The asset class of intangibles, including intellectual property (IP) makes specific demands on the due diligence process for transactions and strategic decision making.
1. IP DUE
DILIGENCE
KEY ISSUES FOR M&AKEY ISSUES FOR M&A
FROM A VALUE PERSPECTIVEFROM A VALUE PERSPECTIVE
FERNANDO TORRES, MSCFERNANDO TORRES, MSC
IPMETRICSIPMETRICS®®
2. TOPICS
Public IP identification and value
Quality, hierarchy and value
elements
The valuation process
IP value enhancement
3. FIRST STEPS: IDENTIFY
THE INTANGIBLES
Internally generated intangible assets or
intellectual property are expensed or recorded at
historical cost
Acquired intangibles and IP reported as
allocated at purchase date
Intellectual property must be stratified into core
and peripheral categories
Not all intangible assets are intellectual property
Not all intellectual property may be at the core
Peripheral portfolios may be monetized
6. IDENTIFY IP PORTFOLIOS
FOR EXTENSIONS
Vertical and horizontal
Out-licensing
Spin-off
Analyze quality of trademark IP
Relevance to current/future business
Relative strength analysis
Potential infringement analysis
7. ANALYZE IA/IP
PORTFOLIO QUALITY
Forward/backward references
Breadth of claims set
Challenge / infringement record
Trade secrets procedures and
safeguards
Knowledge bases
Below-market contracts
8. STANDARDS OF VALUE
Fair market value – FMV –
The price at which property would change hands
between a willing buyer and seller, when neither
party is under compulsion to transact and both
parties have reasonable knowledge of relevant
facts
IRS purposes, hypothetical transaction
Fair value – FASB IFRS –
The amount at which an asset could be bought
or sold in a current transaction between willing
parties, other than in a forced or liquidation sale
GAAP, specific synergies
9. VALUE OF IP IN USE
Value to (hypothetical) licensee
Value to (potential) licensor
Anticipated growth / decline
Reserve value
Blocking value
Monopoly value
Out-licensing
Core IP vis-à-vis Peripheral IP
IP holding company