IP Valuation in Bankruptcy


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NYIPLA presentation regarding the bankruptcy context and IP values

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  • This covers Section VI on Pages 6-7
  • IP Valuation in Bankruptcy

    1. 1. Intellectual Property Valuation, Monetization and Disposition in Bankruptcy Trademark & Copyright CLE Program NYIPLA June 3, 2009 Fernando Torres, MSc Chief Economist
    2. 2. Process 1. Identification 2. Quality, Hierarchy & Value 3. Valuation Process 4. Value Extraction
    3. 3. IP and the Bankruptcy Context <ul><li>Bankruptcy is a set of laws providing for the regulated transfer of debtors’ assets to creditors in order to settle claims </li></ul><ul><li>Assets and liabilities must be valued to arrive at the appropriate transfer ratio </li></ul><ul><li>An administrative process , not negotiated in a market </li></ul><ul><li>Increasingly, intellectual property represents a significant proportion of the value to be transferred </li></ul>
    4. 4. Identification Questions <ul><li>The big unknown is exactly what IP does the debtor own? </li></ul><ul><ul><li>GAAP does not reflect internally-generated IP on financial statements </li></ul></ul><ul><ul><li>Management typically does not know the answer; specialists have the knowledge </li></ul></ul><ul><ul><li>Therefore: an immediate need for an IP Audit </li></ul></ul><ul><li>How does the IP fit into the reorganization plan? Core vs. Peripheral IP assets. </li></ul>
    5. 5. 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
    6. 6. 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
    7. 7. Quality, Hierarchy and Value <ul><li>There may be a good reason why the entity is in bankruptcy </li></ul><ul><li>Not all IP / IA are created equal </li></ul><ul><ul><li>Classify the assets as Core or Periphery </li></ul></ul><ul><li>Analyze quality of IP </li></ul><ul><ul><li>Relevancy to current/future business </li></ul></ul><ul><ul><li>Relative strength analysis </li></ul></ul><ul><li>Peripheral portfolios may be monetized </li></ul><ul><ul><li>Vertical and horizontal </li></ul></ul><ul><ul><li>Out-licensing / Spin-off </li></ul></ul><ul><li>Potential infringement assessment </li></ul>
    8. 8. Quality, Hierarchy and Value <ul><li>Are the assets strategically separable from the core business? </li></ul><ul><li>Evaluation of credit bids for global asset portfolio versus individual asset buyers </li></ul><ul><li>IP assets to serve as collateral for either DIP and/or exit financing </li></ul><ul><li>Will need values for fairness opinions or court approval of §363 asset sales </li></ul>
    9. 9. Analyze IA/IP Portfolio Quality <ul><li>Patents </li></ul><ul><ul><li>Indicators such as: </li></ul></ul><ul><ul><ul><li>Forward/Backward references </li></ul></ul></ul><ul><ul><ul><li>Breadth of key claims </li></ul></ul></ul><ul><ul><ul><li>Challenge/Infringement record </li></ul></ul></ul><ul><li>Trade secrets (procedures & safeguards) </li></ul><ul><li>Knowledge bases </li></ul><ul><li>Below-market contracts </li></ul><ul><li>Trademark – Distinctiveness, breadth of use in commerce </li></ul><ul><li>Timeliness of customer/transaction databases </li></ul>
    10. 10. Valuation <ul><li>Defined Standards </li></ul><ul><li>Accepted Approaches </li></ul><ul><li>Specific Methods </li></ul><ul><li>Hierarchy determines effort allocation </li></ul><ul><li>Trademark values in corporate restructuring </li></ul>
    11. 11. <ul><li>Per $1 of sales, trademarks are worth more the faster the growth rate and the lower the risk </li></ul>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
    12. 12. Trademark Values in Bankruptcy <ul><li>In bankruptcy, trademark value is only 13.6% of the going concern value (on average) </li></ul><ul><li>Statistically, two-thirds of trademarks in liquidation sell at discounts between 81% and 91% </li></ul><ul><li>Global trademarks are more valuable per $1 of sales </li></ul>
    13. 13. Value Extraction <ul><li>Monetization Alternatives </li></ul><ul><ul><li>Sale </li></ul></ul><ul><ul><li>License </li></ul></ul><ul><ul><li>Creditor Settlement </li></ul></ul><ul><ul><li>Sale & Leaseback </li></ul></ul><ul><ul><li>Securitization </li></ul></ul><ul><ul><li>Litigation </li></ul></ul><ul><li>Securitization Alternatives </li></ul><ul><ul><li>Line of Credit </li></ul></ul><ul><ul><li>Take-out or DIP </li></ul></ul><ul><ul><li>Interim </li></ul></ul><ul><ul><li>Long term </li></ul></ul>
    14. 14. IP Auctions in Bankruptcy <ul><li>Direct Marketing vs. Auction </li></ul><ul><ul><li>IP assets are unique with few comparables in the marketplace </li></ul></ul><ul><ul><li>IP assets require a strategic plan to identify incremental value opportunities </li></ul></ul><ul><ul><li>Target buyers typically need more information than is offered through static auction process </li></ul></ul><ul><ul><li>IP assets must be creatively packaged to match specific buyer needs and/or strengths </li></ul></ul><ul><ul><li>Scheduled auctions market the auction as an event, not the specific assets as opportunities. </li></ul></ul>
    15. 15. Conventional Standards of Value <ul><li>Fair Market Value </li></ul><ul><ul><li>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) </li></ul></ul><ul><li>Fair Value </li></ul><ul><ul><li>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) </li></ul></ul>
    16. 16. Accepted Approaches <ul><li>Cost </li></ul><ul><ul><li>Measure value as the avoided cost of reproducing the functionality of the asset today. </li></ul></ul><ul><li>Market </li></ul><ul><ul><li>Value is measured by recent market transactions of comparable assets </li></ul></ul><ul><li>Income </li></ul><ul><ul><li>Measure as the net present value of expected net profit from using the asset </li></ul></ul>
    17. 17. Specific Methods <ul><li>Relief from royalty </li></ul><ul><ul><li>Select representative royalty rate for IP asset and apply to expected sales trend </li></ul></ul><ul><li>Market multiples </li></ul><ul><ul><li>Reference comparable publicly disclosed transactions to get price/sales and price/book ratios </li></ul></ul><ul><li>Option valuation </li></ul><ul><ul><li>Asses value of waiting before practicing a patent, or extend a trademark to new markets, explicitly accounting for uncertainty </li></ul></ul>