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San Francisco, September, 2006
Maximising value of distressed technology companies and their intellectual property

By Steven R. Gerbsman - Principal, Gerbsman Partners

This article first appeared in Financier Worldwide's Global Restructuring & Insolvency Review 2006. © 2006 Financier Worldwide Limited.

Since 2001, a significant number of distressed technology companies with intellectual property (typically no hard assets) were liquidated, with little or no value being recovered by stakeholders. However, through a focused and targeted M&Aauction approach, a number of crisis management/investment banking firms have developed a proven process for maximising stakeholder value. This process includes the packaging, promoting, identifying, qualifying and closing of qualified and interested parties. It also necessitates the managing of cash, cleaning up balance sheet and creditor issues, providing leadership, motivation and morale to the core management team, as well as insuring a 'date certain'for the M&A auction.

What is the intellectual property worth?

This question is asked numerous times. Typically three candidate groups can be identified that should/will have an interest in distressed intellectual property and associated assets. These are customers, competitors, and VC/equity groups for their portfolio companies. For these groups, the make or buy scenario be- comes a buy opportunity. Critical factors in the ultimate value received for intellectual property, besides the quality and relevance of the IP, is the intellectual capital, or the team associated with that property. The value of intellectual property is directly related to the quality, availability and continuation of the intellectual capital. Other key factors include the amount of resources and time the company can spend on the sales/M&Aprocess. The availability, forecasting, and control of cash is the ultimate resource needed to develop and execute a plan of action for maximising value.

What is needed to maximise value of intellectual property through a controlled process?

Team
The most important aspect of maximising value is maintaining the 'core' key development and marketing team. These individuals have the domain knowledge and expertise needed to maximise value. It can be categorically stated, that the value/increased value of the intellectual property is directly related to the quality and availability of the key development team.

Development process
In order to prove value for the potential buyer and to receive multiple offers for the IP, the following is suggested (software example):

  • Development process documentation (project plans, deliverables, version/release control, change procedures, etc.)

  • Requirements and Specifications

  • Process, Object, and Data models

  • Architecture and API descriptions

  • Use of third party platforms/components/tools

  • Prototypes/Demos

  • Source code - platform

  • Source code - client specific

  • Test environment (including test scripts and data) and Test reports

  • Bug/change reports

  • Performance tests & results

  • Future enhancement plans/specifications

Deployment process
The IP will generate a higher value if it has been proven to work both in terms of sales and implementation. Documentation from sales and deployment, together with case studies and meeting with current clients/prospects is useful. To start, the following is suggested (software example):

  • Customer list. For each customer: name, contact information, reference person, number of employees,contractsize,deliverables,liabilities, environment, integration efforts, functionality deployed, and the status of the project in terms of ongoing efforts.

  • Documentation provided to the client.

  • Education support material (Development process, Implementation guidelines, API's, etc., for internal development/enhancement/ maintenance).

  • List of systems you have integrated with so far.

Ownership and protection
One of the key issues in maximising value of the IP, is the ability to give 'clean title'. In most distressed technology/intellectual property circumstances, the IPis sold 'as is, where is', with no representations or warranties other then that of a clean title. Typically the sale will be an asset sale. In order to do so, contingent liabilities such as real estate executory contracts, equipment lease agreements, senior and junior debt and other creditor and accounts payable issues must be resolved/restructured. Most stakeholders of distressed technology/intellectual property companies have already written off the majority or all of their investment. The primary objective for them is to ensure a 'clean exit', no bankruptcy, no law suits and to spend time on go forward investing, rather than a limited return clean up.

As a starting point, the following knowledge is suggested in order to insure the ultimate success of the M&A process:

  • Any executory contracts limiting the ability to close a transaction.

  • Do current client contracts provide rights to the clients that limits the use of the intellectual property in any way?

  • Has the company used intellectual property owned by someone else? If so, on what terms?

  • Results of patent searches.

  • Anything in the company's solution that is currently protected.
    - If no, can something be protected? Does the company have any patent applications prepared?
    - If yes, is it defendable and can something else be protected as well?

  • Current ownership structure. Any earlier participants (co founders, earlier investors, developers, etc.) that can claim ownership?

With continued VC and private equity funding of technology and life science intellectual property companies, the odds are that a good percentage of them will not meet their business model objectives. When and if that occurs, then the above process can be a good guide in maximising the value of distressed companies and their intellectual property.

Steven R. Gerbsman is a principal at Gerbsman Partners.

For additional information and questions, please contact Steven R. Gerbsman at: steve@gerbsmanpartners.com. Gerbsman Partners has offices and strategic alliances in North America, Europe and Israel.

This article first appeared in Financier Worldwide’s Global Restructuring & Insolvency Review 2006. © 2006 Financier Worldwide Limited. Permission to use this reprint has been granted by the publisher. For further information on Financier Worldwide and its publications, please contact James Lowe on +44 (0)845 345 0456 or by email: james.lowe@financierworldwide.com

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Phone: +1.415.456.0628, Fax: +1.415.459.2278
Email: Steve@GerbsmanPartners.com
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