This article has been written by Ruchira Halli.
Table of Contents
In the last few years, Mergers and Acquisitions have become the key strategy for rapid growth in the corporate world. Merger, in the simplest form, means an agreement wherein the assets of two or more existing companies are either vested into one company or they come under the control of one company. Whereas amalgamation occurs when two or more companies merge in order to establish a brand-new company and all the liabilities and assets are allocated to it. This trick of merging creates the speediest and steadiest way to secure assets and existence in the market which helps in exploring new market opportunities. Moreover, mergers can also easily expand its consumer base by eliminating competition and by sustaining and enhancing profitability. When companies merge themselves through agreement all the tangible, as well as intangible assets of one company, become a part of the revenue of the other acquiring company and Intellectual Property and its rights are the most important assets among these.
What are Intellectual Property Rights?
Intellectual property is something which is invented by humans through its intellect and is intangible in nature. These assets are basically incorporeal and right in rem’ is available against the whole world. There are various kinds of IP such as patents, copyrights, trademarks etc. The laws which help in the governance of IP from creation to use of IP and also prevents IP from exploitation is known as IP laws. Patents Act 1970, Copyrights Act 1976, Trademarks Act 1999, Designs Act 2000, etc. are few enacted legislation with respect to IP in India for the safeguards of such assets. IP has equal importance, or we can say has more value as compared to the other assets of the company. IP plays a vital role in the strategic development of the company as it carries innovation, product value and brand value of a company.
IP serves as a fingerprint of the company as unique as it could be identified through its products and processes. IP is one of the main reasons why the world is under a rush to catch and collect such assets through the means of M&A as it gives control and ownership over assets and also strengthens the market share of the company. With this, even the investors and companies are willing to finance for IP and are ready to divide the risk.
IP valuation plays an important role in M&A and includes three stages, i.e. Pre-acquisition, The Deal and Incorporation as these stages aim at protecting and safeguarding the IP. As a major portion of the company’s business is based upon the IP rights so the valuation of the same is to be determined carefully in such manner that these rights are not undervalued. Research says that the IP asset is not appreciated for its original value.
Once the integrity of the target company is determined then the final price for purchase can be negotiated between the target and acquiring company. The valuation must consider the undercurrents of both the parties’ business, the reasoning for M&A and the net profit and loss from the collaboration. Valuation gives information as to the economic sustainability of M&A and suggests the potential use of IP. Valuation is based on economic prospects and environmental cycles like changing GDP rates, stock market and global situations (like a pandemic, war, etc.) that creates instability with corporate.
IP valuation is more unpredictable as it depends upon the current value of upcoming economic profit or loss that can be expected to accumulate to the owner. Moreover, IP assets are difficult to discover and asses due to the various policies of Government, market situations, the efficiency of companies and globalization. But if a valuation is done with prudent experience and evaluation by professionals and experts then it might produce accurate answers. Thus, it is an art of investigation through legal and financial experts which help in valuation of assets and this process is known as Due Diligence Report.
Due Diligence Valuation
For IP, Due Diligence is vital to the transaction due to the information gap among both the parties. It all starts with MOU in which both parties willingly exchange information, plans documents, etc. If IP contains any information of trade secrets or client information a Confidentiality Agreement should be contracted. While fixing the price and importance of IP holding company the Rule of the Thumb is used. And the technological, legal and financial aspects shall be computed through Due Diligence. There are three methods for valuation of IP, Market-Based Value, value is determined on the basis of the market price of the similar property but it is extremely difficult to find an analogues property. Cost-Based Value, value is determined on the basis of the cost required to either create or replace but it overlooks time value of money and maintenance cost. Estimates of Future Economic Benefits, the value determined on the basis upon the estimation of past and future pecuniary benefits also known as Discounted Cash Flow. This method computes future financial benefits of business based upon various factors such as business history, profits of assets, margin, projection year, expected capital outflows, investment predictions, etc. Therefore, a highly preferred method as the results are accurate. Any of these methods can be used in Due Diligence for IP valuation.
Acquiring IP Assets
On the acceptance of the Due Diligence Report by both the parties and upon the fixation of the final purchase price the M&A Agreement is executed which is an official transfer in the eyes of law. The agreement mentions tangible and intangible assets i.e. non-IP. The IP assets must be particularly stated and distinguished in the agreement or asset sale. IP assets should prefer a transfer through the separate agreement as they are distinct in nature and the records of the new owner are required for valid use of it in respective jurisdictions. The intention to transfer 0the IP asset and goodwill can be clearly acknowledged during the sale of assets and lastly the exchange of documents is done.
How Advantageous IP can be in M&A
If an IP asset is transferred through an organised process, even the smallest part of IP deal is like a treasure-trove because this IP collection increases the value of the merging entities through various blends of business. For examples: Selling the IP asset to maximum value user, Donating the patent for tax benefits, Spinning it off to startups in return of equity, Abandonment of patents for cost reduction, Licensing the IP, Giving the IP asset as funds in R&D, Forming or creating IP subsidiary that focuses on licensing of the same, Patent platform, Pooling off the patents, copyrights, etc. with others.
But a lot of entities are terrified to give the control their IP assets as it may result in trailing their competitive benefit or like opening a patent war or may create a negative reputation for using IP diplomas. Licensing the IP assets is a common strategy used by entities as well as competitors. This strategy may not only help with cash incremental but also with financial and strategic benefits.
Incremental in Value of the companies
One of the most important roles played by an IP asset in M&A is that it increases the value of the Acquiring company. It helps the company to grow in the market and to accomplish the business objectives and strategies. New innovations do take a lot of time, money and hard work which certainly makes it impossible to make inventions every time in such an inconsistent market, thus the entities by merging must look at it as opportunities through M&A. If the existing innovation or technology is acquired by the companies then it would be a win-win situation for both the parties, it may lead to expansion as well as they will lead in the market.
Technology can be transferred
IP assets can be transferred from one to another, because of the transfer of technology the free flow is maintained in the marketplace. This also manipulates and exploits the IP asset to the fullest.
Helps the companies to attain unique resources
M&A helps in increasing the value of the company and holding a strong place in the market. These entities want to become a dominant force in the marketplace compared to their competitors. To become the dominant force, M&A is an important tool through which these unique innovations or resources can be acquired. Thus, it changes the position of the companies and altogether creates a distinctive and economical business model for merging entities.
Diversify into various sectors
M&A helps the companies to expand, explore and enhance into diverse sectors of businesses. It enables the entities to enter various fields of business. This not only opens the door to enter a new market but also is a convenient option to penetrate a pre-established enterprise or resources. This reduces operation cost and also establishes a diversified resource for the entities.
Growth is an undoubtedly essential object in corporate strategies and if there is a growth that will lead to expansion of turnover. In M&A the IP asset promotes growth expectations of the business by acquiring trade secrets, copyrights, patents, technology, etc. The company must keep a check on the IP asset and its product so that they work in consonance with the business requirement.
The Bottom Line
Thus, IPs are intangible assets but for the progress of a company, it plays an essential role and increases the value of the company. And that is why IP assets are secured through the M & A process. IP assets play a very crucial role in M&A as these assets increase the value of the company, helps the company to grow, diversify the company into various sectors, helps to explore the market and obtain new resources. Therefore, Due Diligence and IP valuation must be done in a correct manner so that the deal is not infructuous and is executed in a successful manner. Undoubtedly, IP is becoming the dominant force in M&A transactions.
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