Intellectual Property During Mergers & Acquisitions
by Logan Maurer & Akshat Biyani
The term Intellectual property (IP) is used to describe intangible assets that can be legally owned, protected, and monetized. Typical intellectual property assets include trademarks, brands, patents, copyrights, domain names, and internet protocol addresses. IP assets of every kind are a valuable currency in today’s innovation-driven world. They can prove especially important during mergers and acquisitions (M&A) when transacting parties sign off on a change of IP ownership as a part of the deal. That’s because intellectual property adds to a company’s asset portfolio, increasing its value proposition for the acquiring company.
However, it would be wrong to assume that IP rights are automatically transferred during an M&A process. A famous case in point is the 1998 acquisition of Rolls Royce by the German automaker Volkswagen. It was only later that Volkswagen realized it had purchased Rolls Royce without the right to use its trademark, which had been sold earlier to rival carmaker BMW.
The reverse is even more likely: that ownership of intangible assets changes hands without the acquiring company being aware of the transfer. Purchase agreements typically include language referring to the sale of “all other assets” of the target firm. This catch-all includes assets unknowingly owned and so unknowingly sold. So, one may buy an asset and be unaware they have done so. Plus, if unused, and either cost-free or inexpensive to maintain, the asset may go unnoticed for many, many years.
Managing IP assets during an M&A process is, therefore, crucial.
Key Challenges in Managing Intellectual Property During M&A Transactions
Any large business entity is likely to hold a complex IP portfolio with multiple owners, licenses, and agreements. The transfer of these assets during an M&A deal involves a host of legal, financial, and practical challenges.
Here are some of the most common IP-related challenges your business could face during M&A transactions.
Lack of Transparency in IP Ownership and Infringement Risks
An accurate estimation of a business’s IP portfolio and the risks of infringement with it warrant concrete documentation. That could be related to:
- Patents and patent applications, including patent numbers, jurisdictions covered, filing, registration, and issue dates.
- Confidentiality and Invention Assignment Agreements with employees or third-party consultants.
- Claims of IP infringement, including IP litigation or arbitration, among other things.
The absence of critical IP data can hinder an acquirer’s due diligence process during an M&A transaction. Developing and maintaining such rigorous documentation is a complex and time-consuming process that businesses may not want to undertake unless expressly advised. Failure to do so can adversely impact the transparency of IP ownership and potential infringement risks during an M&A deal.
Difficulty in Valuing IP Assets Accurately
Unlike tangible assets, IP portfolios often have a volatile monetary value. Evaluating that value accurately depends on:
- The current market value of the IP assets, and
- The value of the future benefits or drawbacks that the assets may bring to the acquirer.
There is no standard method for estimating either one of these values. The absence of a closely comparable IP in the open market can make it difficult to estimate an IP asset’s current market value. On the other hand, the value of its future benefits and drawbacks depends on unpredictable factors such as market trends and consumer behavior.
A number of consultancies specialize in the valuation of IP assets. Typically, this valuation process is performed for the benefit of a lender or borrower where the assets will be collateral against a loan. However, valuation services may be in order to benefit the either party in a merger or acquisition deal. Knowing the worth of such assets, both in liquidation and in fair market value, can be critical information for both parties in M&A.
Issues Related to the Transfer of Ownership and Licensing Agreements
Many IP assets within a company’s portfolio might be licensed rather than owned outright. That binds the owner of such assets to the terms and conditions listed in the licensing agreements. These terms govern the use and transfer of the IP and are likely to affect the acquiring business’s ability to monetize them. In some cases, the acquirer may need to renegotiate the terms with the licensor to ensure the validity of the transfer.
A related issue is the transfer of ownership of jointly owned IPs. When multiple parties share the ownership of an IP asset, a transfer of ownership requires the consent of all owners and may involve negotiating a buyout of their ownership interests.
Risks Related to Litigation and Regulatory Compliance
Incomplete knowledge of licensing and ownership agreements and regulatory compliance measures related to an IP transfer can expose the acquirer to severe legal and regulatory risks.
- Infringement claims: The acquirer may face potential infringement claims from third parties concerning the infringement of existing patents, trademarks, copyrights, or other IP assets. These claims can lead to costly and often lengthy litigation and damages, affecting the net value of the M&A deal.
- Compliance processes: The transfer of certain types of IP, such as technology or software, may require regulatory approval and compliance with specific laws and regulations. Evaluating and ensuring complete compliance in such cases can, once again, be expensive and time-consuming. In worst cases, stringent compliance requirements may delay or even derail an entire M&A transaction.
Special Considerations for IP Assets such as IPv4 Addresses
Internet Protocol Version 4 (IPv4) addresses are highly valuable. At the same time, they may warrant special attention during a transfer of intellectual property portfolios. Here are a few things acquirers should consider when assuming ownership of IPv4 addresses during an M&A transaction.
- Legal Status: The general legal status of IPv4 addresses is somewhat ambiguous. Their ownership is decided according to property rights under some jurisdictions and through general contractual asset ownership in others. Broadly speaking, rights to registration of IP addresses (in one of the five international registrars) is sold in open markets. That is, the IP address is not transferred, the right to its registration – and therefor control and use – is sold. This ownership issue is discussed in this blog.
- Registry Requirements: IPv4 addresses are typically registered with the above-mentioned Regional Internet Registries (RIRs). The legal transfer of these addresses may require regulatory compliance with relevant RIR policies and procedures.
- Contractual Obligations: IPv4 addresses can be bought or leased under contractual agreements. These lease agreements or any other ownership contracts might bind the ownership and use of IPv4 addresses after transfer.
Solutions to Managing Intellectual Property During M&A Transactions
IP portfolios can make up for a significant part of the value generated by an M&A transaction. This is especially true for technology-dependent businesses that could derive most of their value through intangible IP assets such as IPv4 addresses. Such deals require proactive management of IP transfer processes.
Here are a few effective solutions that can help with this:
Conducting Due Diligence to Identify and Assess IP Assets
Due diligence is crucial to protecting an acquirer against litigation and regulatory risks during the transfer of IP assets. An effective IP due diligence process would involve the following steps:
- Identifying third-party IP assets that a company may be using under licensing agreements or other arrangements.
- Reviewing ownership, validity, and enforceability regarding the transfer of each IP asset.
- Assessing the scope of use and monetization of each asset and identifying limitations such as geographic or temporal restrictions.
- Identifying potential IP infringement risks, such as lawsuits or infringement claims.
Developing IP Integration Plans and Strategies
Once every IP asset has been duly identified and assessed, the acquirer should develop integration plans and strategies to manage their acquisition. These plans include:
- Identifying potential conflicts between the IP assets of the merging companies, including overlapping patents, trademarks, or copyrights.
- Conducting thorough valuation of IP assets of both parties to determine the value generated during the transaction. This can be done by estimating the current market value of the assets, the immediate future value they will likely generate, and the operational value they offer to the acquiring business.
- Making detailed plans about the integration, management, future licensing, and operational use of acquired IP assets.
Ensuring Proper Transfer of Ownership and Licensing Agreements
Next, the acquiring company must obtain clear titles to the IP assets acquired, including associated patents, trademarks, copyrights, trade secrets, and domain names. Licensing agreements should also be carefully reviewed during this stage to ensure the viable transfer and enforcement of all ownership terms and conditions. This helps the acquiring company evaluate whether to continue, modify, or terminate existing licensing agreements.
Managing IP Assets Such as IPv4 Addresses
IPv4 addresses are valuable resources that can generate significant value during an M&A deal. Further, the ownership of these addresses can be critical to the acquiring company’s business operations. Acquiring full ownership of all IPv4 assets is crucial in case the acquirer wishes to continue or merge these operations.
The American Registry For Internet Numbers (ARIN) prescribes several regulatory measures that both parties must follow while transferring ownership of IPv4 addresses. Additionally, a thorough valuation must be conducted to estimate the monetary and operational value of these Internet Protocol addresses. This will help the acquirer determine how many of the acquired addresses would add value to the acquisition over the long term. Surplus addresses can be readily sold on marketplaces worldwide.
Managing IP Assets Smartly During M&A
A majority of the assets owned by businesses today are intellectual property-related. So much so that IP assets can be considered a key driver of the modern economy. Evaluating a target company’s IP assets is crucial to generating positive value during any M&A transaction. That is because IP assets can produce substantial revenue and operational benefits for the acquirer.
At Hilco Streambank, we help clients identify, preserve, and extract value from intellectual property with industry-leading experience, diligence, and creativity. We offer monetization and valuation services that help both parties in an M&A deal conduct successful and economically viable negotiations. Our service catalog includes:
- Monetization services
- Advisory services
- Valuation services
Visit us to learn how we leverage our extensive buyer network and years of experience to negotiate M&A deals.