The IP Iceberg: Navigating the Hidden Value Beneath the Surface in M&A Deals


In today's knowledge economy, intellectual property (IP) assets like patents, trademarks and trade secrets are central to business growth and success. This is especially true when it comes to mergers and acquisitions (M&A), where IP is often overlooked yet can make or break deals worth billions.

Recent data highlights just how crucial IP is to strategic M&A activity across sectors. According to Refinitiv's 2021 M&A report, the global value of M&A deals reached $5.9 trillion in 2021, representing a 64% yearly increase. Technology sector deals topped $1 trillion for the first time as IP took center stage.

Additionally, a study from the US Patent and Trademark Office found that IP-intensive industries generated over $6.6 trillion in revenue in 2019, accounting for 38.2% of total US GDP. The European Patent Office also reported that 86% of all economic activity in Europe depends on these IP-intensive sectors.

Yet despite these staggering figures, IP assets are frequently undervalued or ignored in M&A due diligence and negotiations. According to Ocean Tomo's annual IP market study, a thorough analysis of patents, trademarks, copyrights and trade secrets should be core to any M&A strategy for businesses of all sizes across all sectors.

The Unseen Powerhouse: IP Due Diligence

IP due diligence? Sounds like a fancy term for a boring task, right? Think again.

IP due diligence is the meticulous process of examining a target company's IP assets - patents, trademarks, copyrights, and trade secrets. It's about understanding the value and potential risks associated with these assets.

According to Dan Tiemann, US Group Leader, Deal Advisory and Strategy at KPMG, "Although due diligence may not be seen as the most important factor in a deal success, it is obviously an essential part of deal execution.

Without it, acquirers may be ill-prepared for what they have in store when they try to integrate their target. Effective due diligence helps to reveal risks and allows the acquirer to understand and tackle those issues pre-close."

Imagine buying a house without checking if it's infested with termites. That's what skipping IP due diligence in M&A is like. You might end up with a beautiful façade hiding a crumbling structure. And in the world of business, this could mean paying for assets that are worth less than originally thought, or even worse, facing legal complications post-acquisition.

As the Financier Worldwide report suggests, "Properly conducted, IP due diligence will provide a prospective investor or merger partner with detailed information about the IP assets of a target that may affect pricing or other key elements of the proposed transaction or, in certain circumstances, even recommend terminating the business relationship altogether."

The Deal Sweetener: Patent Analysis

Patents - they're not just for the tech nerds.

A company's patent portfolio can be a goldmine. It's a clear indicator of the company's innovative capacity and future growth potential.

A robust patent portfolio can significantly increase the transaction value. According to a study published on Springer Link, patent analysis can even predict the success of M&A deals.

But, it's not just about the number of patents. It's about their quality, their relevance to your business, and the potential market they can unlock. A ScienceDirect study found that acquired patents are often more complex and of higher technological merit than internally developed ones.

Patent due diligence is an essential step in M&A transactions. It is important to identify and adequately analyze intellectual property issues because the ownership, validity, enforceability, and transferability of patents can significantly impact the transaction value.

Patent analytics tools, including those driven by newer artificial intelligence technologies, can reduce the time required to sort, classify, and identify assets.

However, patent assessment in view of a business strategy is highly contextual, and nothing can replace a technology and business-savvy IP professional assessing each asset individually to identify its strengths, weaknesses, and opportunities.

The Brand Guardian: Trademark Review

What's in a name? Well, in the world of M&A, a whole lot.

Trademarks are the guardians of a company's brand identity. They protect the company's name, logo, and any unique symbols associated with it. A thorough trademark review ensures that the company has exclusive rights to its brand elements.

As per a Lawyer Monthly article, a thorough trademark review and validation is vital for any business to reduce the risk of surprise payouts or legal complications.

Trademark due diligence is a crucial step in M&A transactions. The structure of either type of transaction involves substantial amounts of preparation, review, and documentation to achieve the client's desired objectives. Reviewing and validating trademark rights is an essential step for due diligence, helping avoid costly surprises.

Trademark registration is an important process that protects a company's brand identity. Imagine buying a company only to find out you can't use its well-established brand name. It's like buying a Ferrari without the prancing horse logo. According to Clarivate, reviewing and validating trademark rights is an essential step for due diligence, helping avoid costly surprises.

The Hidden Traps: Legal Complications

Legal complications - the two words that can send shivers down any CEO's spine.

Overlooking IP due diligence can lead to a minefield of legal complications. From patent infringements to disputes over trademark ownership, the potential pitfalls are many.

While we may not have exact numbers, it's no secret that the costs associated with these legal issues can be astronomical. Patent infringement lawsuits, for example, can cost millions of dollars in damages and legal fees. Not to mention the potential damage to the company's reputation and the disruption to business operations.

According to a report by Hinge Marketing, IP is the new currency of modern business, and for many companies, the acquisition of a firm and its IP is the quickest path to market dominance or at least a roadblock to competitive incursions.

Much like adding a new business model, a strategic M&A may help save considerable time and expense in a growth strategy.

For instance, if a company is considering a new service, it might be easier and more cost-effective to acquire the capability rather than developing and delivering the service on its own.

The Game Changer: IP in M&A Strategy

IP - the secret weapon in your M&A strategy.

IP is a valuable asset that can significantly impact a company's M&A strategy. A strong IP portfolio can increase a company's bargaining power during negotiations, potentially leading to a higher transaction value. It can also shape the post-merger integration strategy, as the acquiring company will need to effectively manage and utilize the acquired IP assets.

While specific studies on this topic may be scarce, industry experts widely acknowledge the significant role of IP in M&A.

According to a report by McKinsey, business leaders report that their companies are currently building 50 percent more new businesses per year than they did two to five years ago.

However, building new businesses through internal innovation and organic growth can be insufficient for companies pursuing ambitious growth agendas. Instead, these companies could take a lesson from digital disruptors and embark on a series of well-considered acquisitions.

As McKinsey highlights, "IP-driven mergers enable companies to integrate knowledge faster than R&D teams could organically." Forbes adds that "small, serial IP acquisitions help quickly multiply offerings without risking large failed deals."

In 2013, Rockstar's deal with Spherix was considered a game-changer for IP investors. Rockstar bought most of the patent portfolio from bankrupt Canadian telecom company Nortel for $4.5 billion, and then sold a portion of the portfolio to Spherix for $100 million. This deal demonstrated the value of IP assets and how they can be used to generate significant revenue.

Conclusion: IP - The Overlooked Asset in M&A

Still think IP is just a boring legal term? Time to think again.

In the world of M&A, IP is not just an asset; it's a game-changer. It's the secret sauce that can add flavor to the deal, the hidden treasure that can increase the transaction value, and the secret map that can guide the M&A strategy.

According to a report by Aon, intangible assets, including IP, can maximize value in IPO, M&A, and enterprise.

In 2021, global M&A activities reached a record-breaking value of US$5.9 trillion, a 64% increase compared to 2020. A significant chunk of this value was driven by the technology sector, where M&A deals surpassed the US$1 trillion mark for the first time, largely due to the critical role of IP.

IP is not just relevant in the tech industry. It plays a significant role in the value totality of every company, across industries like pharmaceuticals and media. According to the European Patent Office, IP-intensive industries made up 42% of all economic activity in the European Union.

Many companies consider the acquisition of a firm and its IP as the quickest path to market dominance or a roadblock to competitive incursions. Strategic M&A may help save considerable time and expense in a growth strategy.

IP is a game-changer in M&A transactions, and it plays a significant role in the value totality of every company. A thorough IP due diligence review is particularly important in business transactions, such as mergers and acquisitions, since IP is often the most valuable asset of a company.