AOL's announcement that it has sold 800 patents to Microsoft for more than $1 billion highlights just how valuable portfolios of intellectual property can be.
By far the most significant recent transaction from a value perspective is Google's acquisition of Motorola Mobility Holdings Inc for $12.5 billion, which was motivated on the basis of Google gaining access to Motorola's portfolio of patents.
These examples of companies that have done significant value transactions on intellectual property are by no means the norm. Our experience is that many business development and commercial executives have concluded transactions that have given away intellectual property assets, in the form of trade marks and patents, at values substantially less than their full market value. Alternatively they have turned down transactions that could have resulted in significant value for their companies in that they have not fully appreciated the value of intellectual property in a business as a result of it not yet being cash generative. For those that are willing to spend the time and effort understanding the intellectual property held by a business, analysing the market in which the intellectual property could be commercialised and doing a comprehensive valuation exercise, the rewards are significant.
Sceptics often argue that because of its intangible nature, intellectual property cannot and should not be valued. This of course does not reflect commercial reality where businesses that devote time and effort to the management and valuation of their intellectual property assets derive substantial economic benefits from their intellectual property portfolios.
When considering the best methods of extracting value from a company's intellectual property, whether that be under a transaction or in day-to-day operations, valuation is critical. The variety of ways in which a company can exploit its intellectual property is often far greater than for conventional, tangible assets. Intangible assets can be bought and sold, as can tangible assets, however, they can also be licensed, used in financing, used for value creation out of enforcement activities such as stick-licensing and for tax planning.
The typical reasons for which a valuation of intellectual property is conducted include strategic, transactional, tax, financial and legal.
Historically business executives have spent little time thinking about the management of intellectual property. However, transactions like the AOL transaction and the growth of the importance of intangible assets in businesses has required that modern business executives spend a significant amount of time on the strategic management of their intellectual property assets. The normal approach by which value would be extracted from conventional, tangible assets applies equally to intangible assets. A well thought through valuation analysis is essential in providing management with the information required to define an appropriate strategy and then executing on this strategy.
In a merger and acquisition activity, valuations are usually done on both tangible and intangible assets. The valuation of intellectual property is of course appropriate in order to ensure that prudent and proper decisions are made around the value at which these assets are to be transferred and that they are not simply ignored or undervalued in the broader transaction. However, valuations of intellectual property are often required for other styles of transactions, such as licensing out, licensing in, intellectual property acquisitions or sales, spin-outs and joint ventures and a wide range of other transactions that are typical to intellectual property assets.
Many intellectual property valuations are conducted in order to comply with tax requirements. In some instances these valuations are used in simply attributing a value to intellectual property for the purposes of a transaction or for transfer pricing purposes. South African companies are also looking more actively at issues such as intellectual property holding structures and the benefits that these can offer.
It is not uncommon for companies to use intellectual property for the purposes of raising capital or securing debt. Using intellectual property to raise capital or secure debt is not new, even in South Africa where a number of companies have bundled together portfolios of intellectual property, typically trade marks, for these purposes. Less common though is the use of royalty income as a basis to issue bonds. The most prominent example of this is the now famous "Bowie Bonds" where the royalty stream that was flowing from David Bowie's music rights was used as security to issue bonds.
In addition to strategic, transactional, tax and financial reasons, valuations of intellectual property may also be required for legal reasons. Typical examples of this are conducting valuations for the purposes of determining damages or reasonable royalties that are to be paid in lieu of damages. Damages aim to compensate a plaintiff for the economic loss that the intellectual property holder has suffered as a result of the unauthorised use of intellectual property. The economic benefit that has been denied to the holder of intellectual property needs to be quantified.
Intellectual property valuation is becoming more commonplace as companies look to extract value from and recognise the value of their intellectual property. There is also a growing recognition that these assets hold substantial value but that specialist skills that are required for the management and valuation of these assets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.