IP Valuation in Bankruptcy

Intellectual Property Valuation, Monetization and Disposition in Bankruptcy Trademark & Copyright CLE Program NYIPLA June 3, 2009 Fernando Torres, MSc Chief Economist

Process 1. Identification 2. Quality, Hierarchy & Value 3. Valuation Process 4. Value Extraction

IP and the Bankruptcy Context
Bankruptcy is a set of laws providing for the regulated transfer of debtors’ assets to creditors in order to settle claims
Assets and liabilities must be valued to arrive at the appropriate transfer ratio
An administrative process , not negotiated in a market
Increasingly, intellectual property represents a significant proportion of the value to be transferred

Identification Questions
The big unknown is exactly what IP does the debtor own?
GAAP does not reflect internally-generated IP on financial statements
Management typically does not know the answer; specialists have the knowledge
Therefore: an immediate need for an IP Audit
How does the IP fit into the reorganization plan? Core vs. Peripheral IP assets.

IP & Intangible Assets Intellectual Property PATENTS COPY RIGHTS TRADE MARKS TRADE SECRETS Intangible Assets Data & Knowledge Bases COPY RIGHTS Customer & Vendor Relations Proprietary Software Internet Assets

Core and Non-Core IP/IA Underused Contracts & Relationships Embedded Workforce Derivative Patents Unused TM’s & Brands Non-Core Technology & Know How Core Assets Core Intellectual Property

Quality, Hierarchy and Value
There may be a good reason why the entity is in bankruptcy
Not all IP / IA are created equal
Classify the assets as Core or Periphery
Analyze quality of IP
Relevancy to current/future business
Relative strength analysis
Peripheral portfolios may be monetized
Vertical and horizontal
Out-licensing / Spin-off
Potential infringement assessment

Quality, Hierarchy and Value
Are the assets strategically separable from the core business?
Evaluation of credit bids for global asset portfolio versus individual asset buyers
IP assets to serve as collateral for either DIP and/or exit financing
Will need values for fairness opinions or court approval of §363 asset sales

Analyze IA/IP Portfolio Quality
Patents
Indicators such as:
Forward/Backward references
Breadth of key claims
Challenge/Infringement record
Trade secrets (procedures & safeguards)
Knowledge bases
Below-market contracts
Trademark – Distinctiveness, breadth of use in commerce
Timeliness of customer/transaction databases

Valuation
Defined Standards
Accepted Approaches
Specific Methods
Hierarchy determines effort allocation
Trademark values in corporate restructuring

Per $1 of sales, trademarks are worth more the faster the growth rate and the lower the risk
Trademark Values in Practice V TM S Slow Growth (2%) Fast Growth (5%) High Risk (30%) $0.15 $0.18 Low Risk (12%) $0.48 $0.69

Trademark Values in Bankruptcy
In bankruptcy, trademark value is only 13.6% of the going concern value (on average)
Statistically, two-thirds of trademarks in liquidation sell at discounts between 81% and 91%
Global trademarks are more valuable per $1 of sales

Value Extraction
Monetization Alternatives
Sale
License
Creditor Settlement
Sale & Leaseback
Securitization
Litigation
Securitization Alternatives
Line of Credit
Take-out or DIP
Interim
Long term

IP Auctions in Bankruptcy
Direct Marketing vs. Auction
IP assets are unique with few comparables in the marketplace
IP assets require a strategic plan to identify incremental value opportunities
Target buyers typically need more information than is offered through static auction process
IP assets must be creatively packaged to match specific buyer needs and/or strengths
Scheduled auctions market the auction as an event, not the specific assets as opportunities.

Conventional Standards of Value
Fair Market Value
The price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. (IRS.-Hypothetical)
Fair Value
The amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. (FASB.-Specific synergies)

Accepted Approaches
Cost
Measure value as the avoided cost of reproducing the functionality of the asset today.
Market
Value is measured by recent market transactions of comparable assets
Income
Measure as the net present value of expected net profit from using the asset

Specific Methods
Relief from royalty
Select representative royalty rate for IP asset and apply to expected sales trend
Market multiples
Reference comparable publicly disclosed transactions to get price/sales and price/book ratios
Option valuation
Asses value of waiting before practicing a patent, or extend a trademark to new markets, explicitly accounting for uncertainty

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IP Valuation in Bankruptcy

by Fernando Torres, MSc on Jul 07, 2010

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