Foresight Valuation Group

Intellectual asset management, intellectual property valuation, strategy and litigation support

Category: Blog

A Postmortem of the Nortel Patent Auction

Posted on Modified on by Foresight Valuation Group

Guest blog by: Eduardo Sanchez

In a previous post I wrote this as my closing paragraph:

“An alternative scenario where return is maximized by selling parts of the Nortel portfolio to different bidders is feasible. If indeed this is the case, it will be a sad indicator that IP is not seen as of yet, and is not employed as the truly strategic asset that it has become. The result will be to leave the bidders all equally vulnerable and condemning them to continue to live in the “visible and vulnerable” glass house where patents are acquired to ensure immunity from lawsuits, in a permanent state of fear. Why? In the words of Mark Blaxhill and Ralph Eckardt “because companies that live in glass houses, should not throw stones.”

The reality has proven far more incredible than any fiction or fantasy. According to a CNN report “Apple takes the patents wars seriously. Google not so much” where in turn Mark Stephens writing on his blog “The enemy of my enemy” is quoted as assigning the following break down for the sum paid by each of the members of the winning consortia:

· RIM and Ericsson paid $ 1 Billion:
o Ericsson gets a fully paid license to the portfolio
o RIM gets a paid-up license plus possibly some carry forward net operating losses (NOL) from Nortel.

· Microsoft and Sony paid $ 1 Billion:
o Microsoft already had a license to the Nortel Patents.

· EMC paid $400 Million:
o EMC gets the sole ownership of a subset of the patents (allegedly in storage technology)

· Apple paid $2 billion:
o Apple gets outright ownership of Nortel’s LTE Portfolio (and some Android related ones)

I have plotted on the IP/Product Matrix the net gain in IP strength the successful bidders and members of the “Rock Star Bid Co” that won the patent auction.

Figure 1 shows yellow and red arrows next to the companies that made up the winning consortium. The arrows show the individual net gain for each company on its IP, sales-power dimensions, or both, as a result of their successful acquisition of the Nortel Portfolio. This includes Apple, RIM, Ericsson, and Microsoft. Microsoft in particular was initially only “rumored” to participate in the bid. EMC and Sony were not mentioned much, that is why I show their arrows as red.

In summary, while the Apple-led consortium won the patent portfolio, each member will reap benefits unequally, in a way that aligns with either the strategic nature of their vision, the tactical approach to the bidding, or both. Apple, with the outright acquisition of LTE (or Long Term Evolution) patents, has, overnight, gained a strong foothold IP-position in what is expected to be the wireless network technology standard for the next decade (which is what Google was hoping to do). This also signals a potential reduction in future royalties that Apple would have had to pay per handset to third parties. Were the $2 billion invested justified? It made business sense to Apple, apparently.

For Microsoft, who already had licenses to Nortel’s patent portfolio, the decision was as strategic – not to lose rights to the patents while still having leverage – as it was tactical: collaborate with rivals / competitors to enable its own business and that of its partners (Nokia’s in particular). This leaves Samsung in a more precarious situation too.

The net result is that Apple and EMC have significantly enhanced their IP positions, while Microsoft has reasserted its rights at a minimal cost, and by doing so, helped its ecosystem. All others will benefit, but as all other members of the consortium in the glass house quadrant, their drive to compete for sales/products could again bring them in a collision course (ie, litigation) with their allies of today. For some of these companies, the acquisition was driven by fear as much as by business needs. There is already talk of Google suing, for example.

For sure history has been made, and at a $4.5 billion price tag, there is a clear message that developing IP in-house, managing it, and asserting its value to capitalize on it by collaborating through licensing, not bartering IP, should be the “new” trend in IP markets.

Microsoft played and assumed the role that I had originally suggested / predicted Intel would have played. I may be off the mark here, but this might indicate a “slight” bias to thinking in mainly “software terms” and not hardware by most players in this transaction, i.e., Seeing things through an “Android-lens” only by most players, specially Google.

As I already stated, they all now benefit from this acquisition. But would they equally benefit in the market going forward? I predict that they will each benefit in a different way, and here are a few comments regarding the matter.

Google: the original “stalking horse” is now left vulnerable relative to the “strength” the others have gained with the purchase. Given Apple’s (and Microsoft’s) role leading the consortium, it is not hard to see that Google’s “Android” ecosystem was a driver to purchase the portfolio.

Google is to be praised for, in spite of having the cash, not pursuing the patent portfolio at all cost. A futile endeavor. It simply did not make business sense at $4.5 billion. This is not only responsible, it is a statement, albeit silent, to the move Sony, Apple, Microsoft, RIM, and EMC made by forming a consortium aimed at defeating Google’s plans.

The report by Mr. Stephens and CNN show that Google may not have been serious about winning the bid after it realized all his rivals were against it. Some accused them of not being serious at all; I am not sure that is a fair statement. After all, losing the bid to an entity named “Rockstars Bid Co” at over $4 billion is no joke!

Still, had Google been thinking more strategically and with a bit more business sense, beyond Android, as some of the other bidders executives and boards were doing individually, they could have approached the opportunity differently. For example, placing an initial lower bid, or not making one at all and let others show their cards first; or simply let go of its fears and try, as Apple did, to collaborate with its rivals.

Intel: did not win the auction because its management simply did not think the portfolio was worth US$4.5 Billion. This is consistent with Intel’s approach to business.

Intel just paid US$1.4 Billion for Infineon’s wireless business unit. Almost concurrently, Intel also purchased MacAfee for $7.68 billion, a 60% premium over McAfee’s share price of $29.93 at the time, according to the New York Times. Intel’s cash reserves then were US$12.2 Billion, leaving ~ US$ 3 billion in cash. Infineon’s acquisition was finalized in January. The McAfee acquisition was finalized this past February. You can read a good insight on this strategy of acquiring these two companies here.

Clearly, buying the Nortel portfolio made sense for Intel, and was consistent with its business plan, but not if overpriced. Intel still benefits as it has historically collaborated with its customers and suppliers, some of which are in the winning consortium. Intel’s customers and partners have enabled themselves, EMC for example (Nokia by proxy via Microsoft).

There are speculations that Intel might have kept on bidding; it sounds possible, but given Intel’s recent acquisition history the price tag may have been too high to make a business case.

What about the rest?

EMC: was not mentioned as potential bidder, but it is no secret that Pat Gelsinger, COO for EMC’s Information Structure Products, and former Intel Exec, and first ever CTO at that company, is helping lead EMC’s growth, and understands the value of IP. With a solid business model and ever increasing sales, this is a great strategic move for them. EMC and Intel have had a long-standing alliance as explained on EMC’s site here.

Many people ask why did EMC get involved? When half of the company is run by Pat Gelsinger, an Intel veteran, who played a key role in Intel’s then “emerging computing, networking, and communications products and technologies ” (when he was CTO, according to his biography ) it is not a stretch of the imagination to think an executive with his background would understand how crucial it would be for EMC to be a strong IP player. He certainly would have been at least one of a few executives at EMC urging their board to make a move on the Nortel Patent auction.

RPX and IV: Not much to comment. When it comes to IP strategic decisions the boards of the big high tech players like to be in full control of their IP assets and decision making, as it should be. They simply cannot outsource protection of all their IP.

RIM , Apple and Ericsson: all hoped to strengthen their position and now are moving further into the Glass House Quadrant of the IP Marketplace. With Apple initially having a generally weak position in wireless, Ericsson wanting to bolster its IP portfolio, and RIM also trying to do the same for its products and technology. All three achieved it. ZTE could have been a formidable competitor for Ericsson if the entire portfolio had gone to them, but it was effectively shut off.

· Sony’s participation was unexpected but not when one considers that Sony-Ericsson manufactures handsets, for example… Sony also competes in gaming, against Microsoft.

· Microsoft. Makes perfect sense for them to have played such a role, they are collaborating with the rest and the net result will be more licensing and more business. Their collaboration with Nokia is greatly enhanced with this acquisition.

Next? As the positions of all the players in this auction have shifted, we should get ready for more IP wars in the near future. As the tremors of the new order reach others that so far have chosen to remain silent, or simply sit it out and wait for things to settle, new lines are being drawn. The rivals can all see through each others glass walls. In particular, strong LTE players will be looking through Apple’s glass walls now. Among them one will find the likes of Interdigital and Qualcomm, straight from the Shark Quadrant.

More about Eduardo

 

Of Rembrandts, Nuclear Weapons, And Throwing Stones Into Glass Houses – or Why Intel might (or should) Win the Auction For The Nortel Patent Portfolio?

Posted on Modified on by Foresight Valuation Group

Guest Blog By: Eduardo Sanchez

Intel might be, or should be, the winner of the auction for the Nortel patent-portfolio scheduled for Monday, June 27, 2011. The ensuing activity for the Nortel portfolio has seen an unusual number of late moves, and fueled even more speculation about its outcome, and potential consequences.

In little more than a decade since Kevin Rivette’s book Rembrandts in the Attic was published, patents have gone from being referred to as precious but forgotten works of art, to being described as nuclear weapons being lobbed against rivals in the IP wars of the 21st Century. This language has only helped increase the speculations about the Nortel auction, while adding very little to the understanding of the truly strategic and transformational nature of the events unfolding before us, and the effect it has had on the firms engaged in it.

The latest list of potential bidders has expanded to include some of the biggest players in the high-tech industry, giving rise to interesting reviews such as this one at the Tangible IP Blog.

I would like to add one extra dimension to the analysis done thus far on the subject. To do that, I will borrow the IP / Product Matrix [1] developed by Mark Blaxhill and Ralph Eckhart in their Book: The Invisible Edge, Taking Your Strategy to the Next Level Using Intellectual Property. This is shown in FIGURE 1 below:

FIGURE 1

 

Before proceeding, one should keep in mind that on the IP / Product Matrix, the horizontal axis represents the strength that a company has in IP. The vertical axis represents a company’s market share or sales-power.

Next we will need some definition for each quadrant of the IP / Product Matrix[2]:

The Target Firm: Plenty of manufacturing, lack of IP strength.

– Rely on manufacturing cost advantages to build market share, compete purely on cost.

– New comers to areas with established technologies.

– No IP of their own.

– They bring little to negotiations when negotiation licensing deals.

– No R&D or marketing expenses allows them to quickly become formidable competitors

– Growth Path: Glass House

i.e.: High tech companies in emerging markets. Example: ZTE

The Glass House Firm: balanced growth, large patent portfolios, and large market share at the same time.

– IP is used only as a supporting asset in support of manufacturing and marketing.

– Try to avoid entanglement with IP of others.

– Lack complete technological autonomy.

– Need competitors’ IP for their own products.

– Its competitors are in similar position to its own.

– Cross-licensing is common to avoid legal action, in effect they create “hidden licensing networks”

– Most companies remain in this “visible and vulnerable” glass house.

– Growth Path: Shark

– i.e. Intel, Apple, Google, HP, Nokia, Ericsson, Motorola, TI

The Minnow Firm: newer and smaller-market businesses.

– More options as they grow and evolve

– Modest product sales

– Developing new-technology portfolio

– Growth Path: Chose to evolve into either Sharks or Targets, along either axis.

The Shark* Firm: Company of ideas. Plenty of IP Strength.

-Focuses on Innovation. Pure IP Play. No manufacturing.

– Strong negotiation position when licensing its technologies.

-Licenses IP to all manufacturers

– Path to growth: Already a top “predator”

i.e.: Tessera, Qualcomm, Interdigital, universities

FIGURE 2

 

In Mark Blaxhill and Ralph Eckardt’s words, the Shark label is one “we apply with respect: These companies are highly fit and often relentless models of commercial innovation”.

When we use the IP / Product Matrix to plot the potential bidders for the Nortel Patents, those in red text, and others who have chosen to remain on the sidelines thus far, the relative strength positions, with respect to each other in the mobile / telecom, interesting patterns emerge. This is shown in FIGURE 2.

Apple, RIM, and ZTE all license technologies from competitors / peers in the upper right corner, or the glass house quadrant, and from the firms in the lower right corner, or the Shark quadrant. This makes sense as the first two manufacturing mobile handsets, and ZTE manufacturing mobile gear. All three might seek to strengthen their IP position by acquiring the Nortel portfolio, which will also result in reducing the royalties they pay to others (Sharks, or Glasshouse types) which would increase their margins per manufactured device. This move takes these three companies from being on the Target Quadrant, in so far as mobile devices / telecom is concerned, and places them firmly on the Glass House Quadrant. There they can become even more formidable competitors in that space with a robust patent-portfolio that others will seek to license rather than suing them.

Ericsson and Google seek to strengthen their IP position by acquiring patents and use them defensively / offensively. In the case of Google at least, to protect its Android ecosystem and beyond as the Nortel portfolio includes wireless, Wi-Fi, internet search, social networking and LTE the next generation in mobile, according to this blog by TechRawr. Ericsson seeks to acquire a few more essential patents to enhance its waning 2G portfolio. They both acquire, for “internal consumption”, if you will. Ericson’s position in the telecom Industry and its recent forays in the IP world to acquire patents is very ably delineated here by Andrew Watson at the Tangible IP blog and, also here by Pramath Malik at the TechRawr blog. Already in the Glass House quadrant, Ericsson seeks to strengthen their IP positions.

RPX and Intellectual Ventures (IV), both considered potential bidders, and already owners of significant strong patent portfolios, might seek to further strengthen their IP holdings by acquiring the Nortel portfolio to better serve their clients and make their IP offering more attractive. RPX and IV have strong position in the Shark Quadrant already (although not necessarily a perfect fit for the definition of a shark firm). The possible incentives for these two to participate in the auction are described here by Mr.Watson of the Tangible IP Blog.

The rest of the firms listed, that are not bidding, like: Samsung, Microsoft, Nokia, Qualcomm, and Interdigital, are a mixed bag ranging from those already in the Glass house to the Shark Quadrants. They have very strong patent portfolios to strike licensing deals, inbound or outbound, from each other, and are confident that they would have access to the Nortel patents one way or another. They also seek to continue to protect their Glass House by acquiring even more patents. This is the case with Samsung and Microsoft who license defensively through RPX already, or from the likes of Qualcomm or Interdigital, in Samsung’s case. Microsoft in particular receives royalties from handset Taiwanese manufacturers HTC as reported by Fiercewireless here, and has recently partnered with Nokia supplying the mobile OS (Windows Phone 7.1 Mango) for its next generation of products, a move Nokia made at the expense of its own mobile OS MeeGo that co-developed last year with… (surprise, surprise) Intel.

Intel is, I believe, the special case of the bunch, and as Mr. Andrew Watson of Tangible IP Blog admits here, not much is known about its intentions or the business reasons it claims it has to bid for the Nortel Portfolio. However, already some have pointed out to Intel’s very recent acquisition of Infineon’s Wireless business, IP, employees, and management included.

Intel is the Glass House Firm par excellence. Since being selected as one of the two companies to supply IBM with components, the Intel 8088 processor, for its open architecture PC (if you recall the other was Microsoft and the MS-DOS OS it bought to supply IBM) Intel has been supplying essential building blocks first to the PC, then the “Internet economy”, and now wireless communications. It holds still a central and very important role with most of its sales coming from the PC market.

Most importantly, Intel has excelled at executing open innovation strategies licensing technologies from its suppliers to manufacture its own product. Intel owns 100% of its world class manufacturing operations. It also engages in the definition of standards, and in the development of new technologies with partners, as was the case with WiMax, and as mentioned above it has co-developed solutions as it did with Nokia and its MeeGo Mobile OS last year, to name only a few examples of an extensive list.

Often some of these initiatives fail (MeeGo), or are overtaken by rival or newer technologies and industry standards, as was the case with WiMax, but Intel sees this as necessary “enabling” activities to increase its market share while nurturing its “ecosystem”.

Initiatives and projects may fail, but Intel is left with the IP and key knowledge that it is willing to license and let others use to enable their success in the marketplace. Being in the Glass House Quadrant itself, Intel wants others to increase their sales to maximize its own. The net result is that everyone benefits.

Intel is re-aligning, yet again, its resources to become, and continue to be the “Sponsors of tomorrow™” as stated on their website. For example: some might remember the very successful early years of Intel’s Centrino Processor technology and the effect it had on the proliferation of “hot spots” and increased sales of laptops. It launched an entire line of wireless products which included mobile processors, micro-architecture, main board chipset, and wireless network capabilities. Today, Intel states on its website that “Intel Centrino wireless technology will allow you to stay connected throughout your busy day by providing great coverage and reliable connectivity while consuming minimal power.”

Intel has further commented on the Infineon acquisition : “The business enhances Intel’s existing communication portfolio with leading wireless mobility and cellular platforms, bringing together Intel’s strengths in WiFi and 4G WiMAX with WLS’ leadership in 2G and 3G, and a combined path to accelerate 4G LTE. Collectively these building blocks further support Intel’s move to serve a broader array of customers and market segments with best-in-class computing solutions founded on energy-efficient performance, Internet connectivity and security.” This according to Intel’s own press release. The Nortel patent portfolio acquisition in this context would be a logical next step to take for Intel.

The central position that Intel had in the computing industry over the last 30 years is being reinforced by Intel’s upper management by acquiring Infineon’s lines of products and by adding it to its own, pairing it up with its world class manufacturing capability, operational excellence, and an already robust IP portfolio.

A Nortel IP portfolio acquisition will not only make Intel stronger, it will make its customers stronger, by giving them access to “building” blocks that already contain the technology and IP bundled so they can focus on developing and manufacturing the next generations of products, be it tablets, netbooks, networks, or handsets.

Intel is, in short, fulfilling its role as the Glass House par excellence, only that it is going much further this time. Intel is morphing itself into a version of a House made of “transparent aluminum”. This is the same transparent aluminum, a super strong transparent material, designed by the character Scotty, the famed Engineer of the Starship Enterprise in the movie “The Voyage Home”. Scotty used it to build holding tanks that enabled them to fly a whale and its calf back to the future to once again save Earth. (If interested, You can see a clip here)

Landscape for Nortel Patent Auction

. Intel is transforming itself so it can transform the industry. There is no other firm currently bidding for the Nortel patent portfolio that can make such claim.

• Apple, while already one of the most valuable companies in the world (based on recent market cap figures), is seeking to strengthen its own position. Apple still remains a proprietary system house. Intel can help it and enable it while doing the same for others in the industry.

• RIM faces the same challenge while struggling to keep its line of products competitive. It could also benefit from Intel’s “building blocks” to do that.

• ZTE, while not as much is known about it, seems like it seeks to become a Glass House company. They would have access to licensing Intel’s technology anyways should they choose to use Intel’s building blocks to design its products. This would save it the cash required to develop IP and compete with the others, and can continue to focus on development and manufacturing activities.

• Samsung, Nokia, Microsoft and Ericsson are all in need of the IP, and all have had joint development efforts and licensing deals with Intel. Intel’s ownership of the Nortel Patents will help them, and not hurt them as it would if any of the other competitors were to acquire the portfolio.

By morphing from the traditional Glass House to becoming the Transparent Aluminum House, Intel not only strengthens its own IP position, but by extension also that of its customers. This is similar to that approach handset manufacturers follow when seeking mobile OS suppliers. They seek an OS that shields them from lawsuits and therefore potential injunctions at the ITC.

What would the new Intel look like?

Intel The Transparent Aluminum House: balanced growth, larger and very strong patent portfolios in wireless, and large market share at the same time.

– IP is used as strategic asset in support of its manufacturing and marketing of its own operations and that of its customers.

– Almost impervious to entanglement with IP of others but willing and very capable to license and enable an entire industry.

– Lacks absolute technological autonomy, but owns superior IP /technology which uses to collaborate with others.

– Needs competitors’ IP for their own products, and continues to excel at open innovation strategies to obtain it.

– It assumes competitors are in a similar position to its own. (Only the paranoid survive!)

– Cross licensing is common to avoid legal action but assertively used to maximize return on investment on its IP, “hidden licensing networks” that dilute IP ROI are less frequent.

– Growth Path: Continuous improvement on this business model.

In summary, only Intel has already positioned itself to become a force multiplier able to enable an entire industry with its technology, a role it has fulfilled for over three decades now. If Intel wins the bid for the Nortel Patent portfolio, the value added to the entire industry would be greater than that achieved if one of the other competitors won it. The other companies could lack the strategic vision and industry wide perspective Intel has shown to bring historically to its business models. If others win the bid, the industry might revert to business as usual.

The Boards of Directors and CEO’s of the competing bidding firms will consider these facts with the result that the fierce bidding wars many predict may not exceed the US$ 2 billion. It does not make business sense to spend that much capital to accumulate patent portfolios to let them sit idle while second-rate development and manufacturing operations flounder, cash strapped, churning out mediocre products. Case in point: Nortel. This is how the Nortel Patents became available, an imploded glass house that failed at executing its marketing, manufacturing, and development operations.

An alternative scenario where return is maximized by selling parts of the Nortel portfolio to different bidders is feasible. If indeed this is the case, it will be a sad indicator that IP is not seen as of yet, and is not employed as the truly strategic asset that it has become. The result will be to leave the bidders all equally vulnerable and condemning them to continue to live in the “visible and vulnerable” glass house where patents are acquired to ensure immunity from lawsuits, in a permanent state of fear. Why? in the words of Mark Blaxhill and Ralph Eckardt “because companies that live in glass houses, should not throw stones.”

You can read about or reach Eduardo at: http://about.me/eduardoasanchez

For inquiries regarding Foresight Valuation Group, please reach us by completing our online contact form.

Notes:

[1] Blaxill, Mark, and Ralph Eckardt. “The Company You Keep.” The Invisible Edge: Taking Your Strategy to the next Level Using Intellectual Property. New York: Portfolio, 2009. 91. Print.

[2] Blaxill, Mark, and Ralph Eckardt. “The Company You Keep.” The Invisible Edge: Taking Your Strategy to the next Level Using Intellectual Property. New York: Portfolio, 2009. 91-94. Print.

 

How to Avoid Another Rolls Royce? The Role of IP Due Diligence in M&A Transactions

Posted on Modified on by Foresight Valuation Group

A recent Harvard Business Review article states the following: “Deal making is glamorous; due diligence is not” [1]. The article goes on to say: “That simple statement goes a long way toward explaining why so many companies have made so many acquisitions that have produced so little value”. One of the most extreme examples of IP due diligence-gone -wrong happened in 1998, when German car maker Volkswagen purchased the assets of Rolls Royce and Bentley automobiles for about $900 million. Volkswagen did not realize until after the deal was closed that the IP assets did not include the right to use the Rolls Royce trademark… The trademark was owned by another car maker, BMW, pursuant to a prior agreement. Volkswagen had therefore acquired all the rights necessary to manufacture the car, but did not have the right to brand it as a Rolls Royce! This story highlights the critical role of IP Due Diligence in the acquisition process, and should serve as a reminder to M&A corporate teams, especially with the recent rise in acquisition activity.

The San Jose Mercury called 2010: “the season of billion-dollar deals…”[2] From HP’s $1.1 billion purchase of Palm Inc. to Symantec’s $1.3 billion acquisition of VeriSign. Many large Silicon Valley companies are emerging from the recession with large cash reserves and are looking for opportunities to reshape their businesses around emerging technologies. According to Dealogic [3] technology companies have bought over 1,500 firms for over $50 billion this year. This represents a significant increase over the same period last year, when sector companies bought just about 1,000 companies for a little under $30 billion.

Frankly, acquisitions are risky deals. In a seminal 1987 study, Harvard Business School professor Michael Porter found that companies sold off many more acquisitions than they kept. He also found that companies with acquisition strategies reduced, instead of creating shareholder value. Later studies reinforced Porter’s conclusions. A KPMG study conducted 15 years later found that over 80% of mergers were unsuccessful in producing any business benefit, as measured by shareholder value. That study further identified due diligence as one of three key activities that successful acquirers had prioritized in the pre-deal phase, and that had a tangible impact on their ability to deliver financial benefits from the deal (synergy evaluation and integration project planning were the other two).

Although big companies often assemble large teams and spend lots of money analyzing the size and scope of a deal in question —the fact is, the momentum of the transaction is hard to resist once senior management has the target in its sights. Due diligence all too often becomes an exercise in verifying the target’s financial statements rather than conducting a fair analysis of the deal’s strategic logic and the acquirer’s ability to realize value from it. Seldom does the process lead managers to kill potential acquisitions, even when the deals are deeply flawed. The lack of prioritization of IP due diligence further compounds the problem. Corporate, tax and accounting issues often take precedence, and by the time the deal team gets to dealing with the IP, the deal structure has already been set.

The topic of IP Due Diligence was discussed in a recent panel moderated by Foresight Valuation Group, as part of the IP Summit, which took place in Silicon Valley. The panel included some of the Valley’s largest corporate buyers (Intel, Cisco, Juniper) along with corporate lawyers and IP consultants with knowledge of M&A due diligence activities. The panel members have all agreed that the process of IP Due Diligence, in the context of corporate M&A deals, should be prioritized, both in terms of timeline (earlier in the deal) and importance. The panel identified several major topics that could be addressed to streamline the IP Due Diligence process:

1. Education about the risks associated with the IP portfolio. Given the general risk associated with acquisitions, tech deals are even riskier than average, because of the complexity of the products involved. The IP portfolio is a key asset in technology deals, much more so than in any other deal. IP due diligence is therefore absolutely critical to managing risks associated with the deal. Knowing the risks associated with a flawed IP Due Diligence process can go a long way towards encouraging senior management to allocate more resources to the process. The panel members brought examples of serious problems with IP portfolios of acquisition targets (lack of licensing rights, forged inventor assignments) that could have devastated the post-deal integration had they not been found through the due diligence process.

2. IP Assets should be incorporated in the valuation of the target. IP assets are treated as an afterthought, and usually do not drive the value of the target. A deal is not driven by the IP assets, but vice versa, and this is an unacceptable situation when it comes to high tech acquisitions. Several of the panelists mentioned the fact that investment bankers and other financial advisers participating on the deal often sideline issues that could alter the value of the deal, or complicate the process. It is therefore the case that IP assets are not evaluated and priced separately from the target, but are rather priced after the deal is concluded, often for accounting purposes, where the price of the deal needs to be allocated among the various assets purchased with the target. IP Valuation is a general issue that hinders many transactions, due to the lack of efficient markets for IP (no comps) and the lack of transparency when it comes to reporting IP deals, and the valuation considerations that went into pricing them. Improving the transparency through better reporting of IP deals will go a long way in improving IP transaction markets, and will also help with M&A due diligence and the quantitative assessment of IP assets in the pre-deal phase.

3. Integrate the seller in the process. Considering the seller’s post-deal indemnifications exposure with respect to the representations and warranties given in the transaction agreement, sellers should have a vested interest in the IP Due Diligence process. Sellers should be integrated in IP Due Diligence in a way that would help both sides streamline the process in a more efficient and cost effective way. Panel members representing buyer organizations actually mentioned that, from a seller perspective, better presentation of IP assets will help the sellers in getting better terms for the deal, which is not necessarily in the buyer’s best interest. That is an interesting point to keep in mind, as the buyer’s and seller’s objectives aren’t always aligned.

The Green IP Revolution

Posted on Modified on by Foresight Valuation Group

Governor Arnold Schwarzenegger recently celebrated over a report released by the Cleantech Group and Deloitte which showed that California’s clean tech companies received the highest venture capital funding in the second quarter of 2010.

“California has led the world in enacting policies that harness the private sector to create the clean and renewable technologies needed to combat climate change and reduce our dependency on oil. And our efforts are paying off, as illustrated by a wave of green innovation all over the state that is spurring investment and creating jobs. These numbers showing California is getting the most clean tech investment is just the latest example that we are moving in the right direction of building our green economy and creating a brighter, more sustainable future for us all.”

The report’s preliminary 2010 second quarter results showed that clean technology venture investments in North America, Europe, China and India, totaled $2.02 billion across 140 companies. For North America, California led the way with $980 million in investment, more than two thirds the total share. As the Green revolution heats up in the Golden state, we at Foresight are keeping an eye on what this means for innovation and IP. Entrepreneurs and business owners know the importance of ideas and intellectual assets, which are often the result of years of research and development. Their IP lies at the heart of their Cleantech company’s competitive advantage.

Late last year the Obama administration, with an eye on Cleantech being the growth engine for the economy, developed a pilot program to accelerate the examination of green technology patent applications at the U.S. Patent and Trademark Office (USPTO). We had learned earlier this year that the Kappos Administration has been heavily involved in streamlining the USPTO and this appears to be an area of particular importance. This is what Commerce Secretary Gary Locke said when the program was announced:

“American competitiveness depends on innovation and innovation depends on creative Americans developing new technology. By ensuring that many new products will receive patent protection more quickly, we can encourage our brightest innovations to invest needed resources in developing new technologies and help bring those technologies to market more quickly.”

The average examination time in the past had typically been 30 months for green technologies. Not only has the time frame for examination been accelerated, barriers have also been lowered for what qualified as “Green Technology” subject matter for patent applications pending before the USPTO. When the Green Technology Pilot Program was announced in December 2009, the program was limited to inventions in certain classifications in order to assist the USPTO in balancing the additional workload and to gauge the resources needed for the program. The USPTO has determined that the classification requirement is unnecessary because the workload has been balanced with other mechanisms, and the requirement was causing the denial of petitions for a number of green technology applications that would have otherwise qualified for the program.

The Program is available to the first 3,000 applicants and ends on December 8, 2010. The Patent Office estimates that approximately 25,000 of the currently pending patent applications meet the requirements needed to be classified as a Green Patent. To date, more than 950 requests have been filed by applicants who wish for their application to be eligible for the Green Technology Pilot Program. Only 342 of those have been granted, primarily because many of the inventions weren’t in classifications that were eligible. The lifting of the classification requirements is expected to allow many more applications to be eligible for the program. If interested, applicants should act quickly and carefully weigh the Program’s benefits against the requirements needed–most notably, claim limitations, abbreviated restriction practice, and early publication.

Proudly powered by WordPress | Foresight theme designed by thingsym