Very often Mergers and Acquisitions (M&A) are fraught with difficulty. Though estimates vary widely, most analysts agree that the failure rates for M&A activity are as much as 50-90%.
The reason why the odds are so poor is because a lot can go wrong during the process of integrating two companies. From evaluating the strategic fit and valuing the deal, to culture and human resources, financing and maintaining sales momentum through the transition. M&A is complex.
When assessing an opportunity, companies go through a phase of due diligence in which important aspects of the operation are scrutinised – generally with the help of accountants or corporate lawyers. However, intellectual property is a critical component in this process that could present considerable risk to the company if it is overlooked or left too late.
One of the most high profile examples of IP due diligence failure was by Volkswagen in 1998. After spending approximately US$750 million to purchase of Rolls Royce Motor Cars, the team realised that while it owned the right to manufacture the vehicle, it did not have the right to put the name on it – BMW did.
Some of the other issues to look for include:
- Does the company actually have the rights they claim?
- Are rights still valid?
- Have there been any infringements or suspected infringements?
- Will the transfer of rights be exclusive?
IP due diligence goes beyond the buyer, too. If you’re positioning your company to be purchased at maximum valuation, or looking at a joint venture, or even simply partnering around a licensing or franchising agreement, analysis and verification of intellectual property claims should be top on your due diligence checklist. If your IP claims are in any way misrepresented there is a risk that your deal could be re-valued or significantly delayed.
To get the best outcome, consider commissioning a full and independent search of ownership (including maintenance/renewal), as well as freedom to operate, the scope of granted rights, and whether there are incurred costs of unused assets. Your ‘IP asset inventory’ should cover not only patents and trade marks, but also designs, copyright, trade secrets, commercial agreements and a summary of the strategy and approach to IP protection.
All too often, these considerations are factored in only at the late stages to identify any potential ‘deal-breakers’. A best practice approach would see these investigations undertaken early so they can help set an accurate valuation of the IP portfolio and its contribution to the organisational assets. It will also allow for any updates, changes and corrections to be made on either side before the deal crosses the line. A merger or acquisition cannot be accurately valued without an accurate assessment of the target company’s IP assets.
In summary, make sure you conduct your IP due diligence prior to starting the M&A process; an IP advisor could help you to avoid buying a lemon, or spot a potential gold mine. The work could be as simple as compiling a list of what IP the company being acquired may have, through to assessing the strengths of the IP rights held by that company.