Using IP to Achieve Your Business Strategy Serena Tierney Wragge & Co
IP from a business perspective
IP is a valuable financial asset for many businesses – much greater proportion of assets than was the case historically
Businesses with good IP management outperform their competitors by up to 30%
IP assets are often not identified or valued, thus
under-utilised as possible collateral/security – or to support pension obligations
effectiveness of internal investment priorities cannot be assessed
performance targets may be set too low – or high
assets may be sold at too low a price
may be fragmented across a group, reducing their value
enforceability may be compromised
tax risks may not be identified in time
holding structure may reduce value achievable in an insolvency
Changing environment for intangible assets – ‘… and goodwill…’ no longer good enough
Intangible assets subject to far more attention by regulators - consequence of Enron scandal in USA
Accounting standards are now tighter: IFRS 3 and EU equivalents
Corporate governance requirements have been introduced: Sarbanes Oxley in US; best practice in EU
Tax authorities have spotted the opportunities
No longer possible to ignore management of intangible assets
A new focus for IP – secured lending
International Trade Rules – UNCITRAL guide to secured lending – IP annex
modernisation and harmonisation of rules on international business: new rules to facilitate use of IP assets as security for lending on both domestic and international basis
“ The Guide is based on the premise that sound secured transactions laws can have significant economic benefits for States that adopt them, including attracting credit from domestic and foreign lenders and other credit providers, promoting the development and growth of domestic businesses (in particular small and medium-sized enterprises) and generally increasing trade.”
ISO – Brand valuation standard under development- Basic requirements for methods of monetary brand valuation ISO/DISS 10668; also patent valuation standard under development
IP strategy starts at the top
IP strategy is integral part of business strategy
Align IP policy to business objectives
Need buy-in from CEO / COO / CFO
How do you get the CEO’s attention?
Intangible assets are 50% -70% overall value of company – efficient management essential to best in class performance
Financial reporting compliance
Impact on corporate tax bill
Provide funding opportunities
Strategic advantage in M&A
Most of the value of listed companies is intangible assets
2003 study by PwC showed that intangible assets made up 74% of the average purchase price of companies acquired in that year
Market capitalisation of FTSE 100 on August 31 st 2007 was 3 times book value*
What are intangible assets?
Generally-accepted categories include those relating to different operational functions of the business. Many are not formal IP rights but are essential supports for those rights.
Efficient management essential
Well-managed technology or brands and customer relationships are principal drivers of corporate value
Failure to identify and understand these assets risks:
Loss of confidence by investors and funders/Vulnerability to takeover
Investment on IP protection and enforcement may be misdirected
Poor market return
Setting performance targets too low/inability to achieve high performance delivery
Poor strategic decisions on internal investment priorities
Selling assets at too low a value
An under-valued brand
In 1996, Allied Domecq sold its ‘Plymouth Gin’ brand to a group of investors for a £9m
The investors put resources into reviving the brand
In 2001, it had become the UK’s best-selling premium gin brand and they sold a 50% interest in it for £20m
Allied Domecq missed out on the opportunity to make a far better return on their investment
Sarbanes Oxley – US business operations
Companies need to recognize any transactions that may impact intangible assets, establish a process to value them, and implement an adequate control system. They must find the relationship between the company's intangibles and its financial outcome.
EU corporate governance requirements
Many EU companies have business operations in the US and have to comply with Sarbanes Oxley. As a result, best practice in Europe follows the same principles and is increasingly expected by investors and lenders.
Financial reporting compliance
International Accounting Standard – IFRS3
Requires companies to value all acquired intangible assets for their balance sheets.
Any impairment to those assets must be stated each year in the company’s annual report
Brands, technology and other intangible assets must be valued by a company independent of the business and auditors
Equivalent standards are under consideration or have been adopted in many other countries
IP impacts the corporate tax bill
Specially favourable taxation rules in many jurisdictions
R&D tax credits
Low tax rates on IP in e.g. Republic of Ireland; Luxembourg; Netherlands
BUT BEWARE - there are also risks of increased tax bills
Withholding taxes on royalty income – may be relieved by double taxation treaties
Transfer pricing rules on intra-group use of IP
Strategic advantage in M&A
Understanding value of intangible assets enables management to appreciate and negotiate correct value for company
Can save embarrassment and loss of confidence such as when eBay had to write off $1.4bn of $2.6bn investment in Skype*
It can help in planning future expansion by identifying suitable technology for acquisition
*Wall Street Journal 3 rd October 2007
Designing a strategy for IP as a financial asset
IP strategy reinforces overall strategy – different at different stages of the company ’ s development
Establish a new market?
Become a significant player in an existing market?
Develop your market share vis- à -vis your competitors?
Maintain your market share in a mature market?
Build your company by organic growth?
Build your company by acquiring others?
Protect your company from acquisition by others?
Components of an intangible assets strategy - checklist
Board involvement – strategy for use and development of IP
IP protection strategy
IP enforcement strategy
Intellectual assets management processes
Identifying, valuing and managing IP as a financial asset enables