The Right IP Strategy Can Maximize Value: IPO, M&A, Enterprise

March 18, 2020

Alia Samhat

[Editor’s note: The COVID-19 global pandemic has urged companies around the world to focus their attention on providing for the health and safety of their employees and preparing their organizations for a period of disruption. On top of our regular articles examining the longer-term issues and trends impacting organizations, The One Brief will also bring our readers insights into the current situation.]

This content originally appeared as an Aon-sponsored article for Wall Street Journal Custom Content.

OVERVIEW

Intangible assets – which include intellectual property (IP) such as brands, trade secrets, patents, trademarks and copyrights – can represent a significant amount of a company’s market value. However, as companies approach an initial public offering (IPO) or a merger and acquisition (M&A) transaction, they often don’t have an IP strategy in place that both protects these critical products and services and maximizes enterprise value.

When it comes to IPOs, too often the due diligence begins and ends with making sure the patents and other IP assets are owned and have no encumbrances, according to Lewis Lee, CEO of Aon Intellectual Property Solutions.

“What’s not being done and what should be done is more of a strategic look at the company’s IP position prior to an event, whether an IPO or M&A transaction,” Lee says. “If you’re investing in this company, you likely agree with the vision and innovation road map. Well-formed IP assets that align with this vision add a protective covering for future products and services and their associated revenue streams.”

IN DEPTH

In Lee’s view, the right IP portfolio should be “the third magic pillar” in an IPO road show – the meetings that executives have with current and potential investors as well as the company’s future products and services and the technology capabilities to implement those products and services.

Getting An Early Start

A company’s research and development spend should be coupled with a plan for converting that work into trade secrets, patents, copyrights and trademarks. “You should start planning your IP strategy from day one,” Lee says. “It should be interwoven with your business strategy.”

If there were no budgetary limitations, companies would file for IP protection around the entire world. Since that often isn’t possible, when implementing an IP strategy, “it’s critical for companies to properly select jurisdictions where they might make or sell their products or expand into new lines,” according to Steven Gursky, a partner with Olshan Frome Wolosky in New York City. “It is important they are filing the proper marks in the proper countries and in the proper classes.”

According to Gursky, company executives should stress to investors the untapped opportunity in the licensing of a trademark for other products and assure them that future opportunities have been adequately protected. For example, an apparel firm could logically anticipate it might expand into the fragrance business at some point, and therefore it should make sure its IP portfolio safeguards that future market.

“It is a sign of sloppiness in the operation of a business if your company is materially involved in the ownership of IP and you haven’t properly managed it,” Gursky says. “It is not a small detail. To me, it would be an indication of naivete.”

And that naivete can be costly. “You might lose the market opportunity,” Lee says.

Placing Value On Intellectual Property

A key element of an IP strategy is putting a specific dollar amount on the untapped value of IP, especially in future uses. Brian Cochrane, chief commercial officer of Aon’s New Ventures Group, says that has been difficult in the past.

The investment banking world focuses on multiples in making valuations, such as revenue multiples and EBITDA (earnings before interest, taxes, depreciation and amortization) multiples. That can undervalue IP-heavy companies, according to Cochrane. He says the issue is that IP is forward-looking, and traditional comps are backward-looking.

“There’s an evangelical and educational process for this, so people can understand they can create significant enterprise value by how well they are converting innovation into IP assets,” Lee adds.

Aon has developed a platform, fueled by artificial intelligence, that helps more accurately assess the value of IP by using big data sets. The results are then vetted by the firm’s IP experts.

Having a clear understanding of the value of a company’s IP – and being able to make a strong case for it – has numerous benefits. One is being able to tell a convincing story to investors. For example, a company trying to demonstrate a pivot from older, traditional products to newer, innovative solutions with greater revenue potential can articulate this value proposition through its IP portfolio.

Another benefit is lowering the cost of capital. “Being able to accurately value IP assets unlocks their use to support many additional ways to fund the business,” Lee says.

A strategic analysis of the IP portfolio can also reduce the cost of insurance coverage to protect against legal challenges to a firm’s IP from competitors or so-called patent trolls, which is a common occurrence, especially around IPOs. In fact, one study by a technology law journal found that nearly half of 50 firms encountered this challenge right before their IPO or within a year of it happening. “If you can’t value something, you can’t insure it,” Cochrane says.

Cochrane compares a company protecting its IP to providing sufficient cyber security. The latter didn’t come on to the radar of corporate boards until there were major data breaches. With the growing value of IP, this important asset could become susceptible to seismic events, like highly publicized lawsuits, that could make executives realize the perils of not having a strong IP strategy. “Eighty-five percent of the value of the S&P is intangible,” he says. “For those companies where it’s not a board-level issue, they’re going to get bitten – and it’s going to hurt.”