The folks over at Marketmerge have published an interesting report on the role of IP in M&A activity. According to the survey of both private equity and corporate players, IP is becoming a more important factor in M&A transactions. But, issues of valuation are of concern. As the report notes:
respondents believe IP value is not fully reflected in traditional valuation methods like cash flow projections. Respondents rated exposure to patent litigation, freedom to operate and strength in key markets highest (at least 4 out of 5) in terms of importance, and yet all of these factors are overlooked or not readily incorporated by traditional valuation models. The failure of traditional valuation models to capture the unique features of IP assets and risks contributed to the particularly strong dissatisfaction of private equity respondents with current valuation techniques.
In other words, it is important to include intangibles (infringement risk, freedom to operate) in the valuation process for other intangibles (IP). This need to look at the intangibles of intangibles illustrates just how hard the valuation process really is. It is not clear to me that financial valuation models can ever incorporate all these factors. Better disclosure is probably the real goal.
Interestingly, there is a split between private equity and corporate responses to the problems of disclosure. Private equity respondents saw the failure to identify IP risks as a major problem in due diligence, whereas corporate respondents were more concerned about insufficient due diligence resulting in the failure to identified IP opportunities. That split probably reflect the differing motivations — investment versus operation. Each perspective has a slightly different take on what information is most important in the disclosure (due diligence) process.
PS – thanks to Mary Adams over at the blog IC Knowledge Center for bringing this to our attention.