One of the sine qua non for a successful merger is performance of adequate due diligence and asset valuations. In asset valuations, valuation of IP assets is critical for ensuring a successful transaction outcome. This is particularly true for IP-rich companies. However, valuation of IP assets is often relegated to the backdrop vis-à-vis other valuations. The second important challenge encountered is globalization of deals. Understanding the target’s regulatory environment and cultural attitude towards IP protection becomes critical for a competent valuation. This difference emerges even more strikingly as companies come from different backdrops such as EU and Emerging Economies. Thus, IP rich companies face the twin challenge of valuation of assets and internationalization of deals which often means stepping into unchartered territories.
When transactions are IP rich, a strategic due diligence process benefits from IP intelligence and IP valuation to facilitate target identification, ranking, deal pricing, structuring, setting reserves, prioritizing later-stage “traditional” due diligence tasks and compliance with post deal financing reporting requirement. When taken in the nascent stage, such a due diligence enables an indepth comprehension of the strategic fit, risks, value extraction; an appreciation of the target’s core and non-core IP assets. Eventually all this can facilitate post-deal IP integration and enhance the probability of realizing full value of transaction.
From the Antitrust perspective too a true determination of the value of IP portfolio is important as it determines the monopoly power ex-ante.
The general practice has so far been to make an estimate and put this lump sum value in the goodwill of the company's balance sheets. Infact even in a developed market like Europe , a recent survey indicates that only 12% of the companies involved an independent third party evaluator to value their assets.
As for the methods to evaluate, there are various valuation methods available: Cost-based, market-based, option based , income-based etc. However, valuation of IP assets is easier said then done, as the traditional methods of valuation such as market based or cost based fail to capture the full value. Another method of valuation is estimates based on past and future economic profits. Which of the models amongst these or an adaptation of them or a hybrid of one or more model best suits the valuation, depends on the particular facts and circumstances of each company as also the information available.
Nothwithstanding the challenges encountered in valuation and the difficulties faced, it is still a fruitful and worthwhile exercise as it helps the company realize the true value of its assets apart from getting a positive market response reflected in its market valuation.
