellectual Property Finance

2 Basic Valuation Concepts

Basic Valuation Concepts Future benefits are the driver of the value of assets Net Present Value Discounted Cash-flow methods Expected income of an alternative investment Income Approach Market Price Market Transaction Method Judgement of others in the marketplace Market Approach Reproduction Cost Replacement Cost Amount of Expenses Cost Approach Real Options Approach

Methodology of Income Approach Time Historical Performance Financial Projections Capitalizing with Cost of Capital Future Cash Flows of the Subject Asset DCF – Method Net Present Value

Market Approach – Basic Idea Valuation of an asset using known transaction prices of comparable assets Example: Application of Sales Multiples Sales Comparable Asset Transaction Price Comparable asset Sales Asset to be valued Market Vaue Asset to be valued Value Asset to be valued = Transaction Price Comparable Sales Comparable * Sales Asset to be valued

3 Application of Income Approach

Application of Income Approach Analysis of Subject Asset - Example Patent Protected Technology Analysis of Income Contribution of Subject Asset Valuation Methods Based on Income Approach Determination of Discount Rate Tax Amortization Benefit Agenda

Analysis of Subject Asset - Example Patent Protected Technology

Analysis of Income Contribution of Subject Asset

Valuation Methods Based on Income Approach

Determination of Discount Rate

Tax Amortization Benefit

Examples “Packaging”/ “Insulation sleeve” Packaging Insulation Sleeve EP 1 362 793 A2

Characteristics of Patents – Analysis of Value Drivers Strategic Alignment Availability of Comparable Technology Stage of development Innovativeness Technology Lifecycle Legal status / Validity Claim Coverage Territorial scope Age Legal Protection Technology Strategic Alignment Product Lifecycle Protected Coverage Product/Process Commercialization Patent value Realization Market potential Industry structure Exploitation Business use Potential Future Use Blocking Competitive advantages Exclusivity Freedom-to-Operate Market share Margin Complementary Assets Solution Value of unprotected technology Value of protection rights

Strategic Alignment

Availability of Comparable Technology

Stage of development

Innovativeness

Technology Lifecycle

Legal status / Validity

Claim Coverage

Territorial scope

Age

Strategic Alignment

Product Lifecycle

Protected Coverage

Value of a Patent Patent Value = Value of Protected Technology Value of protection rights Value of Business Unit Owning the patent Lack of Protection Rights Value of not patent protected technology Lack of Protection Rights Trade Secret Availability of Technology + =

Value of Business Unit

Owning the patent

Lack of Protection Rights

Lack of Protection

Rights

Trade Secret

Availability of

Technology

Valuation of the Protected Technology Products Competitor Patent- portfolio Patente Pa 3 Pa 5 Pa 1 Pa 7 Pa 4 Pa 6 Pa 2 P 1 P 2 P 1 P 2 Improvements, Features Fundamental Invention P 3 Complementary Protection Valuation of Patent Portfolio or Single Patents Know How

Overview Time Historical Performance Financial Projections Capitalizing with Cost of Capital / Return Rate on Asset Future Cash Flows of the Subject Asset DCF – Method Net Present Value Three Steps Analyse the Cash Flows Project Future Cash Flows Estimate Capitalization Rate

Three Steps

Analyse the Cash Flows

Project Future Cash Flows

Estimate Capitalization Rate

Analysis of Free Cash Flows of Business Unit Sales ./. Cost of Sales ./. SG&A Operating Profit ./. Tax NOPLAT ./. Changes WC ./. CapEx Free Cash Flow Market potential Market Share Incremental Income Analysis Increased Revenues Decreased Costs Industry Structue Competitive Advantages Business Value Capitalization Royalty Analysis Relief-from-Royalty Profit split Royalty Income Residual Value / Excess Earnings IP Valuation Models Financial Impact of (Un-) Protected Technology on Free Cash Flows Other Approaches

Incremental Income Analysis

Increased Revenues

Decreased Costs

Royalty Analysis

Relief-from-Royalty

Profit split

Royalty Income

Incremental Income Analysis (Premium Prices, Cost Savings) Sales ./. Cost of Sales ./. SG&A Operating Profit ./. Tax NOPLAT ./. Changes WC ./. CapEx Free Cash Flow Market potential Market Share Basic Assumption Comparable business unit without protected technology is available Industry Structue Competitive Advantages Business Value Capitalization Approach Comparison of FCF based on protected technology and FCF not applying subject asset Comments Analysis Impact of (Un-) Protected Technology on Free Cash Flows Application is limited! e.g. cost reductions realized by process patents (?) e.g. price premium for a product feature – caused by patent or trademark

Basic Assumption

Comparable business unit without

protected technology is available

Approach

Comparison of FCF based on protected

technology and FCF not applying

subject asset

Application is limited!

e.g. cost reductions realized by

process patents (?)

e.g. price premium for a product

feature – caused by patent or

trademark

Residual Value Method / Excess Earnings (Formula Method) January 1, 200X Asset to be valued E N T I T Y E N T I T Y Market Value of Equity Market Value of Debt Enity Value (Income Approach) ./. Value of all other assets (e.g. Fixed assets, trademarks, Contracts) = Value of asset to be valued Valuation of Core Asset Application is limited - Example Contribution to a joint venture Other interpretations of approach Assump t i ons Risk of overerstimating Working Capital Tangible Fixed Assets Portfolio Proprietary Technology TM 2 TM 1 Intellectual Property Rights Contracts Customer Relationship … Software

Approaches to Calculate Residual Value Income of Business Unit Entity Value of Business Unit Capitalization Excess Earnings Approach Residual Value Approach ./. Value of all Other Assets, e.g. Tangible Fixed Assets, Working Capital, Trademarks Residual Value Income of Business Unit ./. Contribution of all Other Assets to Income of Business Unit Return on Assets Return of Assets Excess Earnings Capitalization Residual Value ! =

Royalty Method (Relief-from-Royalty, Profit Split) Sales ./. Cost of Sales ./. SG&A Operating Profit ./. Tax NOPLAT ./. Changes WC ./. CapEx Free Cash Flow Royalty Income Basic Assumption Availability of comparable licensing transactions and detailed data Saving of Royalty Payments Business Value Capitalization Approach => hybrid Applying Market Transactions Applying profit split analysis Comments Analysis of Royalty Savings Application Risk of underestimating value Royalty Income Analysis of market transactions Favourable or unfavourable contract

Basic Assumption

Availability of comparable licensing

transactions and detailed data

Approach => hybrid

Applying Market Transactions

Applying profit split analysis

Application

Risk of underestimating value

Royalty Income

Analysis of market transactions

Favourable or unfavourable contract

Project Future Cash Flows - Application of Lifecycle Analysis Typical Life Cycle- models D A T A Plausibility check of data Modelling Price Volume 1 Research Studies Benchmarks Analysis of Products Analysis of Technology 2 3 4 5 Business Plan business industry

Determination of Capitalization Rate Januar 1, 200X Goodwill Market Value of Equity Debt Intangible Assets X Cost of Equity X Cost of Debt (after Tax) Asset specific Risik high low Rate of Return on individual Asset Weighted Average Cost of Capital Asset Specific Risk Premium = + / - Weighted Average Rate of Return on total Assets Weighted Average Cost of Capital = Working Capital Tangible Fixed Assets

WACC to WARA – Example Weighted Average Cost of Capital to Weighted Average Return on Assets

Determination of Weighted Average Cost of Capital – WACC (1-t) = Tax shield

Definition of Cost of Equity Application of Capital Asset Pricing Model Risikfree Rate i Market Risik Premium (r m – i) ß (Measure for Systematic Risik) Cost of Equity r E + .

Industry Specific ß-Factors

Tax Amortisation Benefit (TAB) Maximum Amount to be Payed for an Asset Tax Deductability of Purchased Asset: Net Present Value of future tax benefits based on depreciation/amortisation of purchase price Incremental Income + Residual Value + Relief-from- Royalty + Market Approach - Cost Approach (+/-) Purchase Price Allocation Asset Deal – Share Deal?

Tax Amortisation Benefit - Basics Fair Value = NPV (FCF) + TAB TAB = t * NPV (Depreciation) Depreciation = Fair Value / n TAB = NPV (Fair Value / n) Fair Value = NPV (FCF) + NPV (Fair Value / n)

Tax Amortisation Benefit - Calculation with (1) (2) (3) (4)

Reasonableness of Valuation Results 4

Plausibility Check of Valuation Results 30 40 50 60 80 70 90 100 80 40 115 15 Value Mio. € Tangible fixed assets Working Capital Patent and Trademark Portfolio Estimate of business value 350 Value of goodwill Business Value Going Concern Other Intanbible Assets

Case Study Packaging Solution Appemdix

Basic Data Case Study

Business Plan „Packaging Solution“ Remaining Useful Life of Patent: 7 Years (2013)

Balance Sheet „Packaging Solution“ December 31, 2006 (Mio. EUR) Goodwill Patents Trademarks Other Intangible Assets E N T I T Y E N T I T Y Market Value of Equity Market Value of Debt to be determined Equity : Ratio of Peer Group 60 : 40 Working Capital 75 Tangible Fixed Assets 100

General Assumptions Market Research Annual Growth Rate after 2009 about 2% Background Mature market, very long lifecycle Technology Research Expectation of new technology after 2013

Application of Income approach Case Study

Analysis of Free Cash Flows of Business Unit Sales ./. Cost of Sales ./. SG&A Operating Profit ./. Tax NOPLAT ./. Changes WC ./. CapEx Free Cash Flow Market potential Market Share Incremental Income Analysis Increased Revenues Decreased Costs Industry Structue Competitive Advantages Business Value Capitalization Royalty Analysis Relief-from-Royalty Profit split Royalty Income Residual Value / Excess Earnings IP Valuation Models Financial Impact of (Un-) Protected Technology on Free Cash Flows Other Approaches

Incremental Income Analysis

Increased Revenues

Decreased Costs

Royalty Analysis

Relief-from-Royalty

Profit split

Royalty Income

Calculation of Weighted Average Cost of Capital

Calculation of Discount Factors 1 1,0908 1 1,0908 1 1,0908 2 1 1,0908 3 1 1,0908 4 1 1,0908 5 1 1,0908 6 1 1,0908 7 Weighted Average Cost of Capital 9,08% Discount Factor

Royalty Analysis Sales ./. Cost of Sales ./. SG&A Operating Profit ./. Tax NOPLAT ./. Changes WC ./. CapEx Free Cash Flow Royalty Income Basic Assumption Availability of comparable licensing transactions and detailed data Saving of Royalty Payments Business Value Capitalization Approach => hybrid Applying Market Transactions Applying profit split analysis Comments Analysis of Royalty Savings Application Risk of underestimating value Royalty Income Analysis of market transactions Favourable or unfavourable contract

Basic Assumption

Availability of comparable licensing

transactions and detailed data

Approach => hybrid

Applying Market Transactions

Applying profit split analysis

Application

Risk of underestimating value

Royalty Income

Analysis of market transactions

Favourable or unfavourable contract

Estimation of Royalty Rates Royalty-Rate Royalty Source Research Medical Device 03-Dec-03 Licensee: CH Licensee Business: Licensor: Massachusetts Technology Licensor Business: Academia Royalty Rate, % (low range): 1.50 Royalty Rate, % (high range): 2.00 Upfront Fee: Licensed Property: This Agreement is made and entered into this day of , 1993. The Licensor hereby grants to LICENSEE the right and license to make, have made, use, lease and sell the LICENSED PRODUCTS and to practice the LICENSED PROCESSES in the TERRITORY for the FIELD OF USE. Technology relates to Case, "". "PRODUCT AREA" shall mean:. Compensation Detail: Royalty: For LICENSED PRODUCTS and LICENSED PROCESSES which do not contain substantial technical contribution, improvement, or change developed by LICENSEE, Running Royalties in an amount equal to Two Percent (2%) of the NET SALES of the LICENSED PRODUCTS leased or sold by LICENSEE and/or its SUBLICENSEE(S). For LICENSED PRODUCTS and LICENSED PROCESSES containing a substantial technical contribution, improvement, or change developed by LICENSEE, Running Royalties in an amount equal to One and One-Half Percent (1.5%) of the NET SALES of the LICENSED PRODUCTS leased or sold by SUBLICENSEE(S), or Twelve Percent (12%) of gross revenue received by LICENSEE from SUBLICENSEE(S), whichever of the two above referenced means of calculating sublicensing revenue yields a smaller number. Source: Form S-1 External Sources EY Sources Anhaltspunkte für die Bestimmung des Lizenzsatzes in den einzelnen Industriezweigen können daraus entnommen werden, daß z. B. im allgemeinen in der Elektroindustrie ein Lizenzsatz von 1/2 - 5% in der Maschinen- und Werkzeugindustrie ein Lizenzsatz von 1/3 - 10% in der chemischen Industrie ein Lizenzsatz von 2 - 5% auf pharmazeutischem Gebiet ein Lizenzsatz von 2 - 10% vom Umsatz üblich ist. (11) Für den Fall besonders hoher Umsätze kann die nachfolgende, bei Umsätzen über 3 Millionen M einsetzende Staffel als Anhalt für eine Ermäßigung des Lizenzsatzes dienen, wobei jedoch im Einzelfall zu berücksichtigen ist, ob und in welcher Höhe in den verschiedenen Industriezweigen solche Ermäßigungen des Lizenzsatzes bei freien Erfindungen üblich sind. Bei einem Gesamtumsatz [ Nach Rückfrage zur Euroumstellung beim Bundesministerium für Wirtschaft und Arbeit wurde am 14. November 2002 folgende Antwort gegeben: "Die Vergütungsrichtlinie ist nicht auf Euro-Beträge umgestellt worden. Insoweit ist darauf hinzuweisen, dass es sich bei dieser Richtlinie nicht um ein Gesetz handelt. DM-Beträge müssen daher entsprechend dem offiziellen Umrechnungskurs auf Euro-Beträge umgerechnet werden." ] von 0-3 Millionen DM keine Ermäßigung des Lizenzsatzes, von 3-5 Millionen DM 10% ige Ermäßigung des Lizenzsatzes für den 3 Millionen DM übersteigenden Umsatz, von 5-10 Millionen DM 20% ige Ermäßigung des Lizenzsatzes für den 5 Millionen DM übersteigenden Umsatz, von 10-20 Millionen DM 30% ige Ermäßigung des Lizenzsatzes für den 10 Millionen DM übersteigenden Umsatz, von 20-30 Millionen DM ….. Benchmarks Literature Examples

Anhaltspunkte für die Bestimmung des Lizenzsatzes in den einzelnen Industriezweigen können daraus entnommen werden, daß z. B. im allgemeinen

in der Elektroindustrie ein Lizenzsatz von 1/2 - 5%

in der Maschinen- und Werkzeugindustrie ein Lizenzsatz von 1/3 - 10%

in der chemischen Industrie ein Lizenzsatz von 2 - 5%

auf pharmazeutischem Gebiet ein Lizenzsatz von 2 - 10%

vom Umsatz üblich ist.

(11) Für den Fall besonders hoher Umsätze kann die nachfolgende, bei Umsätzen über 3 Millionen M einsetzende Staffel als Anhalt für eine Ermäßigung des Lizenzsatzes dienen, wobei jedoch im Einzelfall zu berücksichtigen ist, ob und in welcher Höhe in den verschiedenen Industriezweigen solche Ermäßigungen des Lizenzsatzes bei freien Erfindungen üblich sind. Bei einem Gesamtumsatz

[ Nach Rückfrage zur Euroumstellung beim Bundesministerium für Wirtschaft und Arbeit wurde am 14. November 2002 folgende Antwort gegeben: "Die Vergütungsrichtlinie ist nicht auf Euro-Beträge umgestellt worden. Insoweit ist darauf hinzuweisen, dass es sich bei dieser Richtlinie nicht um ein Gesetz handelt. DM-Beträge müssen daher entsprechend dem offiziellen Umrechnungskurs auf Euro-Beträge umgerechnet werden." ]

von 0-3 Millionen DM keine Ermäßigung des Lizenzsatzes,

von 3-5 Millionen DM 10% ige Ermäßigung des Lizenzsatzes für den 3 Millionen DM übersteigenden Umsatz,

von 5-10 Millionen DM 20% ige Ermäßigung des Lizenzsatzes für den 5 Millionen DM übersteigenden Umsatz,

von 10-20 Millionen DM 30% ige Ermäßigung des Lizenzsatzes für den 10 Millionen DM übersteigenden Umsatz,

von 20-30 Millionen DM …..

Projection of Future Revenues Assumptions Sales Projection Annual Growth Rate after 2009 2% Background Mature market, very long lifecycle, expectation of new technology after 2013 Business Plan Extrapolation

Relief-from-Royalty TAB = Tax Amortisation Benefit

Projection of Future Cash Flows Sales Projection Annual Growth Rate 2% Operating Profit Margin Average of Profit Margin 2006 – 2008 = 16,6% Business Plan

Sales Projection

Annual Growth Rate 2%

Operating Profit Margin

Average of Profit Margin

2006 – 2008 = 16,6%

Relief-from-Royalty – Profit Split Analysis TAB = Tax Amortisation Benefit

Incremental Income Analysis Sales ./. Cost of Sales ./. SG&A Operating Profit ./. Tax NOPLAT ./. Changes WC ./. CapEx Free Cash Flow Market potential Market Share Basic Assumption Comparable business unit without protected technology is available Industry Structue Competitive Advantages Business Value Capitalization Approach Comparison of FCF based on protected technology and FCF not applying subject asset Comments Analysis Impact of (Un-) Protected Technology on Free Cash Flows Application is limited! e.g. cost reductions realized by process patents (?) e.g. price premium for a product feature – caused by patent or trademark

Basic Assumption

Comparable business unit without

protected technology is available

Approach

Comparison of FCF based on protected

technology and FCF not applying

subject asset

Application is limited!

e.g. cost reductions realized by

process patents (?)

e.g. price premium for a product

feature – caused by patent or

trademark

Incremental Income Analysis TAB = Tax Amortisation Benefit Application of incremental income analysis is critical! The key issue is to identify the Incremental Income.

Residual Value Method / Excess Earnings (Formula Method) January 1, 200X Asset to be valued E N T I T Y E N T I T Y Market Value of Equity Market Value of Debt Enity Value (Income Approach) ./. Value of all other assets (e.g. Fixed assets, trademarks, Contracts) = Value of asset to be valued Valuation of Core Asset Application is limited - Example Contribution to a joint venture Other interpretations of approach Assump t i ons Risk of overerstimating Working Capital Tangible Fixed Assets Portfolio Proprietary Technology TM 2 TM 1 Intellectual Property Rights Contracts Customer Relationship … Software

Residual Value & Excess Earnings Approach Income of Business Unit Entity Value of Business Unit Capitalization Excess Earnings Approach Residual Value Approach ./. Value of all Other Assets, e.g. Tangible Fixed Assets, Working Capital, Trademarks Residual Value Income of Business Unit ./. Contribution of all Other Assets to Income of Business Unit Return on Assets Return of Assets Excess Earnings Capitalization Residual Value ! =

Calculation of Residual Value TAB = Tax Amortisation Benefit

Residual Value & Excess Earnings Approach Income of Business Unit Entity Value of Business Unit Capitalization Excess Earnings Approach Residual Value Approach ./. Value of all Other Assets, e.g. Tangible Fixed Assets, Working Capital, Trademarks Residual Value Income of Business Unit ./. Contribution of all Other Assets to Income of Business Unit Return on Assets Return of Assets Excess Earnings Capitalization Residual Value ! =

Calculation of Excess Earnings Approach TAB = Tax Amortisation Benefit

Calculation of Income Contribution of Other Assets: Contributory Asset Charges Deduction of Other Assets Using Contributory Asset Charges

Interpretation of Valuation Results

Tax Amortisation Benefit - Modelling

Contact Prof. Dr. Ulrich Moser TAGValuation Erfurt University of Applied Sciences (Germany) WP/StB/CVA Tel.: +962 6 5100600 Fax: +962 6 510-0601 E-Mail: u.c.moser@t-online.de

Contact Khalid Sweiti TAGValuation Manager CPA Amman-Jordan Tel.: +962 6 5100600 Fax: +962 6 510-0601 E-Mail: ksweiti@tagvaluation.com