Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
Valuing IP in the Context     of Bankruptcy             a Webinar for Certified Patent Valuation Analysts                 ...
Abstract   A review of specific considerations and  methodologies practiced valuing IP in thecontext of corporate restruct...
Agenda   1. IP and the Bankruptcy Context   2. Value Models by Properties   3. Practical Issues in Bankruptcy   4. Case St...
IP and the Bankruptcy Context        A regulated process        The need for valuation        Creditors and claims        ...
Bankruptcy: a regulated process• Chapter 11 Reorganization reflects the policy that “better to  rehabilitate than to disso...
Bankruptcy: the need for valuation• For the most part, assets and liabilities must be valued to arrive at  the appropriate...
Bankruptcy: IP & Intangible Assets                          Intangible Assets          Intellectual Property              ...
Bankruptcy: creditors and claims• Some creditors have secured debts, such as mortgages, and title  passes under contract• ...
Bankruptcy: Core and Non-Core IPCore Assets                       Embedded                       Workforce            Deri...
Bankruptcy: importance of IP• Increasingly, intellectual property (IP) represents a  significant proportion of the aggrega...
IP value models by property        Patents        Trademarks        Copyrights        Trade Secrets
Value models: patents• A patent is only the temporary right to exclude others from a  specific market delimited by a writt...
Value models: patents• In a going concern environment, the technology/product  protected by a patent is typically clearly ...
Value models: patents• One concrete aspect to be considered in BK valuation is the  “option” or “flexibility” value a pate...
Value models: patents• The Black-Scholes model gives a precise answer to the term  "likely" by applying the statistical mo...
Value models: patents• Key concept (BS): the higher the volatility of returns is, the higher the  value of the patent and ...
Value models: patents• In the BK context, the specific facts surrounding the  company (DIP), the patented technology/produ...
Value Models: Trademarks• Typically the most vulnerable intangible, and the most valuable of  most B2C bankruptcy situatio...
Value Models: Trademarks• Must be based on the business model of potential acquirers to  be FMV• Conceptually, the value o...
Value Models: Trademarks• The model can be reduced* to a simpler formula:                                                 ...
Value Models: Trademarks• Going Concern                                                 Slow    Fast• Relative orders of m...
Value Models: Trademarks                                                               Slow    Fast• Bankruptcy           ...
Value Models: Copyrights• Copyright arises automatically when a work is created, unlike  other IP• Perfecting security int...
Value Models: Trade Secrets• Trade secrets in bankruptcy are difficult to value if not properly  institutionalized; most o...
IP Valuation Practical Issues in Bankruptcy        Due Diligence        Initial Assessment        Alternative Scenarios
Practical Considerations• There may be a good reason why the entity is in bankruptcy• Perfection of title is key, particul...
Practical Considerations• Potential infringement assessment• Are the assets strategically separable from the core business...
Practical Considerations• Monetization Alternatives   •   Sale   •   License   •   Creditor Settlement   •   Sale & Leaseb...
IP Valuation in Bankruptcy: Case Study        Initial Assessment        Identifying Value        Outcomes
Retail Bankruptcy: Case Study• 2009 bankruptcy and liquidation of a prominent NY-based retailer  of home, jewelry, and fur...
Retail Bankruptcy: Case Study• Another category of ancillary intangibles identified in the due  diligence process was cust...
Retail Bankruptcy: Case Study• The trademark valuation model applied the statistical discount  analysis and the approved t...
About IPmetrics®• Founded in 2000• Specialized in IP Valuation,  Damages Expertise, and  Monetization• Experienced IP Prof...
Thank You   For Questions and related materials,       please contact the author at:             ftorres@ipmetrics.net    ...
Upcoming SlideShare
Loading in …5
×

Valuing IP in a Bankruptcy Context

1,181 views

Published on

Valuing IP in a Bankruptcy Context

  • Be the first to comment

  • Be the first to like this

Valuing IP in a Bankruptcy Context

  1. 1. Valuing IP in the Context of Bankruptcy a Webinar for Certified Patent Valuation Analysts Fernando Torres, MSc Chief Economist IPmetrics LLC ftorres@ipmetrics.net
  2. 2. Abstract A review of specific considerations and methodologies practiced valuing IP in thecontext of corporate restructuring through the bankruptcy process.
  3. 3. Agenda 1. IP and the Bankruptcy Context 2. Value Models by Properties 3. Practical Issues in Bankruptcy 4. Case Study
  4. 4. IP and the Bankruptcy Context A regulated process The need for valuation Creditors and claims Importance of IP
  5. 5. Bankruptcy: a regulated process• Chapter 11 Reorganization reflects the policy that “better to rehabilitate than to dissolve” (Ch. 7 Liquidation is last resort)• Bankruptcy is a set of laws providing for the regulated transfer of debtors‟ assets to creditors in order to settle claims• Until the business can be reorganized according to a “Plan,” a Trustee or Debtor-in-Possession (DIP) is authorized to manage the property of the estate and to continue operations• The DIP receives into the estate all “executory contracts” which include IP licenses and then can: 1. Assume beneficial contracts for the operation – assets 2. Assign not critical but valuable contracts – within limits 3. Reject not critical contracts – within limits
  6. 6. Bankruptcy: the need for valuation• For the most part, assets and liabilities must be valued to arrive at the appropriate transfer ratio between what the DIP owns and the creditors are owed• Per FASB, internally-generated IP is not reported in financial statements and must now be valued*• An administrative process, not negotiated in a market * GAAP does not recognize internally generated IP value, only acquisitions (since 2001, FASB 141-142)
  7. 7. Bankruptcy: IP & Intangible Assets Intangible Assets Intellectual Property Data & Customer Knowledge & Vendor TRADE Bases Relations MARKSPATENTS COPY RIGHTS Internet Proprietary COPY TRADE Software Assets RIGHTS SECRETS
  8. 8. Bankruptcy: creditors and claims• Some creditors have secured debts, such as mortgages, and title passes under contract• Most creditors are unsecured, pooled resources left over are distributed in either reorganization or liquidation
  9. 9. Bankruptcy: Core and Non-Core IPCore Assets Embedded Workforce Derivative Patents Underused Core Intellectual Contracts & Property Relationships Unused TM’s & Brands Non-Core Technology & Know How
  10. 10. Bankruptcy: importance of IP• Increasingly, intellectual property (IP) represents a significant proportion of the aggregate value to be transferred, e.g.– • Trademarks: Tower Records (2004 & „06) Borders (2011) • Patents: Polaroid (2001) • Copyrights: Marvel Comics (1996)
  11. 11. IP value models by property Patents Trademarks Copyrights Trade Secrets
  12. 12. Value models: patents• A patent is only the temporary right to exclude others from a specific market delimited by a written description of an innovation• A patent has no intrinsic value independently of the value of a business, so the key questions to address are: • What is the value of the underlying business? And • How can this patent contribute to that business value?• A patents use is a key arbiter of its economic value, thus what are the past, current, and potential uses in terms of: • Internal application • External licensing, including cross- and mixed licensing • Competitive blocking • Sleeping or submarine patents
  13. 13. Value models: patents• In a going concern environment, the technology/product protected by a patent is typically clearly identified by the internal user or licensee.• In that case, conventional valuation models (cost, income, market) are applicable• In a bankruptcy context, additional analysis is necessary and different valuation techniques are often needed • Will the DIP continue to use the same technology covered by the patent at issue? i.e., is it a core technology or can it be licensed/sold? • Is there a market for the rights afforded by the patent, such as competitors (strategic buyers) or investors (financial buyers)? • Are there acceptable non-infringing alternatives available to potential joint venture, merger, or other bidders for the BK company assets?
  14. 14. Value models: patents• One concrete aspect to be considered in BK valuation is the “option” or “flexibility” value a patent gives.• A patent can be seen as the time-limited right, not the obligation, to exclude others from purchasing/selling the underlying asset (opportunity) at an uncertain price/profit. • Given the volatility of the industry, what is the "likely" range of variation for the value of the business in the future; and • What is the proper return on the amount invested buying the patent (even if it expires unused).• The patent‟s flexibility will have value to a buyer only to the extent that the "likely" price in the future exceeds the opportunity cost of earning just as much in a risk-less alternative.
  15. 15. Value models: patents• The Black-Scholes model gives a precise answer to the term "likely" by applying the statistical model of the Normal distribution to model the volatility of the specific business segment.• The BS option price (maximum expected profit) stands for the value of the patent. In this approach, a patent is valuable today to the extent the probability-adjusted potential net income from practicing it (or licensing) exceeds the probability-adjusted additional expense of maintaining its validity and developing the ancillary assets required to implement it.
  16. 16. Value models: patents• Key concept (BS): the higher the volatility of returns is, the higher the value of the patent and the license royalty rates Net Payoff from introducing product Patent Value NPV Cash Flow Implementation Cost
  17. 17. Value models: patents• In the BK context, the specific facts surrounding the company (DIP), the patented technology/product, the competitive environment, and the interest of financial buyers must be taken into account to properly value the patent by: • Establishing the ownership and statutory validity of the patent and its expiration date • Defining the most likely (or the alternative scenarios) of use: • Internally if key to operations • Licensing if continuing cash flow is more important than disposition • Outright sale if non-essential • The historical track record, accounting costs, and engineering appraisal of the merits of the technology are secondary to market realities
  18. 18. Value Models: Trademarks• Typically the most vulnerable intangible, and the most valuable of most B2C bankruptcy situations• Track record is important, because trademark rights are only earned through use in commerce, they deteriorate immediately and cannot be “parked” (more than 3 years) nor are they viable for a “non-practicing entity”• In TM valuation, the method most often applied is „Relief from Royalty‟ (Income Approach with optional input from Market)• Generally, we seek to explain trademark value as a function of the sales the TM supports, the context in which TM was acquired (liquidation or going concern), the scope of TM use, and other exogenous case-specific factors
  19. 19. Value Models: Trademarks• Must be based on the business model of potential acquirers to be FMV• Conceptually, the value of the trademark bundle is measured by the royalty avoided at market rate “r” on Sales “S” which grow at a rate “g” and are discounted to the present at the discount rate “k” and this relationship may be more or less than proportional (elastic at rate “ ”) depending on the existence of close substitutes/competitors. ( g k )t TM r S0 e dt
  20. 20. Value Models: Trademarks• The model can be reduced* to a simpler formula: r TM S (k g ) e 1• Typical values in a going concern and in bankruptcy are illustrated in the following tables, applying empirical estimates based on our econometric analytics of B2C industries: * Assuming trademark rights are maintained in perpetuity and perfect elasticity, =1 .
  21. 21. Value Models: Trademarks• Going Concern Slow Fast• Relative orders of magnitude TM Growth Growth of the TM/S ratio, for a 5% S (g=2%) (g=5%) royalty rate in scenarios combining high and low risk High (reflected in the cost of capital) and growth rates Risk 0.15 0.18 (k=30%)• Risk/volatility is relatively more important than the rate of growth in determining the Low ratio of the trademark asset Risk 0.48 0.69 as a proportion of (initial) (k=12%) annual sales * Assuming trademark rights are maintained in perpetuity and perfect elasticity, =1 .
  22. 22. Value Models: Trademarks Slow Fast• Bankruptcy TM Growth Growth• Relative orders of magnitude S of the TM/S ratio, for a 5% (g=2%) (g=5%) royalty rate in scenarios High combining high and low risk (reflected in the cost of Risk 0.02 0.02 capital) and growth rates (k=30%)• Generally, two-thirds of trademarks in bankruptcy Low sell at discounts between Risk 0.06 0.09 80% and 90% of GC value (k=12%) * Assuming trademark rights are maintained in perpetuity and perfect elasticity, =1 .
  23. 23. Value Models: Copyrights• Copyright arises automatically when a work is created, unlike other IP• Perfecting security interest requires state-UCC-1 filings and a filing with the Copyright Office if registered• Most enterprise copyrights are only valuable if transferred with the trademarks as they generally are ancillary marketing assets.• Exceptions are industries based on copyrighted works with intrinsic value: media, film, music, publishing• As with patents, the value of the copyright is commensurate with the profitability of the business opportunity these rights afford the owner• Modeling relies on defining the business plan over the (often long term) statutory life of the rights
  24. 24. Value Models: Trade Secrets• Trade secrets in bankruptcy are difficult to value if not properly institutionalized; most often they are human capital that does not travel with the bankrupt estate• Trade secrets may be most valuable if they are necessary to implement patented technology and bundled with the corresponding IP assets• The content of customer databases may be marketable and, therefore, valued if privacy is preserved and the partial or complete sales court-approved• Competitors are often the only likely market for the trade secrets, and the DIP may not have scheduled (identified) them and have a readily marketable asset at all.
  25. 25. IP Valuation Practical Issues in Bankruptcy Due Diligence Initial Assessment Alternative Scenarios
  26. 26. Practical Considerations• There may be a good reason why the entity is in bankruptcy• Perfection of title is key, particularly Copyrights• Not all IP / IA are created equal • Classify the assets as Core or Periphery• Analyze quality of IP • Relevance to current/future business • Relative strength analysis• Peripheral portfolios may be monetized • Vertical and horizontal • Out-licensing / Spin-off
  27. 27. Practical Considerations• Potential infringement assessment• 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
  28. 28. Practical Considerations• Monetization Alternatives • Sale • License • Creditor Settlement • Sale & Leaseback • Securitization • Litigation• Securitization Alternatives • Line of Credit • Take-out or DIP • Interim • Long term
  29. 29. IP Valuation in Bankruptcy: Case Study Initial Assessment Identifying Value Outcomes
  30. 30. Retail Bankruptcy: Case Study• 2009 bankruptcy and liquidation of a prominent NY-based retailer of home, jewelry, and furniture stores, its second round under Chapter 11 since the start of the recession at the end of 2007.• After the real estate, both owned and leased, was relatively quickly liquidated, the merchandise inventory was sold to specialized liquidators.• However, as the IP consulting team was brought in at an early stage, at least some of the liquidation sales were conducted under a trademark license. The liquidators had to recognize, and pay for, the market power of the mark “[brand] Diamond Sale” vis-à-vis a generic “diamond liquidation.”
  31. 31. Retail Bankruptcy: Case Study• Another category of ancillary intangibles identified in the due diligence process was customer databases, in particular the bridal registry information asset. Given a suitable privacy policy, and respecting third party rights during the process, the long history of the stores had created a valuable asset, not necessarily for a new and similar store, but for new and valuable uses.• The valuation identified and included the value of the opportunity, requiring a nation-wide campaign, with PR, online promotions, and directly contacting investors• Main trade secret value models for the database info: • segmenting the information by product category, to appeal to specialized buyers as opposed to the same type of department stores; • identifying new uses for the information.
  32. 32. Retail Bankruptcy: Case Study• The trademark valuation model applied the statistical discount analysis and the approved transaction amount was on the high end of the range.• The sales forecast model took into account the loss of store space and the (statistical) damage to goodwill, and included the possibility of segmented segments emerging from the BK liquidation (a department store becoming a series of specialty stores• A few months after the final auction, the brand has been recast into a new, smaller, and more focused store, under new ownership.
  33. 33. About IPmetrics®• Founded in 2000• Specialized in IP Valuation, Damages Expertise, and Monetization• Experienced IP Professionals• Subject Matter Expert Network• Based in California www.IPMETRICS.net
  34. 34. Thank You For Questions and related materials, please contact the author at: ftorres@ipmetrics.net @FTorresMSc @IPmetrics

×