Inside the role of IP in M&A transactions

As the value of patents continues to grow, so does the value of an in-house lawyer that has knowledge of IP and its impact on business

Mallun Yen, executive vice president at RPX Corporation

Mergers and acquisitions are, by their very nature, extremely complex transactions. A wide variety of factors must be taken into account when a company decides it wants to buy, sell, divide or combine companies or business units. And, in the last few decades, business leaders have had to consider one more factor that has been growing in significance: Intellectual property. Companies now see IP–especially patents–as keystones of business architecture.

“More than ever, patents are viewed as assets with value, either in and of themselves or as ways to generate revenue,” says Mallun Yen, executive vice president at RPX Corporation, where she oversees new products and initiatives.

“IP is an increasingly valuable asset class in business,” agrees Kevin Rhodes, vice president and chief intellectual property counsel for 3M. “Intellectual assets for an M&A target or company you are trying to value in connection to M&A are materially impacted by assets they have.”

Due diligence

A greater number of M&A transactions are actually driven by IP-related decisions, and, though patent portfolios often get the most press, intellectual property actually covers a wide range of assets.

“There are various forms of IP,” explains Oral D. Pottinger, director at Huron Consulting Group. “Customer lists, industrial designs and permits all vary in terms of wide-ranging property rights. One thing that is challenging during the due diligence in M&A transactions is to recognize the value of IP.”

Due diligence, of course, plays an extremely important role in any M&A transaction, but the type of attention involved in vetting, say, a patent portfolio is necessary and best done early on in the process.

“IP due diligence can take longer, so it can be pushed to the back end,” says Annette E. Becker, partner at K&L Gates. “It should be handled up front, so you can identify and confirm the ownership and scope of the IP, or if you are seeing things you don't like, you can get out of the process.”

While intellectual property is, indeed, valuable, and it's best to know everything you can about a patent portfolio before diving into an M&A transaction, that's not to say that it's always easy to determine the value of an patent portfolio. Yen points out that the true value of IP–especially patents–can be difficult to calculate. Despite the claims of some industry experts, there is no single monetary value that can be ascribed to each patent. Instead, says Yen, companies must take into account a number of factors, such as the purpose of a portfolio, whether it will be used for defensive or offensive means, for cost savings or clearing a path.

This due diligence is essential because of the increasing importance companies of all sizes and in all spaces have placed on patents in the recent past. “Patents are more important than ever. Patents can provide value as a defensive bulwark against lawsuits or infringement assertions or can be used defensively for countersuits,” explains Yen.

Role of the GC

Ultimately, patent risk is not a legal issue, but a financial and business risk. But, as Rhodes points out, a chief IP counsel brings together the business, technology and legal realms, so the wise GC will surround him or herself with a team of IP specialists who can navigate these three disparate worlds. And that ability to combine legal and business savvy certainly comes into play during an M&A transaction.

Fortunately, in today's business world, that savvy GC does not need to go into battle unequipped. He or she can have access to the right weapons for the modern age—information.

“The more a GC or legal department has access to data and visibility into what these transactions look like, the better they’ll be as business partners and the better they can navigate the legal landscape,” Rhodes explains.

Down to business

No matter how the company plans to use certain IP assets, the driving force behind any M&A decision should always be a business goal.

“Start with how the IP can be used to support an overall business strategy,” says Becker. “Target a company that has IP that is important to your current business strategy.” Then, she says, decide if it would be less expensive to buy that IP or to build it yourself, or if you need the target company's assets to help you break into a new market segment.

Yen agrees that M&A transactions should begin with a solid business need, and patents should be seen as one potential path toward meeting that need. “The majority of M&A transactions are not driven by patents,” she explains. “You look at several candidates. When you do that, you look at the technology, the business fit, the people, etc. If it is a business area affected by patents, look at what they own or what they license, or what assertions or threats they face as a result of having or not having patents or licenses in place.”

When it comes to evaluating the value of a targeted patent portfolio, the waters get a bit murky. Yen describes it as a “bit of a black art,” emphasizing that there is no one clear formula that leads to a magic number. Many factors are involved, including the “chilling effect” – discouraging legal rights via the threat of legal sanction – the portfolio might have on other companies that might file lawsuits, as the threat of litigation is always present when dealing with intellectual property.

Becker adds that the quantity of patents in a portfolio is actually secondary to the quality of those patents, as some patents can have enormous value if companies went through a great deal of strategic planning and testing in the process of obtaining the patent.

Intelligent decisions

All of this research is designed to help the savvy business make the right decision with regards to the proposed business transaction. Because of the nature of intellectual property, companies have a number of options at their disposal, including licensing agreements. In some cases, licensing patents may make more business sense than diving into a merger or acquisition.

Much of the critical decision making depends on the business the company is in. In a competitive space like the mobile device arena, a single product may be covered by hundreds of patents, and it may not be possible for one company to acquire them all. The size of the company matters as well, as larger, well-established companies are usually better off licensing patents.

Either way, companies must have a clear idea of why they value the IP assets. Is it a way to break into a new market segment, or accelerate a strategic plan (which is often the case, as acquiring patents can be faster than obtaining them, which can take up to seven years)? While some patents can provide a straightforward revenue stream, like a licensing campaign, others are targeted as assets to support business initiatives going forward.

Of course, patents are important for companies on the other end of the acquisition transaction – those companies looking to get acquired. “If you are looking to get acquired, there is a lot you can do to make yourself a more attractive acquisition target,” Yen explains. “A few key patents help, and it's best to make sure you are doing the right thing with regards to clearing a path for your products and technology.” Once again, litigation plays a key role here, as companies can be hesitant to acquire a business that is embroiled in—or has the potential to get involved in—an IP dispute, and at a minimum, it has direct financial bearing by affecting the acquisition terms and escrow hold-back.

No matter what, it's important to “know your dance partner,” as Pottinger puts it, especially if you are looking to acquire a foreign company. Be sure you know who you are partnering with, he warns, recommending that companies thoroughly vet acquisition targets for issues like corruption and bribery. He also recommends that companies take all the due diligence data they have collected in the process and keep it in one central, secure location, so that you can restrict access to the IP, limiting the number of parties who are authorized to touch sensitive and important data.

With the proper data in hand, including due diligence on the value of patent assets, status of current and pending litigation, status of licensing agreements, review of potential risk, and more, the GC and the IP specialists in the law department can assist the business stakeholders in making the right decision for the company. “You need to decide what drives shareholder value, and anything you can do to support the company's business objectives from an IP perspective is helpful,” says Yen.

Because, as the value of patents continues to grow, so does the value of an in-house lawyer that has knowledge of IP and its impact on business. Perhaps the best advice for counsel, in this case, is nice and simple. As Yen puts it, “Be in step with business goals.” That way, legal can play a key role in ensuring that their companies have real growth potential.

Senior Editor

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Rich Steeves

Richard P. Steeves is Senior Editor of InsideCounsel magazine, where he covers the intellectual property and compliance beats. Rich earned a B.A. in English Literature...

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