It has been written by Taniksha Gupta, pursuing a Diploma in M&A, Institutional Finance and Investment Laws from LawSikho. It has been edited by Ojuswi (Associate, LawSikho).
It has been published by Rachit Garg.
Table of Contents
Introduction
For decades, mergers and acquisitions have been essential tools for advancing company goals and allocating limited financial and human resources. There may be a variety of factors at play in these transactions, such as the desire to diversify one’s business. These transactions are influenced by a variety of factors, which change as the market changes. Patents, trademarks, and copyrights are just some of the Intellectual Property (IP) that has recently driven M&A deals. IP is now widely acknowledged as one of the company’s greatest beneficial assets. This acceptance, on the other hand, did not happen by chance. Intellectual property (IP) has come to be seen as a valuable asset as a result of decades of progress on the national and international levels. This article analyses the dominant force in future commercial transactions comprising M&A.
Mergers and Acquisitions
As an outcome of M&A, two or more companies are combined into a single entity. This process does not result in any new investments. However, the parties associated in such a transaction exchange shares. In most cases, the buyer corporation, which maintains its unique identity, is the one that endures, while the seller company dies.
It is accurate to refer to a merger as an amalgamation of all of the assets and liabilities from one firm being passed on to the recipient entity in exchange for payment through the transferee company’s equity capital or debt obligations or funds. The goal of an acquisition, on the other hand, is to get a majority stake in the obtained company’s stock. A consensus can be reached with those who maintain a major stake in the management of the firm, stocks can be purchased on the marketplace or by private sale, or a takeover proposal can be made to the supervisory board of stakeholders.
When it comes to corporate acquisitions, a takeover is very different from a merger. Takeovers take less time to complete because the acquirer sets the maximum price that can be offered to the target company, and the target company must be willing to cooperate for the takeover to go through. There is a difference between a merger and a takeover when it comes to the payment of consideration. However, since each set of shareholders loses executive control in both instances, mergers and acquisitions can be considered similar operations. Vertical, horizontal, circular or conglomerate business combinations can be classified according to the objective portfolio of a proposal.
The pharmaceutical industry has been involved in two of the top three big M&A deals through September 30th, 2019. The combined company value of AbbVie and Allergan was US$ 86.3 billion. Bristol-Myers Squibb and Celgene’s US$ 89.5 billion mergers were the most expensive. The second-largest deal was the merger of United Technologies and Raytheon, which was valued at US$ 88.9 billion. However, despite their military backgrounds, these companies are focused on technology. For the most part, these acquisitions are focused on intellectual property (IP).
Difference between Mergers and Acquisition
| Parameters for Comparison | Merger | Acquisition |
|---|---|---|
| Definition | A merger occurs when two or more companies join forces to form a new entity. | An acquisition occurs when one company buys out the other. |
| Power | The powers remain the same for both the merging companies. | The acquiring company holds all of the ultimate power. |
| Name | In the event of a merger, the company is given a new name. | When a firm is acquired, the name of the purchasing company can be utilized. |
| Legal formalities | In comparison to acquisitions, mergers have additional legal procedures. | In comparison to a merger, there are fewer legal formalities in an acquisition. |
| Level | In a merger, two or more companies that consider each other to be of the same level come together to form a new company. | In an acquisition, the firm acquiring the other company is regarded as larger and more powerful. |
Intellectual Property as a Major Factor
Insights into the role of intellectual property rights in mergers and acquisitions are critical, given the significance of intellectual property dealings in mergers and acquisitions, both in terms of quantity and valuation. The fact that mergers and acquisitions take place throughout both peak and recession periods is noteworthy. The rising side of the issue was highlighted by the mergers and acquisitions activities that contributed towards a major portion of the global economy in the mid to late 1990s. There has been a marked increase in the number of mergers and acquisitions where intellectual property is a prime concern.
One of the primary goals of an acquirer company is to increase the value of its stockholders, and taking IP into account is an important part of that strategy. The number of cross-border mergers rose significantly as the 5th wave of mergers progressed. The opportunity to integrate intangible assets was a major driving force behind mergers and acquisitions. Aside from that, sources report that the value of intangible assets is higher for companies that plan to expand their sector all across the border, especially for those companies.
A few of the earliest examples of a brand value-driven M&A transaction is the Grand Metropolitan of Great Britain -Pilsbury deal. “The Grand Metropolitan of Great Britain decided to buy Pillsbury Company for $5.7 billion in order to acquire well-known brands like Burger King and Haagen-Dazs. The amount of time and money required to build a brand with such high values was the driving force behind this transaction.” Companies have come to understand the value of focusing their expansion efforts on those with a more robust intellectual property portfolio.
In response to the assurance that IP reforms were taking place around the world as an international mandate to meet the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, there was a splurge in investment in developing and acquiring intellectual property. Despite the growing attention paid to intellectual property (IP), companies still neglect or fail to thoroughly investigate the IP assets of their targets. The target company, on the other hand, may overlook the value of its intellectual property (IP) assets when calculating the total value of its corporate asset for negotiations. Even though the situation has improved over time, intangible assets still have a high risk of being undervalued.
How IP drives M&A
To remain competitive in today’s business world, companies are increasingly focusing on acquiring technological capabilities. Increasing technological prowess is a two-way street. A company can make better products and provide better services because of it. Another benefit is that businesses are protected against cyber threats and the disruptions they can cause. Against this backdrop, intellectual property rights have emerged as a key factor in technology company M&A processes. Media, medicine, and telecommunications are all examples of industries that rely heavily on intellectual property (IP).
Growth of IP driven M&A Transaction
One of the most common methods for increasing a company’s business is through mergers and acquisitions (M&A). This could be done by acquiring the intellectual property (IP) of a competitor. As previously said, intellectual property (IP) assets are extremely valuable in today’s business world, and a strong IP portfolio is now a prerequisite for success. A strategy is needed to deal with the increasing competition in the technology sector. In 2012, Google had to acquire Motorola Mobility to thwart hostile attempts by Microsoft, Apple, and other Android competitors.
In the same way, companies in IP-intensive industries frequently use mergers and acquisitions (M&A) to bolster their IP portfolios to stay competitive. If IP is strengthened, will it have an impact on the role of IP-driven M&A? This question must be answered. The likelihood of cross-border M&A and domestic M&A involving high-tech enterprises improves when a nation has a stronger IPR system.
Assessment of IP
Intellectual property must be able to be valued independently of a company’s other assets and even sold if it is being valued. Intellectual property must be treated as a ‘stand-alone’ asset to distinguish it from other assets in the case of a business purchase or to be valued in its own right as an organically created asset. Even though intellectual property valuations are necessary for many different situations, a few things remain constant, such as the requirement that the asset is capable of being sold outright or licensed, the need for legal protection to establish the strength of any vested interest in it and provide a way to transfer or assign the asset, and finally, the need for the asset to be resilient enough to withstand loss.
Goodwill acquired through acquisition can be reduced because goodwill always needs to be amortized, but brand value can be retained in the balance sheet, giving a more realistic presentation of capitalization, which is the sole criterion for intellectual property valuation. In mergers and acquisitions, both the purchaser and the seller need to recognize and evaluate their true worth to arrive at a fair price. A valuation report does not reflect the value alone; it also explains how the value was calculated, detailing all assumptions, which gives true insight and would be of tremendous value to the buyer.
In mergers and acquisitions involving significant intellectual property assets, the value of these assets is frequently critical to the transaction’s success. As well as improving the overall appearance of a balance sheet and increasing net asset per share, the valuation of intellectual property allows for the right allocation of value to intellectual property or other readily identifiable intangible assets.
Need for Due Diligence
Assuming that IP rights are automatically transferred when one firm acquires another is a legal error. Issues of intellectual property owners may not be addressed at all by general warranties and assurances. Transactions involving private IT firms provide unique challenges in terms of intellectual property (IP). In some cases, private firms’ intellectual property (IP) rights may not be publicly available. As a result, the buyer must perform considerable legal study before purchasing a company’s intellectual property rights.
IP encompasses a wide range of things, including copyrights, patents, trademarks, and more. Each of these must be thoroughly analyzed before making a purchase decision. It is at this point that M&A consultants and IP attorneys need to coordinate their efforts. All of the target company’s intellectual property rights must be available to the buyer for use in the company’s present and future operations. Otherwise, an M&A deal is likely to be ineffective. To calculate the selling price, the selling corporation must also examine its intellectual property rights.
Conclusion
The acknowledgement of intellectual property (IP) did not proceed in a straight line. IP’s abstract character was frequently cited as a reason why it should not be recognized. As time went on, the necessity for intellectual property protection rose, and so did the need for exclusivity over ideas and concepts. As a way to foster intellectual progress and the development of socially beneficial technologies, such rights were granted to exclude others. The importance of intellectual property (IP) in mergers and acquisitions (M&A) negotiations cannot be overstated.
As previously stated, a company’s ability to defend its intellectual property rights is critical in securing such transactions, as the risks of purchasing a target company’s IP portfolio and the subsequent proliferation of counterfeit or pirated items outweigh the potential rewards. It is important to remember that attempts to improve IP reforms will always clash with the public interest and the approach to handle this conflict is to maintain a balance between the interests of both the public and private stakeholders.
References
- https://articles.manupatra.com/article-details/The-Dominant-Force-In-Future-Commercial-Transactions-Comprising-Mergers-And-Acquisitions
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1591182
- https://sagaciousresearch.com/blog/role-ip-in-mergers-and-acquisitions/
- http://www.commonlii.org/in/journals/INJlIPLaw/2009/11.html
- https://taxguru.in/corporate-law/role-intellectual-property-mergers-acquisitions.html
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