Role of Intellectual Property in Mergers and Acquisition

By: Nidhi Poddar

Introduction

Intellectual Property has not always horse around Merger and Acquisition deals. Intellectual Property plays a disguised role in 2 major aspects:

By making certain Intellectual Property intensive industries, for example, life sciences, where the value of pharmaceuticals can often be viewed with the scope of patent protection.
By making certain deal structures, for example, spin-outs and joint ventures where the rational allocation of Intellectual Property Rights is an unavoidable necessity.

Whether directly or indirectly, consciously or unconsciously, Intellectual Property plays a significant role in any Merger and Acquisition activity. However, it was not unusual that the acquirer decides and proceeds with the typical Acquisition, without involving Intellectual Property experts. In most Merger and Acquisition deals, the acquirer determines the valuation, negotiates principal deal terms, and even finalized the structure of transactions whether internal or external. In certain aspects, Intellectual Property is a rattler to the Merger and Acquisition train i.e. delighted to affix along but not driving with equal importance. This is evidently accurate for valuation in Merger and Acquisition deals. While valuing a business, the bankers or any other person involved will not endeavor to value Intellectual Property separately. As the valuation of Intellectual Property separately is a burdensome task. If in any case, the acquirer measures the value of Intellectual Property separately from the business, then it would not be in the acquirer’s interest as the acquirer has to pay the higher value of the business.[1]

Merger & Acquisition

Waves of Merger and Acquisition is a key feature of corporate history and has evolved significantly in India in past decades. Merger and Acquisition has become the most important aspect of growth strategy in the corporate industry. Merger and Acquisition has shown an effective result in businesses like information technology, telecommunication, business process outsourcing and pharmaceuticals. The strategy of Merger and Acquisition has proven to be a surest way to acquire competencies and funds, opening new market avenues, expanding customer base, snuffing out competition. The strategy helped the corporate industry in maintaining and improving profitability.[2] Merger and Acquisition is a tool for reconstruction of the company in order to maximize the wealth of the company and create goodwill in the global market. Merger refers to consolidation of two companies into one company. This Merger of two companies will help in maximizing profit and enhance the work and ensure that the company achieves the desired goals. Whereas Acquisition refers to a takeover of one company by another company by purchasing its ownership stake. Generally, such a stake is above 50%, which provides the acquiring company the control of management.[3]

Intellectual Property

Intellectual Property is an incorporeal Property which is invented or created by human intellect. Intellectual Properties are intangible in nature and possess a right i.e. ” Right in Rem” which means that the inventor has the right towards the property wholly. The different forms of Intellectual Property are- Copyright, Trademark, Patent, Design etc. Intellectual Property Rights refers to the legal rights possessed by the inventor or creator in order to protect the invention or the creation for a certain period of time. Intellectual Property Rights is an exclusive right to the inventor or the creator or assignee, to use, sell or dispose the invention. Intellectual Property Rights promote the economic development of the country by creating healthy competition and encouraging industrial development and economic growth within the country.[4]

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Intellectual Property is referred to as a corporation’s biggest asset. In the New Economy- Brand names i.e. (Trademarks, Service marks and Trade names), Product value, Brand value, Innovation portfolio of the company plays a pivotal role in the management of assets of the company and are equally important as the goods and services. Sounds, smells, colour and product shape comes under the trademark protection. There should be no surprise that Intellectual Property plays a crucial role in the sale or purchase of a business.[5] Intellectual Property plays a vital role in the strategic development of the corporation. Intellectual Property is one of the various reasons for which different corporations merge or acquire any company, because such Merger and Acquisition strengthens their market share and improves and makes their management system efficient.[6] With the technology advancement, the importance and the value of intellectual property of a company has enhanced. The intellectual property possessed by a company is a cornerstone, thus has increased focus on intellectual property while any commercial transaction. In the present era, it has become the most task to identify and adequately analyze the value of intellectual property of the company as it will directly impact the value of the transaction.[7]

IP due diligence

This article intends to highlight and provide a quick overview on how Intellectual Property due diligence is important in Merger and Acquisition transactions. There is great significance of Intellectual Property due diligence in Merger and Acquisition transactions in relation to the acquisition or investment in technology and biotech companies because the main purpose of acquiring such company is to target the Intellectual Property Assets (IPA) of the company. Intellectual Property Assets mainly refers to Patents, Trademarks, Copyright. Intellectual Property due diligence refers to a deep investigation which is conducted to understand the value of the Intellectual Property of the target company before any Merger or Acquisition.[8]

Role of Intellectual Property in Merger and Acquisition:-

Value addition to the company portfolio:–

Merger and Acquisition of a company helps in adding value to the portfolio of a company. It is very necessary that companies evaluate the portfolio of the company and check whether the current portfolio meets the requirement of the company objective. In the present dynamic and inconstant market environment, it is not possible to invent something new, thus the companies must search for new opportunities and the ways of acquiring existing innovations of the other companies.

Acquiring unique capabilities:-

Every company wishes to have a stronghold and be in a dominating position against their competitors. One of the major tools to achieve this is Merger and Acquisition. By Merger and Acquisition, a company may acquire the unique innovation or capabilities of their competitors. This will help the companies to have an edge over others. This result in changing the whole outlook of the company and creating a unique and efficient business model.

Transfer of Technology: –

A fruitful benefit of acquiring an Intellectual Property is that it allows the transfer of technology from one company to another. This helps in proper exploitation and utilization of the Intellectual Property to its full extent.

Diversification: –

The Acquisition or Merger of a company helps in exploring and enhancing different sectors of a business. Merger and Acquisition open new doors of deals and growth within the market. It is very convenient to start a business through pre-existing or pre-established resources, and even this reduces the cost of operation and helps in creating a diversified asset portfolio for the company.

Growth: –

The main objective to implement the corporate strategy is to promote growth and development and to maximize the profit, resulting in achieving the desired goals. The company must ensure that the product portfolio of the company is updated and is efficient to meet the current demand in the market.[9]

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Some classic example of Merger and Acquisition

In 1988, Nestle acquired Rowntree business. It was the largest foreign takeover of a United Kingdom Company. In this deal, Nestle agreed to pay around US $ 4.5 Billion for Rowntree PLC. The main objective of this deal was to acquire famous brands i.e. Kit Kat, Yorkie, and Rolo.
Another Classic example is Acquisition of Luxury Italian fashion house Versace by Michael Kors. The main objective of this deal is to access new product lines and markets through an established brand and IP portfolio.[10]
Motorola Mobility was acquired by Google Inc. which gave the acquirer complete control of Motorola’s patents. Later Google Inc. sold Motorola Mobility to Lenovo, but retained ownership of Motorola Mobility’s Patent Portfolio. The main objective of Google Inc. was to purchase the patents of Motorola mobility.[11]
Another interesting case study is the Acquisition of Rolls Royce by Volkswagen. Volkswagen has acquired all the assets required for the production of cars but was restricted to use the Logo of Rolls Royce. Volkswagen overlooked the fact that prior to the Acquisition, BMW has already acquired the access to use Rolls Royce Logo for its car.[12] BMW was a direct competitor to Volkswagen. Volkswagen purchased all rights to manufacture Rolls Royce cars but did not have engines for their car as BMW was producing engines for Rolls Royce. Rolls Royce factory was manufacturing both Rolls Royce and Bentley cars. After a lot of twists and turns, in 2003 BMW became the owner of Rolls Royce and Volkswagen is sole manufacturer of Bentley cars. This case study reiterates the importance of intellectual property due diligence before any Merger and Acquisition.

By the above stated classic examples what we get to learn from it.

In any Merger and Acquisition proper due diligence of Intellectual Property asset is a must. The nature of Merger and Acquisition is stated as risky and with the technology advancement in the present era has become riskier. Due diligence of Intellectual Property Assets must be the pertinent question before initiating a formal contact with the target company. Before contacting, the company must do some homework and must collect certain information regarding patents, trademark, copyright, goodwill etc. Needless the same amount of importance must be given to the tangible and intangible assets to get a fair valuation.[13]

Conclusion

Intellectual Property are the intangible assets of the company and plays a vital role in the expansion of the company and even add a great value to the portfolio of the company. Merger and Acquisition help in creating asset portfolio, acquire new capabilities, enhance the growth rate which ultimately help the company achieve their goals. To avoid any uncertainties or defects, a company should ensure a proper due diligence and valuation of Intellectual Property asset before acquisition of the Intellectual Property asset.

A company survival, goodwill and the profit depend on the possession of IP assets. It must be ensured that the deal benefits both the parties. Government is bringing out various policies to encourage Merger & Acquisition in India. The Land Acquisition bill, Labor Law and Good & Sale Tax (GST) will have a great impact on the corporate field.

Any company at any level or a startup company must emphasize on the importance of protecting their Intellectual Property rights. The acquiring company must conduct due diligence to improve their marketability and be able to identify weaknesses.

Due diligence is an integral part of any Merger and Acquisition transaction. Any act of negligence while performing due diligence can lead to over valuation of the company and even lead to an exposure to a unknown risk and liabilities.

[1] https://www.sullcrom.com/siteFiles/Publications/Mousavi-IAM-July-Aug-2011.pdf

[2] https://pdfslide.net/documents/Intellectual-Property-the-dominant-force.html

[3] http://www.legalserviceindia.com/legal/article-2693-role-of-Intellectual-Property-in-an-acquisition-or-Merger.html#:~:text=Intellectual%20Property%20assets%20are%20the,such%20as%20Merger%20and%20acquisition.

[4] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3217699/

[5] https://norrismclaughlin.com/articles/Intellectual-Property-aspects-of-Mergers-a-Acquisitions-part-i-of-ii-conducting-due-diligence/

[6] https://www.udl.co.uk/insights/the-importance-of-ip-in-Mergers-and-Acquisitions

[7] http://www.buildingipvalue.com/05_NA/124_127.htm

[8] https://www.corporatelivewire.com/top-story.html?id=ip-due-diligence-in-ma-transactions

[9] Supra note (3)

[10] https://www.udl.co.uk/insights/the-importance-of-ip-in-mergers-and-acquisitions

[11] https://www.businesswire.com/news/home/20150407005604/en/Research-Markets-Strategic-Importance-Intellectual-Property-IP

[12] https://medium.com/@ramkumar1984.rajachidambaram/how-ip-acquisition-unlocks-huge-value-in-technology-m-a-23e2739cf091