Download - IP Valuation
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Intellectual Property: Valuation, Assessment and Audit
Project Presentation
Intellectual Property Management
IIM Lucknow, Noida Campus
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Agenda
The 9 reasons for valuing IP The Basics
Fundamental Principles The three approaches to value IP
Specific IP Valuation Patents Trademarks and Brands
IP Risk Assessment Damage Assessment IP Audit
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Why Value IP?
1. Exploitation, as any other asset.
A basis for negotiations involving sale, licensing or exchange of IP.
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Why Value IP?
2. For Taxation
Transfer of IP from parent to subsidiary company. Donation of IP as a tax-free gift to some
institution.
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Why Value IP?
3. For raising funds and securing Financing
IP may serve as a collateral with banks
IP value helps startups raise venture capital
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Why Value IP?
4. Profit sharing - when there are multiple IP owners
As in a R&D consortium that involves multiple companies contributing - to determine the allocation of net income.
Joint Ventures and Strategic Partnerships
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Why Value IP?
5. Assessing damage claims in a dispute, infringement or breach of contractual rights.
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Why Value IP?
6. Financial Reporting
Indian Accounting Standard on Intangibles
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Why Value IP?
7. Transfer Pricing
What price is right, for transfer of patents, licensing a trademark, within the firm?
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Why Value IP?
8. In any restructuring or liquidation procedure
As in mergers, spin-offs or bankruptcy
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Why Value IP?
9. IP drives market Value of Stock
Not only for smaller startups without significant real assets, but increasingly for larger companies such as IBM
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Basic Principles of Asset Valuation
The value of an asset is based on the future returns that are expected to be generated by that asset
Returns in the future are worth less than returns now (“time value of money”)
Future returns are uncertain (or ‘risky’) Intangible assets can affect the returns and/or the risks of cash flows
Cash flows
Time
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IP Valuation - Approach
The nature of the asset doesn’t changes the fundamental principle of valuation.
Determine basis/context of
valuation
Select and apply appropriate valuation
methodologies
Identify asset(s) / understand rights
Open market value
Value in use
Fair value
Liquidation value
Book value
Copyright
Database
Trade mark / passing off
Patent
Know-how / trade-secrets
Design right
Calculate the incremental value added by the IP
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But Valuing IP is a bit harder …
1. IP doesn’t comes alone
Intangibles are often composite assets. Value is realised in combination with other assets (tangible and intangible)e.g. brand – value in combination of trade marks (registered; rights in passing off) trade dress copyright logo get-up recipes/formulaen.b. trade mark licence v. brand v. branded business
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Valuing IP is a bit harder
2. Value may depend on form and scope of legal rights protecting the asset
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The fuzzy nature of IP Rights
Unclear how claims will be interpreted in practice inadvertent infringement can occur Unclear boundaries fouls up workings of the
Coase Theorem Disputes over value are not uncommon
IP discounted in the marketplace as a consequence
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Valuing IP is a bit harder
3. Values can vary hugely depending on circumstances between uses between users over time
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Valuing IP is a lot harder
4. Availability of information/incomplete data
Novelty and Secrecy in the IP market
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IP Value Chain
Licensor
Licensee
Customer
IP
IP
Royalty
Revenue
IP Market
Product Market
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Valuing IP is a lot harder
4. Availability of information/incomplete data
The market for IP is private and non- observable - Novelty and Secrecy
Traditional deal structures use no commonly observed or rigorous economic valuation methods reflecting the private and non-observable nature of IP market
Deals are based on emotion and haggling
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All IP valuation methods derive from one of three approaches
Deprival value
Value$$$
Value$$$
Replacementcost
Replacementcost
Net realisable value
Net realisable value
Net present value/value in use
Net present value/value in use
Lower of
Higher of
Valuation methodology
MarketMarket
CostCost
Income (DCF)Income (DCF)
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Cost-based methods
Historic cost v. replacement cost money well spent? investment or expense? obsolescence “inflation”/required return on original investment
Relevant to intangibles which can be “readily” replicated databases “functional” software brands? technologies? know-how?
Value = avoided cost of purchase / reconstruction
Don’t forget opportunity cost of delay (late to market?) risk of failure in attempting to replicate
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Market-based methods
Frequency of transactions evidence of an active market?
Comparability of “market” transactions licences, more often than sale/assignment of IP rights transferred circumstances of transaction (e.g. cross-licence, licence agreed in settlement
of litigation)
Headline data only? summary royalty terms, but what about the rights and obligations under the
licence? summary transaction terms, but what about manufacturing and distribution
contracts?
But still likely to provide some relevant data
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Income method
All IP is worthless if it can’t create, maintain or increase future cash flows
Some examples … Excess Income method Relief from Royalty Premium Profit
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So far …
The valuation of IP is, in principle, no different to a general business valuation
understanding the dynamics of the business and how it creates value is critical the value derived from IP must come from increased prices or volumes, lower
costs, lower risk or greater “optionality”
Valuation methods designed to estimate this incremental value
implicitly through royalty based or residual value calculations explicitly through economic benefits analysis
Valuation is based on expectations of the future and therefore contains significant uncertainty
using multiple methods improves the rigour of the valuation
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Valuation of Patents
Not all patents are equal What is the Strength of Patent Protection ? Length: how much time left to run? Breadth: range of products covered? Validity: likelihood of being upheld if challenged? Exclusionary power: can the owner refuse to
license without raising antitrust or other issues (compulsory licensing)?
Available remedies if patent infringed
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Real Options Valuation
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Patents - Qualitative Valuation methods
Citation Data
Renewal Data
Prism
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Valuation of Trademarks
Income Based Direct Assessment of Benefits DCF - Excess Returns Relief from Royalty
Cost Based Residual Development Cost Recreation Cost
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Income method – Trademark valuation
Premium prices v.generic product adjust for quality/cost differences
Premium profits (brand contribution) v.generic competitors/ utility provider of goods and services adjust for quality/cost differences
Relief from royalty deprival value (value added/cost savings through ownership of asset) discounted cash flow (“DCF”) analysis based on after-tax royalty applied to
projected revenues most commonly used approach by accountants/valuers/Courts and regulators
Excess return on capital
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Income method – Trademark valuation
•Consumer•Business•Consumer•Business
•Premium services•Premium services
•Mix of services•Mix of services
Brand extension•products / services•channels•sector / geography
Brand extension•products / services•channels•sector / geography
Brand loyalty•certainty of demandBrand loyalty•certainty of demand
Demand side factors
Incremental cash flows
Supply side factors
Volumes x Prices x Margins – Capex / Working capital Risk and return
Customer acquisition / retention
Customer acquisition / retention
Staff acquisition / retentionStaff acquisition / retention
Brand supportBrand support
Brand extension costsBrand extension costs
Supply termsSupply terms Financial CapitalFinancial Capital
Economies of scale
Growth Value
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Relief from royalty: discounting projected royalty flows to a present value
Range ofroyalty rates
Taxation
Incrementalcash flows
Discountrate
Presentvalue
Forecast revenues
Other costs
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Comparable royalties approach
‘Comparable’ licence agreements need to be adjusted to reflect specific licence terms, such as duration, geographical coverage, exclusivity lump sum and minimum royalty payments extent to which asset contributes to market demand for the final product the availability of substitutes licensor’s anticipated profitability from use of the IP (including collateral or ancillary
sales/profits) state of development of the IP
The circumstances in which a previous licence was agreed can be significant product of willing negotiations? court-imposed solution cross-licensing uncertainty re validity of IP rights
Interaction of royalty rate and royalty base: the “result”- must reflect the underlying economic position
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Income approach and royalties – allocation of available profits
Typically 25-33% of incremental profits are allocated to the licensor (in situations where licensor has no presence in the market to be licensed) as a royalty
50:50 split may be appropriate where licensee will compete directly with licensor
Allocation reflects inter alia relative risks borne by parties licensor: development of technology licensee: financial and marketing risks
“Rule of thumb” split of profits: beware different interpretations different measures of “profits” application different forms of IP rights
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Excess return on capital
Tan
gibl
eIn
tang
ible
Operating profits
Cost oftangible
assets and other
resources
Rate ofReturn
x
Bra
ndO
ther
s
DiscountRate V
alue
x
Example: the method used by Interbrand in its “Top 100 Brands” tables.
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IP Risk and Damage Assessment
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Risk Assessment
Any financial valuation (rewards) must be weighted down by the risks.
Ignoring the risks leads to overvaluation
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Different assets face different types of Risk
Patents Technological - Is it feasible/viable. Legal - Validity, the ability to stand when
challenged in court of law Trademarks
Priority Freedom to use
Software/Copyrights Piracy Risks
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Damages: The Cost of infringement
Hewlett-Packard pays Pitney Bowes $400 million to settle patent dispute
ASSOCIATED PRESS Tuesday June 5th, 2001
STAMFORD, Conn. — Hewlett-Packard Co. agreed Monday to pay Pitney Bowes Inc. $400 million to settle a lawsuit over print technology patents….
The companies resolved all litigation without admitting wrongdoing.
In CY2000 HP had net earnings of $3.7B on sales of $48.7B. To earn $400M HP had to generate $5.26B in Sales.
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The nature of infringement
On August 31, 1993 a US jury found that Honeywell had infringed a Litton Ring Laser Gyroscope patent and should pay $1.2 billion in damages. This was somewhat less than the $1.96 billion Litton claimed but nevertheless perhaps the largest ever award of damages for patent infringement. However, on July 3rd, 1996 the CAFC whilst upholding the jury verdict on infringement awarded a new trial concerning damages saying that the study by Litton's damages expert Dr. Phillips was predicated on peculation and unrealistic assertions and supported the trial court conclusion that Dr. Phillips' study was "pure fantasy."
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The Theory of Infringement
“The basic theory of damages is to make the IP owner whole for losses caused by the infringers illicit activity. The IP owner is to be restored financially to the position he would have occupied but for the infringement.”
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Wilful Infringement
Treble damages The court may triple the damage award if it is
proven wilful.
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So far …
Valuation may be triggered by an event, like M&A Financing - use of IP as collateral Joint Venture, Sale or Licensing of IP In case of infringement
But the growing importance of IP makes IP assessment is an ongoing process
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IP Audit
Identification, organization and review of a client’s intellectual property assets and potential liabilities Ownership Recordation of transfers Perfection of security interests Compliance with statutory formalities Infringement on third party rights Client’s rights being infringed
Could be General Purpose IP Audit Event Driven Audit Narrow Focus Audit
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Why do an IP audit?
Other than quantifying the value
Identify, organize, and review existing IP portfolio Resolve current issues in IP management practices Establish procedures to ensure protection of assets in the
future Better guarding of trade secrets Docketing system for payment of fees and renewal filings Assignments of IP in employment and consulting agreements Better marking of products
Add value the company What IP assets are underutilized What are the potential value creators
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Benefits of IP Audit
Prevent asset losses Make effective economical use of IP assets Address gaps in licensing and agreement
procedures Minimize risk of third party infringements Determine position in relation to competitors
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Issues unearthed in IP
Defects in title to IP Assignments of ownership from consultants Quitclaim from alleged author or inventor Employee inventions within the scope of work License rights from third parties to make
derivative works Third party joint ownership Defects in patents (copyrights or trademarks as
well) Requests for reexamination or reissue of a patent Amendments to applications Certificates of correction