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Valuation of ip assets

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  • 1. Valuation of IP Assets November 24, 2006 by S.A. Chenthil Kumaran Global Business Solutions Chennai © November 2006 Global Business Solutions. All rights reserved. admin@gbsindia.net
  • 2. Background
    • IPR Assets are recognized as the most important asset of many of the world’s largest and most powerful companies;
    • It is the foundation for the market dominance and continuing profitability of leading corporations.
    • It is often the key objective in mergers and acquisitions.
  • 3. Broad Range of Intangibles With Value
    • The obvious intangibles
      • Patents
      • Copyrights
      • Trademarks
    • Bundles of intellectual capital and intangible assets
      • The Technical Bundle
      • The Marketing Bundle
      • The IT Bundle
  • 4. Technical Bundle of Intangibles
    • Key patents
    • Trade secrets
    • Formulae
    • Packaging technology and sources
    • Process technology
    • Design technology
    • New product technology
    • Technical data sheets
    • Evaluation data
    • Proprietary test results
    • Plant and production design
    • Product specifications
  • 5. Marketing Bundle of Intangibles
    • Corporate name and logo
    • Primary trademark
    • brand names
    • Sub-brand names and trade dress
    • Worldwide trademark registrations
    • Secondary trademarks
    • Packaging design and copyrights
    • Consumer advertising
    • Marketing strategy
    • Product warranties
    • Graphics
    • Promotional concepts
    • Worldwide public relations efforts
  • 6. IT Bundle of Intangibles
    • Enterprise solutions
    • Custom applications
    • Data warehouses
    • Master licenses
    • Source code
    • Databases
    • Data mining
    • Domain names / URLs
    • E-commerce sites
    • Third party software tools
    • Credit / payment systems
  • 7. IP Valuation
    • Valuation Is Context Specific & Time Critical
    • CONTEXT + TIME = VALUE OF IP
  • 8. Investors Value Intellectual Property
    • Intangible assets account for over 70% of the total asset value in 2002 (up from 30% in 1970)
    • IP influences valuation of an organization in case of M&A
        • ST Microelectronics acquired Mastek for $71 M primarily for its IP assets and licensed them for over $450 M
        • Microsoft acquired Web TV for $425 M primarily for its 35 patents
    • IP Valuation helps in raising venture capital
        • TriCN, Inc. - A leading developer of semiconductor interface technology raised over $4.5 M on the basis of its IP assets
  • 9. The IBM Story Annual licensing revenue increased from $30 M in 1992 to over $1.3 B in 1999
    • Innovation encouraged through Performance Management System
    • Approximately $5 B per year in R&D since 1996
    • Over 3,000 patents filed every year
    • Current active portfolio has 21,000 patents in the United States and 38,000 patents worldwide
    • Leading the USPTO list of top patent filing companies for the past eight years
    R&D Process Financial Gains Intellectual Property
  • 10. Reasons for Valuing IP Assets
    • Corporate Mergers & Acquisition
    • Litigation
    • Fund Raising
    • IPO
    • Joint Ventures
    • Intra Company Transfers
    • Financial Reporting
    • Assignment or Acquisition of IP Assets
    • Licensing in or out the IP Asset
    • Investment in the IP Asset (E.g. For further development)
  • 11. Factors Driving IP Value
    • Industry
    • Market Share
    • Profits
    • New Technologies
    • Barriers to Entry
    • Growth Prospects
    • Legal Protection
  • 12. PURPOSES AND USES OF IP VALUATIONS
    • ♦ Financial Reporting
    • ♦ Sale Transaction Support
    • ♦ Licensing
    • ♦ Strategic Alliances
    • ♦ Infringement Damages
    • ♦ Transfer Pricing
    • ♦ Equity Raising
    • ♦ Collateral-based Financing
  • 13. Valuation Effort Required Circumstance Expected Degree of Scrutiny Level of Effort Required Litigation Very High Large Tax-Related Ventures High Large Joint Ventures High Large Intra-Company Transfers High Large
  • 14. Valuation Effort Required (cont.) Circumstance Expected Degree of Scrutiny Level of Effort Required Business Decision Making Medium Medium Licensing (Sale & Purchase) Medium Medium In-Kind Contribution Medium Medium R&D Investment Medium Medium
  • 15. VALUATION OF IP - THREE APPROACHES
    • ♦ Market Approach
    • ♦ Cost Approach
    • ♦ Income Approach
  • 16. MARKET APPROACH
    • ♦ Provides indications of value by studying transactions of property similar to the property for which a value conclusion is sought.
    • ♦ Requirements
      • Active market involving comparable property
      • Past transactions of comparable property
      • Access to transaction price information
  • 17. Disadvantages
    • Search for a comparable market transaction is futile
    • Lack of compatibility
    • IP transactions are part of a larger transaction and details are kept extremely confidential
    • It is never possible to find a transaction
  • 18. COST APPROACH
    • ♦ Replacement Cost Method
    • — Cost of obtaining a property of equivalent utility
    • - "Cost of Replacement"
    • ♦ Reproduction Cost Method
    • — Cost to obtain an unused replica of the subject property
    • - "Cost of Reproduction New“
    • Useful for determining whether to develop the IP in-house or license
    • Helps to put bounds on amount willing to pay or receive for license
  • 19. Disadvantages
    • This approach ignores changes in the time value of money and ignores maintenance Cost. Does not account for market demand.
  • 20. INCOME APPROACH
    • ♦ Assess the ability of IP to produce cash flow
      • Based on discounted cash-flow theory
      • = Present value of cash flow generated from future sales over useful lifetime of IP
    • Key points
      • Identify revenue portion generated by IP
      • Anticipate growth in projections
      • Anticipate duration of revenues
      • Evaluate risks affecting projections (market, IP, technology)
  • 21. Economic Benefits Valuation
    • This method is based upon the principle that an IP asset must produce a net economic benefit during its life in order to have any value i.e. the benefit of the asset over its lifetime must exceed cost.
    • The net economic benefit must be sufficiently large to provide a rate of return with the investment risk.
  • 22. Net Present Value
    • Present Value or a Value at a future date is calculated based on:
      • The cost of design, research, development, marketing and distribution.
      • Life of the Product or Process
      • Life of the associated IP
      • The timing and quantum of the income stream
      • Risk and inflation factors.
      • The above will bring the IP assets to a Net Present Value.
  • 23. Discounted cash flow (“DCF”) analysis
    • Discounted cash flow (“DCF”) analysis sits is probably the most comprehensive of appraisal techniques. Potential profits and cash flows needs are assessed to arrive at the present value through use of a discount rate, or rates.
  • 24. Contd…
    • The projection of market revenues will be a critical step in the valuation using this analysis. The potential will need to be assessed by reference to the enduring nature of the asset, and its marketability, and this must subsume consideration of expenses together with an estimate of residual value or terminal value, if any. This method recognizes market conditions, likely performance and potential, and the time value of money. It is illustrative, demonstrating the cash flow potential, or not, of the property and is highly regarded and widely used in the financial community.
  • 25. Conclusion
    • IP Valuations are based on the IP to be valued (trademark, patents, Copyright etc), for whom its valued and purpose of valuation.
    • Normally many assumptions need to be made and valuing IP assets has the character of being more of an art than a science.
  • 26. THANK YOU