As innovation cycles accelerate and technology convergence increases, intellectual property has become a powerful driver of major corporate acquisitions.
For example, when Johnson & Johnson acquired Shockwave Medical for $13.1 billion in 2024, the deal's success hinged on extensive intellectual property due diligence spanning a portfolio of significant patents. Chief among them: Shockwave Medical's innovative intravascular lithotripsy technology—a strategic fit, as J&J has been seeking to expand its cardiovascular portfolio into high-growth segments.
For companies engaging in mergers, acquisitions or strategic partnerships, understanding the intricacies of IP due diligence is essential for protecting value and avoiding costly oversights.
A recent analysis of 40,000 M&A deals over the past 40 years revealed that between 70% and 75% failed due to inadequate pre-deal analysis and misaligned objectives. Add increased regulatory scrutiny, which has delayed many major global acquisitions, and patent litigation costs—estimations in the U.S. are around $3.5 million per patent litigated—and we reach a crucial reality: Thorough IP due diligence can determine not just the success of a transaction but your company's future market position.
The Complexities Of IP Due Diligence
Our modern business environment is interconnected, which means thorough due diligence requires a comprehensive analysis of ownership chains, licensing agreements and potential infringement risks across multiple jurisdictions. Without a detailed and multifaceted approach, companies risk failing to discover IP complications ranging from gaps in patent coverage to undisclosed third-party rights that could impact commercialization plans.
All this complexity multiplies when dealing with software and digital innovations, where IP rights often overlap. Take artificial intelligence, which has impacted nearly every sector—aerospace and defense, the consumer industry, pharmaceuticals, finance and more. To put this in perspective, Bank of America recently announced that its patent portfolio now includes nearly 1,100 AI and machine learning patents and pending applications (half of which have been granted), marking a 94% increase in just two years.
With technology like AI, a single product might incorporate hundreds of patents, copyrights and trade secrets, making thorough due diligence increasingly challenging but that much more essential. This rapid innovation cycle means companies must scrutinize not just existing IP rights but also pending applications and potential future claims that could affect product development and market access.
The types of transactions requiring rigorous IP due diligence have also expanded beyond traditional M&A. Joint ventures, technology licensing agreements, and even routine supplier contracts now demand careful IP examination. For example, though Tesla opened its patent portfolio for "good faith" use by others, innovators seeking to implement Tesla's technology still need extensive due diligence to understand the implications and limitations of this open-source access.
Impact On Valuations And Deal Dynamics
Recent estimates demonstrate that the global value of intangible assets like IP rights has grown rapidly in recent years, exceeding $62 trillion to date. And importantly, intangible assets now comprise 90% of the value of companies in the S&P 500.
Thus, the impact of IP due diligence findings on deal valuations can be dramatic. When Cisco acquired Splunk for $28 billion last year, a compelling reason for Cisco's interest was Splunk's sophisticated data analytics technology, capable of expanding and enhancing Cisco's existing security infrastructure. This strategic alignment of IP portfolios helps reposition Cisco to compete more effectively in the enterprise security market, particularly against Microsoft, its key competitor. As we've seen time and time again, these types of technological synergies, discovered during thorough IP due diligence, often justify significant acquisition premiums.
Equally as dramatic is potential derailment, and Foxconn's 2016 acquisition of Sharp comes to mind. This massive deal experienced months of turbulence following the discovery of previously undisclosed liabilities at Sharp. As a result, Foxconn—the world's top electronics contract manufacturer—slashed its acquisition offer by almost $900 million.
Strategic Approaches To IP Due Diligence
Given that the typical application remains pending for 36 months or more, overlooking IP issues can jeopardize years of R&D investment and market opportunities. That's why successful companies typically evaluate IP portfolios using a multi-factor framework that considers market coverage, enforceability and competitive positioning. Keep in mind that this analysis becomes particularly crucial in cross-border transactions, where IP rights and enforcement mechanisms vary significantly by jurisdiction.
A strategic approach to IP due diligence starts with assembling the right team: legal counsel specializing in IP law, technical experts who understand the underlying innovations and financial analysts who can quantify findings. Essential components of effective IP due diligence include a thorough ownership analysis, assessment of IP validity and enforceability and evaluation of potential infringement risks. Overall, a robust due diligence checklist should cover:
- Patent and trademark searches across relevant jurisdictions
- Analysis of licensing agreements and technology transfer contracts
- Review of IP-related litigation history
- Assessment of trade secret protection measures
- Examination of research and development documentation
Companies should also verify that all inventors have properly assigned their rights and that all maintenance fees and renewals are current, as oversights in these areas can greatly and adversely affect technology transactions.
Remember that the average IP due diligence process for major transactions takes several months, though this can vary depending on the technologies involved, availability of data and other external factors. Regardless, for optimal results, companies should begin IP due diligence early in the transaction process—ideally before signing letters of intent. Ultimately, this proactive positioning allows for a thorough investigation and can even provide leverage in negotiations.
Value Through Strategic IP Due Diligence
According to PWC, 60% of CEOs plan to make at least one acquisition in the next three years. This, along with technology acceleration and shortened innovation cycles, highlights the importance of thorough IP due diligence. And while we're seeing this across sectors, the stakes are particularly high in emerging fields like artificial intelligence, quantum computing and biotechnology, where IP assets often represent the majority of a company's value.
Success in modern business transactions requires treating IP due diligence as a strategic imperative. Companies that approach IP due diligence systematically, engage specialized expertise early, and maintain robust documentation will be better positioned to navigate complex transactions and emerge successfully.
Read at Forbes.
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.
