INTELLECTUAL PROPERTY RIGHTS AS AN ASSET IN MERGERS AND ACQUISITIONS
A business has numerous assets which are responsible for its very existence. These assets can be broadly categorized into tangible assets and intangible assets. While tangible assets include office building, inventory or any other physical assets, intangible assets include intellectual property. Intellectual property is developed with human intellect and is regulated by the developer or the owner. There are laws and regulations that help control these intellectual properties, like the Indian Copyright Act, 1976, which oversees any copyright-related issues in India. Any and every business targets a more extensive consumer base and a famous brand name and IP asset acquisition or a merger does precisely that. A company needs to evolve rapidly and consistently in a competitive business environment. Innovation is not possible every time, and therefore, to survive, a company must look forward to acquiring existing designs. Traditional companies are running behind to collect IP assets via M&A. For example, a company like Walmart, a physical supermarket giant having no digital presence, acquired Flipkart, an e-commerce business model. This article would analyse various aspects of intellectual property rights during an M&A deal using some recent examples of mergers or acquisitions.
During any merger or acquisition, IP valuation is considered a critical negotiating subject matter. A majority of company's operations are based on IP rights, and therefore IP valuation is to be done accurately to avoid over and undervaluations. There are various steps involving setting up an M&A deal. The most essential of them all is preparing the due diligence report. A due diligence report is a formal document prepared to evaluate the legal and corporate risks that might come with merging or acquiring a company. Apart from the valuation of IP, due diligence also ensures a company's intellectual assets' credibility; for example, Walmart would carefully assess the ownership of all the IP that Flipkart owns. If there are any infringements that Flipkart is being sued for, Walmart must evaluate the same before closing the deal. All the legal issues must be dealt with including legal issues like compensation to the companies' IP owners, transfer or licensing of the IP rights, and post-merger or acquisition ownership of the IP.
A company evaluates its IP assets via accounting valuations and transfer pricing valuations. Accounting valuations are cost price valuations generally used during M&A, while transfer price valuations are used for tax-related purposes. Any acquiring company targets IP assets to increase its market share. Acquiring trade secrets and capturing brand name to achieve a high customer base and outreach is the objective of many M&A deals. For example, Zomato acquiring Uber Eats increased its consumer base. The primary reason behind a M&A deal when it comes to IP, is the time and effort required to develop new technology. Considering the amount of money and work needed for innovation, companies acquire or merge with the existing ones.
Benefits of IP in M&A
Growth is an elementary business objective. A company needs to evolve to increase revenue and profits, to capitalize and protect its market share and ensure survival. Acquisition or merger of IP assets contributes to technological advantages and increases a company's growth prospects. With the growing digitization, a company must have a digital presence to capitalize on a larger consumer space. Sometimes acquisitions and mergers happen between competitors to increase the market share. For example, the Indian telecom industry faces high competition levels with regular updates in technologies and various marketing schemes to attract more consumers. In a market situation like this, two competitors like Vodafone and Idea, merged to increase their market share. This merger was also deemed to compete with the Indian telecom sector's existing competitors like Airtel and Jio.
Transfer of technology is another well-versed example of how a company benefits from acquiring IP assets—considering a traditional company is manufacturing a particular good for many years. The traditional company, to capture the marketplace would acquire or merge with one of these new companies having an efficient way to manufacture and acquire their patent rights. This process leads to greater use of the IP and serves as a win-win situation for both companies. This process also helps a company to diversify. It is effortless to enter another business space by acquiring a pre-existing player—For-example Xerox's entry into data processing via Scientific Data Systems acquisition.
Protecting IP Assets
It is essential to understand that safeguarding their IP against infringement and other threats is as crucial as acquiring a new IP portfolio. During acquisitions or mergers, the proper due diligence procedure must be followed. There should not be any confusion with regard to the ownership of the IPR. Terms like assignment and licensing must be cleared out during negotiations. IP licensing means that the developer owns the IP but has licensed its usage rights. IP assignment means that the ownership is completely assigned to the other party. For example, a company ‘x’ that is an e-commerce website deals with a software developer to increase the website's performance and create an application to improve user-friendliness. In their contract, company ‘x’ will not fully assign the IP rights, but only license the copyrights of the website code to the software developer to develop the required application. On the contrary, according to their contract, the software developer would develop the application and, therefore (if the contract says so) assign all the IP rights of that application to company ‘x’.
Managing IP assets must be governed by a formulated policy of the company. This policy must oversee the due diligence procedure before the acquisition or a merger. Proper utilization of IP assets post-acquisition must also be strategized. This can be done by commercializing IP assets via transfer or licensing. Policies must be formulated within the company to fight infringement cases and to monitor technological developments.
IP assets are the reason behind a company’s evolution. The transition of the business into cyberspace has led to increased valuations of IP assets. Trade secrets, Patent rights, copyrights and trademarks are a few examples of IP assets which interest the acquiring company. During the M&A process, IP assets are evaluated extremely carefully, considering their relevance to the company's objective to grow. There must be no ambiguity regarding ownership of the IP rights, including provisions like transfer and licensing, which must be cleared during negotiations. M&A's are a business opportunity for companies to expand and grow, and sometimes to survive. An example of companies merging to stay in the competition is Vodafone and Idea's merger. In this merger, IP assets would have been classified with extreme clarity considering the new company formed out of it would have each other's trade secrets and each other's consumer base. Nevertheless, with increased digitization, IP assets must be evaluated with care and due diligence during M&A deals.
Title Image Source: The One Brief
This article has been written by Pulkit Taneja. Pulkit is a second-year law student at the National University of Juridical Sciences, Kolkata, India.