No matter the size, when a company is preparing to undergo a merger or acquisition, intellectual property is a factor that can make or break a deal. An IP portfolio is a valuable asset in a company business deal and can represent a significant opportunity for profit–or potential liability. Here’s what you need to know about the due diligence process of intellectual property in corporate mergers and acquisitions.
What Types of Intellectual Property Can a Company Possess or Acquire?
When many people think of intellectual property, patents often are the first things that come to mind. There are utility patents (usually the most valuable and significant investment,) plant patents, and design patents. While patents may provide the bulk of a company’s IP portfolio, there may also be proprietary art in the form of trademarks, trade secrets, or copyrights. These IP factors can influence everything from the company's domain name to a product's secret recipe, and must be handled with responsibility and savvy valuation. These aspects of intellectual property law all must be accounted for and researched during the due diligence process, in order to get an accurate picture of a company's value and assets.
The Due Diligence Process
The due diligence process is essentially an investigation that determines a company’s value and risk, whether it is coming from the company being sold/merged, or the company that’s purchasing. IP lawyers perform the due diligence itself, but company owners have an equally valuable role in assisting their lawyers as much as possible through the transaction process. This can include collecting valuable information and documents early on, much of which is itemized in a due diligence checklist, which the attorneys will use as well. There are three main components in the due diligence process: prioritization, investigation, and results.
Prioritization: The first part of the process involves analyzing due diligence goals. This can include organizing information such as relevant parties, the type of transaction, and process guidelines. It may also include identifying what an acceptable amount of risk will be, or what the expected value and outcome of a merger should be. This part of the process helps establish the expected timeline for due diligence and what the company hopes to achieve overall. Analyzing goals from the get-go helps the company ensure that the merger or acquisition will bring value to them in more ways than one. This aspect is not to be overlooked. Neglecting to identify goals and allow time for a thorough process can increase the risk of a failed merger or acquisition. This is more common than you may think: a study by KPMG found that 83% of merger deals did not boost shareholder returns.
Investigation: The second and most important stage in the due diligence process involves gathering and investigating relevant documents from the company. When it comes to the IP portfolio, this includes patent ownership documents, copyright dispute paperwork, SEC filings, and more. It may also include profitability reports and annual earnings as they directly correlate to specific patents and other forms of IP. The due diligence checklist is imperative during this portion of the process, as it makes sure all bases are covered. Sometimes, a further investigation into earning potential and infringement risk is warranted. A company like GPS can help provide reliable reports that will help you better understand the valuation of an IP portfolio. The more thorough the investigation during this stage, the less hassle and potential repercussions later on.
Results and Evaluation: The final part of the due diligence process is the results portion. This portion of the process is where the results of the findings are revealed to determine if ultimately the merger or acquisition should happen. Many factors can be revealed during this results phase that can cause the company to reevaluate in part or whole or to push ahead with the deal.
Why Is the Due Diligence Process Important?
Due diligence is crucial in any merger or acquisition for one reason: risk. Much is at stake when a merger is investigated. A merger or acquisition could lead to unprecendented profits... or it could lead to legal and financial failure. Although there can be a lot of pressure to go through with a deal once the wheels get turning, it's important to take time to get a thorough understanding of the potential profit and risk. Leaving no stone unturned is crucial, and it's precisely why successful companies never take shortcuts in the due diligence process.
Contact Global Patent Solutions today to learn more about how we can help your company understand and evaluate your own patents or those of a company you're merging with or acquiring.