In today's economic climate, mergers and acquisitions are rarer than they once were, and a deal can falter if the target company has not properly dealt with its intellectual property assets. But for companies with the right offering and the right IP, the opportunities still exist. Just ask the founders of 2-year-old Instagram, which was recently acquired by Facebook for $1 billion (pending Federal Trade Commission approval).
Instagram enables users to easily manipulate their digital photographs to create a retro-looking image. That requires software, in which intellectual property subsists. Of course, the enormous sum Facebook offered wasn't just for the software. For Facebook, the attraction was likely to be more in the engagement levels of Instagram's growing social network. Facebook identified that Instagram's model, based on users sharing photos, could potentially compete with Facebook if it remained independent, but could also enhance Facebook's offering if bolted on. That made it an irresistible proposition.
But is that not always the case? Acquisitions usually happen because companies see a threat or an opportunity (or both). CEOs do not usually think of a company's value in terms of IP alone.
On the other side of the transaction, entrepreneurs often see an acquisition as part of their long-term game plan and will often tailor their business model accordingly. But few prepare their IP for such an eventuality until late in the process. That is unfortunate, as poor planning can lead to fewer interested suitors, a lower purchase price or, in the worst cases, an aborted deal.
This is a great shame as companies can easily take steps to make themselves more attractive—steps that are far easier to climb during the normal course of trading than 24 hours before a deal is due to complete.
Firstly, every company should periodically undertake an intellectual property audit. What are the assets of the company? Are there any registrations that should be undertaken (patents, designs, trademarks etc.)? Are there any contractual loose ends to tidy up?
Clearly, the brand needs protecting. Is there a registered trademark in place? If so, is it broad enough in terms of territory and description of goods and services? Are renewals (in all territories) taken care of? Are there any new names or logos to register? You might be surprised at the number of companies who only discover during pre-sale due diligence that their registered mark is actually different from the company’s current mark.
Have all employees and freelancers signed contracts that transfer relevant rights to the company? What about any intellectual property created by customers (such as Instagram's army of photographers)? It may not be appropriate for the company to own that IP, but it will need a license to use it.
The customer database is itself an asset and it is essential, therefore, to obtain appropriate consents. In Europe and other jurisdictions that recognize database rights as sui generis intellectual property, you also may need to look at how to obtain protection for that.
The value of a company's IP can sometimes rest on third-party IP—for example, software licensed to the company. If that is so, lawyers acting for a potential purchaser will be looking at those contracts. They will look, in particular, at whether any escrow arrangements are in place and whether the license can be terminated on a change of control of the company.
Sometimes it comes as a surprise to a vendor that some of its assets are not actually owned by the company. For example, it is common to find that domain names have been registered in the name of the company's CTO, or worse, its outside IT supplier, rather than the company itself. Such relatively minor problems can usually be fixed at the due diligence stage, but it requires the co-operation of third parties (including in some cases the domain name registry or the court) and it causes delays to the transaction. In today's world any such loss of momentum can be enough to derail a deal.
Compliance is boring. Intellectual property audits are dull. Getting the right paperwork in place is rarely the most urgent task on a busy executive's "to do" list. However, good entrepreneurs, often those who have been through the due diligence process in selling a previous business, will know that it's never too early to get it right. Successful entrepreneurs will think about the content of their electronic deal room long before an offer is on the table.