> GUEST COLUMN:
Turning intellectual property assets into M&A
Andrew Sherman is a capital partner in the
Washington, DC, office of McDermott, Will
& Emery, an international law firm with nearly 1,000
attorneys worldwide. He can be reached at (202) 756-8610, or email firstname.lastname@example.org.
Gerbsman is a turnaround professional who set up the Technology Recovery Group in 1999 to
maximize the stakeholder and shareholder value of underperforming,
undervalued and undercapitalized technology or Internet companies and
their intellectual property. He can be reached at (415) 456-0628, or email
publications frequently remind us that 'intellectual capital' represents
the most important asset of Internet-driven companies, as it does in their
more traditional counterparts. At the same time, most companies face the
challenge of how to enhance the performance and productivity of their
businesses and organizations.
In the knowledge era, the speed of
access to data and the quality of the information often determine the
competitiveness of a business and ultimately its success or failure. Small
and growing technology companies that are able to extract their intangible
value, transform it into knowledge and bundle it into protectable
intellectual property will be in a much better position to be considered
for purchase or be candidates for alliances or spinoff
How can management gather and package intangible
assets to position the company for sale or related transaction?
Intellectual capital is a difficult concept to grasp because it
encompasses intangible items used to measure a company's success and
wealth. Intellectual capital typically falls into the following three
- Human capital. Everything in this category exists
within the skills, experience and abilities of your employees.
Creativity, innovation and forward thinking drive a company forward and
enables it to compete in an environment that is becoming more complex
and idea-dependant. Human capital is hard to measure, but is usually
viewed in terms such as turnover and employee satisfaction.
- Organizational capital. This category only
includes things owned by the company, such as patents, trademarks,
copyrights, formulas and databases. Converting human capital into
organizational capital is difficult and involves collecting, cataloguing
and storing employee knowledge so it belongs to the company.
- Relationship capital. Putting an emphasis on the
customer can be extended to any external relationship that creates value
for a company. Some organizations have been keeping tabs on this
information as it relates to the revenue base, and many are now
recognizing the relationship between customer loyalty and increased
It is critical to take inventory and understand the
potential value of intellectual capital before positioning a company for
sale or related transaction. If you do not know your inventory levels of
intellectual capital, you cannot accurately allocate the proper amount of
resources to develop your business in the most profitable direction. In
addition, taking the time to study all of your company's assets may
uncover attributes or applications that may be of strategic value to a
buyer or partner and will help you maximize the value to your shareholders
from these transactions.
In order to capture and protect the
inventory of intellectual capital, it is crucial for a technology or
Internet company to build an intellectual asset management (IAM) system.
This involves planning a system to create, organize, prioritize and
extract value from a set of intellectual property assets.
intellectual capital and technical know-how of a company are among its
most valuable assets, provide its greatest competitive advantages; they
are the principal drivers of shareholder value. But it is rare for
companies to have adequate personnel, resources and systems in place to
properly manage and leverage these assets.
Establishing an IAM
system also involves monitoring specific developments in the company's
marketplace, such as:
- Gathering intelligence on direct, indirect and potential
- Monitoring developments abroad.
- Tracking innovation – for example the more than 20,000
new patents issued each month in the US alone.
- Maintaining license agreements and streams of royalty
payments on both an inbound and an outbound basis. For example, royalty
audits help ensure against underreporting (inbound) and overpayments
(outbound). Are you getting paid? Is there anyone you are paying but
shouldn't be? Are performance standards being met? Are you in
relationships with the right parties? What could be done to strengthen
existing relationships or distribution channels?
The key intellectual assets of the technology-driven
company may include: brands, goodwill, URLs; patented designs, inventions
or business processes; strategic relationships with customers, vendors,
alliance partners; proprietary content, data, customer lists; key
employees such as knowledge workers and technical staff; software codes
and business models or systems; and regulatory approvals (FDA, FCC,
To make the intellectual capital a critical component of the
exit or liquidation strategy, a detailed action plan should be developed
and should include the following key steps:
- 1. Conduct a legal and strategic audit of the company's
commercially marketable IP.
- Analyze IP for direct and indirect applications.
- Prepare written summaries for prospective purchasers,
licensees and partners.
- Phase out the current use of the IP (if selling IP only
and not as a going concern).
- Analyze current operations and services running
using the IP.
- Prepare a phase-out/shutdown plan.
- Manage the shutdown process.
- Provide clean title for the prospective buyer of the
- Analyze current financial situation by reviewing
the balance sheet – accounts payable, executory contracts and other
- Develop and execute strategy to insure no
'fraudulent conveyance' issues.
- Determine best method to give 'clean title' –
assignment for the benefit of the creditors, foreclosure, chapter
proceeding and/or a reserve clause in sale.
- Prepare prospect/distribution list.
- Identify top prospects together with company,
equity investor(s) and other sources.
- Analyze current customers and competitors – 'who
is out there that could benefit from access or ownership of our
- Draw up an additional list of qualified equity
investors, investment bankers, lawyers, accounting firms and
technology/Internet-related organizations in order to offer the IP to
their portfolio companies and/or investments.
- Manage the process.
- Respond to interested parties.
- Set 'due diligence date(s)' – at 'war room' of
- Set formal 'bidding date,' minimum bids
supported by cashier checks, or go through normal M&A
Sherman and Steven