An area often not considered as fully as it should during an M&A is the real value of the intangible assets of the target acquisition company. This can make a big difference to the money that changes hands — or even whether the deal takes place at all. Maurice Alphandary and Jackie Maguire write for Bioenergy Insights
Intangible assets such as brands now contribute by far the greatest shareholder value in most sectors and many organisations consider their brand to be their most important asset. Studies have shown that companies with a strong brand outperform others in a number of different respects.
When it comes to intangible assets, there are three key issues to consider in an M&A scenario. Firstly, understanding what intangible assets exist and the value of them. Secondly, whether they are adequately protected. And finally, how they could be enhanced and exploited.
Valuing intellectual property (IP) accurately and putting a monetary value on it can be a contentious issue but it can be done. Protection of IP is vital for a company looking to merge, or acquire another. If the target company's IP is not protected (or not protected thoroughly enough, for example in each significant country where it may be at risk) there is a real possibility that its ideas and inventions could be stolen. And if those disappear, the value of the company is of course greatly reduced. On the other hand, a company may have IP that is not fully exploited or commercialised, and its potential to do that may add greatly to its value.
The IP issue needs to be considered at an early stage, as a great deal of the value often resides not just in the IP (e.g. patents, trademarks, copyright, designs, trade secrets) but in other intellectual assets (skills, policies, 'know-how', processes), and intellectual capital (reputation, branding, relationships, contracts). If key employees leave, perhaps because they are unhappy about a possible change in the company's structure, their knowledge may leave with them. Ideas and inventions may be fundamental to the company but the wider intellectual capital often drives growth, profitability and access to markets. Written materials, customer contact lists and bespoke materials can all form part of the intangible assets.
Anyone involved in selling or acquiring a company should establish what intangible assets the target company owns, and whether they are live and valid. Valuation challenges sometimes arise when patents have been registered by early-stage companies for products or inventions which do not yet produce income or royalties as it is more difficult to assess likely value.
Only comparatively recently have organisations tried seriously to put a value on intangible assets. For most of the 20th century, company value was regarded as residing in the land, buildings and tangible products including stock. Although technology, the brand name and patents, as well as the workforce were all seen as being vitally important, there was no reliable method of putting a value on them. However, it can be done.
UK-based IP management provider Coller IP is working with a number of companies in the biofuels industry to help with their IP issues including HWEnergy. HWEnergy is Scotland's leading and longest established biomass heating specialist. It was founded to help expand wood (or 'biomass') heating in Scotland as a mainstream alternative heating . The company provides solutions for the implementation and ongoing operation and management of biomass heating systems for farms and estates, the public and community sector and for businesses. HW Energy was introduced to Coller IP through the latter's role as a consultant to Project VIA (Valuing Intellectual Assets) which was run by the Intellectual Asset Centre (IA Centre) in Glasgow and worked with companies operating in Scotland's renewable energy sector to identify and realise value from their intangible assets.
'Coller IP helped us with IP issues across the board, including IP valuation, obtaining licensing for a prototype of a new product, obtaining trademarks, and, above all, commercialising and marketing our processes,' says Bruno Berardelli, MD for HW Energy.
IP is now becoming a prominent asset class but is still under-represented on balance sheets. Just like other assets, IP can of course be valued, and bought, sold or leased. Over the years, there have been several attempts to incorporate goodwill into the balance sheet.
Since the end of December 2005 all larger quoted companies have had to adopt the International Financial Reporting Standards (IFRS). The legislation specifies that intangible assets obtained through a business acquisition should be valued independently of the auditors and that this value should be identified on the balance sheet of the acquirer. The laudable aim was to have accounting standards that were consistent internationally since precise valuation of all aspects of a company's business is essential for mergers and acquisitions.
In principle, this appears excellent. However, even if the assets have been included on a balance sheet, IP is often not valued accurately, and the information provided may not be detailed enough to be very useful. One of the issues is that identifying the intangible assets within the business may not be straightforward. If a company co-owns IP rights with another organisation, for example, there can be tricky issues to resolve even with expert help. Some products are also likely to involve a 'bundle' of different assets, where the finished product may be more valuable than individual assets. Valuation of intellectual property needs to rely upon sound data, information and expertise which are sometimes not easy to obtain.
IP valuation specialists use a number of different ways to assess brand and other intangible values. Examples include the cost approach, the market approach, and the income approach. Coller IP, for example, uses an appropriate combination of these methods to value IP. The company initiating a merger or sale needs to know what its IP is worth in order to obtaining the maximum value for the company. If the company has been approached regarding a merger or is planning to buy another company, it can be very costly to not know exactly which intangible assets are included in such a situation, and their value.
For anyone looking to be acquired, getting the IP in order is a must. Knowing the value of the IP — or which parts of the IP are more valuable than others — is essential in making decisions about what parts of the business to develop. It is also possible to sell or license parts of your IP portfolio to gain additional revenue.
Accurate valuation of the existing IP, along with ensuring protection is watertight, should always be the first steps. Identification of all the valuable intangible assets in a company can be done internally or by calling in outside specialists. Such specialists will undertake an audit, and then, often using specifically designed software tools, will undertake a landscaping exercise in order to understand the intangible assets that are of value. This includes assessing the company's unique position relative to existing or potential competitors, while at the same time identifying possible opportunities for exploiting any IP further.
Once this has been done, the specialist can then put a value on the assets assessed. The best of these specialists will undertake a range of activities, including checking that patents are enforceable and that an organisation can maintain and defend them. They will also advise on commercialisation including how to avoid potential pitfalls. One of the areas that it is important to look at is how well differentiated the technology and patent applications are from the 'prior art' — that is, previously published third-party patent documents in the same technology space. This involves searching international patent databases, to analyse prior publications and to establish whether third-party patents are still live. This enables an understanding of the differentiation of the patents in question and to understand and articulate the commercial risks associated with third party IP.
Coller IP uses its IP clustering model to identify patents held by other companies that compete with the major services being developed by a business. It uses this analysis to identify gaps in the client's IP portfolio that need to be filled by development, partnering or acquisition, to strengthen their position. Once an organisation understands its intangible assets and their value, it next needs to ensure that protection is as watertight as possible. Having the right patents and trademarks in place is, of course, important, but other areas also need to be considered. For example, does any company you are thinking of merging with, or acquiring, have employment contracts that prevent their employees taking ideas to a competitor?
Coller IP has developed a Commercialisation and Management Process that allows clients to understand the value of their intangible assets and to assess and track the commercial potential of their products and services at different stages of development. In addition, the process prompts decisions on how and whether to protect the underlying assets.
There are many examples to show how IP can realise significant value in an M&A situation. By ensuring that all parties are clear about the value of the intangible assets in question, that these are fully protected and whether there are opportunities to further commercialise them, the organisations involved will be in a good position to judge on what basis a merger or acquisition should take place.
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