Intellectual Property Rights as an asset in Mergers and Acquisition
Written By: Pulkit Taneja
A business has numerous assets which are responsible for its very existence. These assets can be broadly categorized into tangibles assets and intangible assets. While tangible assets include an office building, cashflow, etc., intangible assets include intellectual property. Intellectual property is developed with human intellect and is regulated by the developer or the owner. There are laws and regulations that help regulate these intellectual properties like the Indian Copyright Act, 1976, which oversees any copyright-related issues in India. Considering intellectual property is the primary reason behind a company’s innovation, brand name, presence in the digital space, intellectual property rights are considered equally important if not more than other property rights during a merger or an acquisition. Traditional companies are running behind to collect IP assets via M&A. For example, A company like Walmart, a supermarket giant primarily in the United States acquired Flipkart, an e-commerce business model.
IP and M&A
While any merger or acquisition, IP valuation is considered a critical negotiating subject matter. Most of a company’s operations are based on IP rights, and therefore IP valuation is to be done accurately to avoid over and undervaluations. There are various steps involving setting up an M&A deal the most essential of them all is the preparation of the due diligence report. A due diligence report is a formal document prepared to evaluate the legal and corporate risks that might come along with merging or acquiring a company. Apart from the valuation of IP, due diligence also ensures a company’s intellectual assets’ credibility. Legal issues like compensation to the companies’ IP owners, transfer or licensing of the IP rights and post-merger or acquisition ownership of the IP are to be dealt with. A company evaluates its IP assets via accounting valuations and transfer pricing valuations. Accounting valuations are cost price valuations generally used during M&A, while transfer price valuations are used for tax-related purposes.
The acquiring company targets IP assets to increase its market share. Acquiring trade secrets and capturing brand names to achieve a high customer base and reach is the objective of many M&A deals. For example, Zomato acquiring Uber Eats, which increased their consumer base. The perspective behind an M&A deal is the time and effort required to develop new technology. Considering the amount of money and work needed for innovation, companies acquire or merge with the existing ones.
Benefits of IP in M&A
Growing of business is an elementary business objective. A company needs to grow not only to increase revenue and profits but also to capitalize and protect its market share to survive. Acquisition or a merger of IP assets contributes to technological advantages and increases a company’s growth prospects. Sometimes acquisitions and mergers happen between competitors to increase the market share. For example- the merger between Vodafone and Idea increased the market share and the consumer base of these companies. This merger was also deemed to compete with the existing competitors in the Indian telecom sector like Airtel and Jio.
Any business targets a more extensive consumer base with a popular brand name and IP asset acquisition, or a merger does precisely that. In a competitive business environment, a company needs to evolve continually. A new innovation is not possible consistently and therefore, to survive a company must look forward to acquiring existing innovations.
Transfer of technology is another well-versed example of how a company benefits from acquiring IP assets. Considering a traditional company is manufacturing a certain good for many years. Due to the rise in competition and technology, many companies with ease and efficiency now manufacture this good. The traditional company to capture the marketplace would acquire or merge. This process leads to greater use of the IP and serves as a win-win situation for both companies. This also leads and helps a company to diversify. It is effortless to enter another business space by acquiring a pre-existing player—For-example Xerox’s entry into data processing via the acquisition of Scientific Data Systems.
Protecting IP assets
Most of many company’s significant operations depend on their IP assets. It is essential to understand that for a company safeguarding their IP against infringement, and other threats are equally as important as acquiring a new IP portfolio. While acquisitions or mergers, the proper due diligence procedure must be followed. There must exist no confusion in regards to the ownership of the IPR.
Managing IP assets must be governed by a formulated policy of the company. This policy must oversee the due diligence procedure before the acquisition or a merger. Proper utilization of IP assets post-acquisition must also be strategized. This can be done by commercializing IP assets via transfer or licensing. Policies must be formulated within the company to fight infringement cases and to monitor technological developments.
IP assets are the reason behind a companies evolution. The transition of the business into cyberspace has led to increased valuations of IP assets. Trade secrets, Patent rights, copyrights, and trademarks are few examples of IP assets that the acquiring company focuses on. During the M&A process, IP assets are evaluated extremely carefully, considering their relevance to the company’s objective to grow. There must be no ambiguity regarding ownership of the IP rights including provisions like transfer and licensing, which must be cleared while negotiations. M&As are a business opportunity for companies to expand and grow, and sometimes to survive. An example of companies merging to stay in the competition is the merger between Vodafone and Idea. IP assets in this merger would have been classified with extreme clarity considering the new company formed out of it would have each other’s trade secrets and each other’s consumer base.