According to the European Patent Office, IP-intensive industries made up 42% of all economic activity in the European Union in 2017–which amounts to about €5.7 trillion a year. Making sure that IP can be used to sell a business is an important part of the process. It can help a company stand out from its competitors and make money through licensing agreements. It can also entice new customers, help an organization market itself, and even be used as collateral for loans. The mergers and acquisitions (M&A) landscape has changed, and IP is now the driving force behind many important transactions. In many circumstances, a company's IP portfolio is its competitive advantage and most valuable asset that necessitates thorough IP due diligence, which is essential for assessing the likelihood of a successful, financially rewarding conclusion as well as managing the risks associated with such a transaction.
How Intellectual Property Drives M&A
Companies are increasingly focusing their efforts on improving their technological skills in order to stay ahead of their competitors. It is important to think about both sides of the issue when improving technology. New technology enables people and companies to improve their lives or their services. Along with this, technology can also protect businesses from cyber-threats and other disruptions that can happen to their business. With new technologies becoming a competitive advantage, IP rights have become an important part of mergers and acquisitions for technology companies. Tech companies can hurt their negotiation advantage, their financing options, or future licensing agreements if their potential buyers don’t pay attention to, or don’t value the IP when they decide to acquire. In order to understand the target company’s full IP portfolio, buyers need to do their due diligence.
The Importance of Due Diligence
The goal of due diligence is to help the buyer figure out how much a company is worth and to find and fix problems that might arise after acquisition. It helps the buyer figure out how much risk there is, and it helps them build a clear picture of their assets and liabilities. Due diligence helps companies know what they are getting. Once the right IP is found, buyers and their advisers can figure out what risks there might be and how to deal with them before the deal is done. The first step in figuring out what IP is important or necessary to the target's business is to look at and classify all the IP that the target owns, uses, or licenses in or out. Not doing enough due diligence can lead to an overvaluation of the target, expose the buyer to unknown risks and liabilities, and cause integration problems that could harm synergies. Given the financial and legal value of IP, rigorous due diligence should not be overlooked or discounted. In transactions involving hundreds or even thousands of patents, it is obvious that a significant amount of work must be completed – and promptly – as part of an IP inquiry. Buyers must be prepared for the rigors of due diligence and be able to research the strength and enforceability of the IP in question.
The Role of IP in M&A
When one firm merges with another or acquires a company, the former's IP is transferred to the latter. As a result, the combined or acquiring business gains value. It is not easy to invent something new in today's dynamic and volatile market climate, thus businesses look for fresh ways to acquire current inventions from other businesses. If a company acquires an existing innovation or technology, it may be a win-win situation for both parties as it may lead to expansion as well as market leadership. Another important role of IP in mergers and acquisitions is technology transfer between the organizations involved in the mergers and acquisitions process. This assists businesses in making the greatest use of their resources and assets, including IP holdings.
Determining the Valuation of Intellectual Property
IP valuation is significant in M&A and consists of three stages: pre-acquisition, the deal, and incorporation, with the goal of protecting and securing the IP. Because IP rights account for a significant amount of the company's revenue, their valuation must be carefully calculated to ensure that these rights are not undervalued. Once the target company's integrity is established, the ultimate purchase price can be discussed between the target and purchasing companies. The valuation must take into account the undercurrents of both parties' businesses, the rationale for the M&A, and the net profit and loss from the partnership. Valuation provides information about the economic viability of M&A and suggests prospective uses for IP. Valuation is based on economic prospects and environmental cycles such as shifting GDP rates, stock market and worldwide crises (such as a pandemic, war, etc.) that cause company instability. IP valuation is more volatile because it is based on the current value of future economic profit or loss that can be projected to accrue to the owner. Furthermore, due to diverse government policies, market conditions, company efficiency, and globalization, IP assets are difficult to locate and assess. However, if a valuation is performed with sensible experience and reviewed by professionals and experts, it may produce reliable results.
When it comes to mergers and acquisitions, intellectual property is the most critical factor to consider. Mergers and acquisitions help to improve a company's operations and capabilities, but they are ineffective unless the acquiring company's IP rights are also acquired. Despite being an intangible asset, the purchasing company's IP rights contribute to the company's growth, diversification, and expansion. The acquisition of a company's IP assets is critical for its survival, and as such, it must be bought with due diligence. Otherwise, a business's gains from its IP portfolio may become a burden for the acquiring company. IP assets are particularly important in M&A since they improve the value of the company, help it grow, help it diversify into different industries, and get new resources. As a result, due diligence and IP appraisal should be performed correctly so that the transaction adds value and is completed successfully.