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The following article discusses session two in the IR Global Virtual Series on ‘Dealing in IP: Successfully transacting IP as part of the M&A Process’
Italy – MR We need to evaluate which kind of IP we are talking about, whether that’s a trademark, patent or trade secret.
Of course, if it's a patent or a trade secret, then it's difficult from a legal point of view to have an estimation and evaluation because you need an expert. This could be an accountant or a technical expert who can evaluate the full IP portfolio, and assess the value.
There are different methods of evaluation, including cost, income or market-based measures, but technical expertise is very important for all of them.
The expert plays a key role. For example, I just read a paper about the added value of the most important brands in Italy. The value of the Gucci trademark is evaluated at USD16.3 billion dollars, while Ferrari is valued at USD3.5 billion dollars.
So, it's quite important when you are the acquiring party to know exactly what you are buying and the kind of value this represents for your company, or the target company.
Trademarks are easier for a lawyer to evaluate, but for patents and trade secrets you need an accountant or technical person, to check the importance of a specific patent to your portfolio.
Indonesia – JK I agree with Maurizio, that we need to first understand the detail of the majority of the IP owned by the target company.
In Indonesia, there are not many experts available that could provide the support to secure really accurate valuations. It is only a very select few firms that are able to provide such assistance and, in some cases, when we want to separate the IP valuation from the overall audit, it becomes more difficult.
I have been involved in many projects that required quite a large amount of IP research because it was one of the main assets of the company. It did not change the pricing of the deal, but the result of the valuation allowed us to accurately price the deal before the project proceeded.
We would consider bringing in experts from outside the country to help value IP in a deal, but of course, we would first involve a valuation expert from Indonesia.
Lebanon – WAF In MENA, there is an obvious lack of know-how as to how to assess IP rights in a rather learned manner, especially with the traditional absence of specialised bankers and what I call a regulated copyright economy. Therefore, we mainly rely on international VCs and financial experts to evaluate IP that is found to legally exist in a deal.
Oklahoma, U.S. – PM We often involve accountants to determine value, because valuations are so dependent on the tax laws, and we've discovered that our accountants can value the IP differently based upon different circumstances.
They may value IP one way for a buy-side transaction and another way for a sell-side transaction. Then, weeks after the transaction, they might value it a third way for the purposes of reporting taxes, rather than for the deal; and all of this is legal.
It's imperative that you have accountants involved in evaluating, but this is not the only thing we rely on. Sometimes the accountants need information from the legal team or the business in order to give an accurate valuation, and this ties into some of the comments in the last session. It's imperative to know whether the assets are going to be sold outright, or if there are some kind of ongoing connections to them necessary for the operation of the retained businesses.
Maurizio talked about ownership and whether assets have been mortgaged or pledged as collateral; that is imperative to know. Another issue that I've encountered frequently in transactions, particularly with large international companies, is knowing whether those IP assets are going to be needed internally by the selling company. If this is the case, the assets can't be sold outright and that then affects the valuation of the deal.
We do often find that accountants on either side of deals often disagree on the valuation and struggle to come to an agreement. We did a deal once, where we changed the valuation of the deal based upon the value of the IP that was being sold because we had to carve it out and leave it in an operating entity for a plant so that they could continue to use it.
When we then went to flip the company and sell it to another entity, our client didn't want to include the IP, because they still needed to maintain some use of it. When we went to flip it we disclosed this to the buying party, and they then wanted to bring down the sale price because of this existing right in the original selling company.
It just depends upon what the party’s goals are, and evaluation of those goals can change, from the viewpoint of the buyer or from the accountant doing the work.
Switzerland – SL The client usually puts a value number behind the IP, working together with accountants. I will also work with accountants if I find something in the due diligence that isn't adding up or something that appears to create a risk of litigation.
Value can depend on the taxation of the different IP in question and the tax law of Switzerland. We have 26 cantons with 26 different tax laws, so you definitely need a tax expert to figure out what to do. Of course, if we're talking about international valuations, then it becomes even more complicated.
Usually, the valuation number is there because my client sees potential in the IP which might have synergies or scaling effects if they acquire another company that is in the same or a similar field.
The number isn't necessarily what I would put behind an IP, but that is not for me to answer, because I'm not the one making the price.
What I will do though is do some research to see if there is anything that might reduce the price for my (buy side) client. They will be happy if they don’t pay as much at the end, but they know what any IP or any company they are acquiring is worth to them.
We might bring in technical experts to support our view on valuation, depending on the IP. If it is software code for instance and there is something in there that requires validation or needs to be confirmed as unique and valuable.
We might also need accounting expertise on hand if the client is going to negotiate to price as part of the process. It is pretty difficult to value technology, and sometimes you can see a technology firm is overpriced, but if it’s something like blockchain that banks need to be part of, then they will often pay more for it.
CONTRIBUTORS
Peggy Millikin (PM) Millikin McKay – Oklahoma, U.S. www.irglobal.com/advisor/peggy-millikin
Maurizio Ruben (MR) CDR & Associati – Italy www.irglobal.com/advisor/maurizio-ruben
Justisiari Kusumah (JK) K&K Advocates – Indonesia www.irglobal.com/advisor/justisiari-kusumah
Walid Abou Farhet (WAF) Abou Farhat Law Offices – Lebanon www.irglobal.com/advisor/walid-abou-farhat
Sergio Leemann (SL) Wicki Partners AG – Switzerland www.irglobal.com/advisor/sergio-leemann