Informing commercial valuations through intellectual property insights
In 2021, the value of mergers and acquisitions (M&As) globally increased dramatically, surpassing $5 trillion for the first time in history. With dealmaking at an all-time high, it’s apparent that companies continue to have a tremendous appetite for adding commercial value to their portfolios via mergers and acquisitions.
It’s little wonder, as M&As can prove hugely successful and profitable commercial undertakings. But while the hunger for M&As shows no sign of abating, the processes that underpin such deals, namely intellectual property (IP) due diligence, don’t always keep up with the evolving innovation landscape.
The rise of intangible assets in IP due diligence
At the heart of the problem is the global market shift into a dematerialized economy. According to Ocean Tomo’s 2020 study, intangible assets now make up approximately 90% of the components of the S&P 500’s market value, a complete reversal from the status quo only 50 years ago when only 17% consisted of intangible assets. And, understandably, intangible assets are harder to track, quantify, and evaluate accurately, which increases the risk of errors.
Moreover, the practice of IP due diligence within the M&A process is still often undertaken after closing schedules or a letter of intent to purchase have been rendered. However, in a dematerialized economy, this methodology puts undue time constraints on a complex process, increasing the burden on M&A lawyers and increasing the risk errors without third-party assistance.
How can this be risk in due diligence be mitigated?
The answer lies in integrating IP experts and digital solutions into the cycle of due diligence from the outset of the M&A process. In this way, a company can ensure that no stone is left unturned in the final valuation of a company, because when an element of IP is missed during due diligence, it can prove to be a costly mistake.
Errors in intellectual property due diligence prove costly
“Deal-making is glamorous; due diligence is not…That simple statement goes a long way toward explaining why so many companies have made so many acquisitions, that have produced so little value,” – The Secret of Great Diligence
Once senior management has set their sights on a target company, the momentum of closing schedules and letters of intent begins. This momentum can be a fervent propellant of confirmation bias, which is when information that conflicts with an established belief is often disregarded. Failure to maintain objectivity during an M&A process has led companies to make large-scale and expensive blunders in their IP due diligence.
A prime example is Apple’s purchase of the patent for the screen technology behind the iPad from a Taiwanese company called Proview Electronics (a branch of Proview International Holdings) in 2006. The deal seemed too good to be true, with Apple purchasing the global trademark for just $55,104.
However, it emerged just four years later that the "global trademark" that Apple had acquired for the iPad, did not technically include China. This oversight during Apple’s IP due diligence led to Proview International Holdings suing Apple for trademark infringement for selling the iPad illegally within Chinese territories. Apple finally settled the legal dispute in 2012, paying out $60 million.
In the pharmaceutical industry, the waters of IP due diligence can be even murkier. This is due to the high level of regulatory criteria companies must meet before a drug goes to market—discovery/concept, preclinical research, clinical research, FDA (Food and Drug Administration) review, and FDA post-market safety monitoring. As well as the complexities of the molecule patenting process, which only protects the developer’s investment for a period of 20 years, before rival companies can produce a generic version of the compound and legally compete with them.
For instance, in 2014 Merck & Co. unveiled an $8.4 billion deal to buy out antibiotics-focused Cubist Pharmaceuticals, based on the strength of its top-selling antibiotic, Cubicin. Used primarily to treat bacterial infections of the skin and blood, the drug had generated $700 million in sales during the first nine months of 2014.
However, just hours after the merger’s announcement, a U.S. court invalidated key patents for the drug. Merck had overpaid by an estimated $2-$3 billion, according to analysts. Indeed, Cubicin sales would decline over the next five years, slipping to just $207 million for the first nine months of 2019, due in no small part to the generic competition that ensued following the ruling.
The benefits of integrating expertise in IP due diligence
Hidden pools of value and hidden pitfalls are sometimes missed by M&A transaction lawyers who, while experts in the field of contracts, can often lack the sophisticated tools needed to conduct a truly comprehensive IP due diligence amid this data-intensive, IP-rich, 4th industrial revolution.
Patent experts can mitigate these risks. CAS’ patent solutions combine unparalleled scientific and IP content, specialized technology, and unmatched human expertise that can support IP due diligence. These solutions can help:
- Identify potential legal roadblocks to patents
- More comprehensively evaluate prior art and recognize patentability/enforcement risks
- Ensure IP ownership is clearly known, articulated, and transferable
- Support a robust IP due diligence search, with analytics to guide growth initiatives and collaboration with CAS’ expert team to help fill the gaps
The sophisticated technology and additional human expertise behind solutions like the STN IP Protection Suite™ make due diligence searches more comprehensive. This minimizes risk and enables companies to make smart, data-driven business decisions with greater confidence.
Lean on the intellectual property experts
During this 4th revolution, in which most of a company’s true value rests in intangible assets, it's more vital than ever to give IP due diligence the time and expertise it warrants. And given that companies are more likely than ever to enter cross-sector M&As, increasing by 10% since 2012, a target company’s patent portfolio can increasingly be outside of the buyer's field. In these cases, external expertise is a sound business approach, bringing objectivity and targeted focus to unfamiliar industries.
Indeed, by leaning on external experts a company can help minimize risk, gain a greater understanding of the company they're purchasing, and obtain a true valuation, securing that the merger and acquisition go to plan and represent genuine value for money.
The STN IP Protection Suite enables powerful and precise searching within CAS’ expansive database of scientific and patent content. Users can confidentially find connections, assess overlaps and risks, and get the quality insights needed to make smarter, data-driven decisions.