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The Role of IP in Mergers and Acquisitions

In recent years, mergers and acquisitions have emerged as the primary method for rapid expansion in the corporate world. In an ordinary sense, a merger is an arrangement in which the assets of two or more existing companies are vested in one company or fall under the direction of one company. Amalgamation, on the other hand, occurs when two or more firms merge to form a new company with all its responsibilities and assets transferred to it.

These strategies produce the quickest and most consistent means to acquire assets and market presence, which aids in the exploration of new market prospects. Furthermore, mergers can broaden their consumer base by reducing competitors and sustaining and improving profitability. When two companies combine by agreement, all of the tangible and intangible assets of one company become a part of the income of the other acquiring company, with intellectual property and its rights being the most essential of these assets.

Intellectual Property

Intellectual property is a type of incorporeal property generated or invented by the human mind. Intellectual properties are intangible and have a right, i.e., “Right in Rem,” which indicates that the creator has complete property ownership. Copyright, Trademark, Patent, Design, and so on are all examples of Intellectual Property.

Intellectual property rights give the inventor, creator, or assignee the exclusive right to use, sell, or dispose of the innovation. Intellectual property rights enhance the country’s economic development by fostering healthy competition and stimulating industrial growth and economic prosperity.

Acquisitions & Mergers

The combination of two companies into one is a merger. This merger of two enterprises typically assists in optimizing earnings, improving work, and guaranteeing that the company meets its objectives. Acquisition refers one company purchasing the ownership stake of another. Typically, such a share is greater than 50%, giving the purchasing corporation control over management.

Merger and acquisition waves are crucial in business history and have grown dramatically in India during the last several decades. They have shown themselves to be beneficial in industries such as information technology, telecommunications, business process outsourcing, and pharmaceuticals. M&A strategy is a reliable method of acquiring competencies and money, establishing new market routes, growing client base, and suffocating competition. The process aids the business sector in sustaining and boosting profitability.

IP Valuation & Due Diligence

IP valuation is significant in M&A and consists of three stages: pre-acquisition, the deal, and incorporation, to preserve and secure the IP. Because intellectual property rights account for a significant amount of the company’s revenue, organizations must carefully calculate their valuation to ensure that these rights are not undervalued. According to research, there is an ongoing trend of the actual worth of an IP asset not being appreciated.

The value must consider the undercurrents of both parties’ businesses, the rationale for the merger or acquisition, and the net profit and loss from the partnership. Valuation provides information about the economic viability of M&A and proposes future uses for intellectual property. Valuation is based on economic prospects and environmental cycles such as shifting GDP rates, stock market, and worldwide crises (such as a pandemic, war, etc.) that cause company instability.

IP valuation is volatile since it is based on the current value of future economic profit or loss projected to accrue to the owner. Furthermore, due to varying government rules, market conditions, company efficiency, and globalization, IP assets are difficult to locate and assess. However, if a valuation is performed with expertise and reviewed by professionals and experts, it may yield reliable results.

Due diligence procedures are a valuable source of information for both parties in an M&A transaction. The significant factors of the acquisition are IP rights and technological evaluation. Because of the difficulties in evaluating IP rights, IP due diligence is incredibly complicated. Poorly conceived or poorly executed business strategy is one of the main reasons for IP-driven M&A failure. As a result, thorough and well-structured due diligence is essential. It offers critical information about future advantages, economic life, ownership rights, and asset limits.

How IP Affects M&As

Adding value to the company’s portfolio: A merger or acquisition of a firm adds value to a company’s portfolio. Companies must examine their portfolios and determine if the current portfolio fits the requirements of the company’s objectives. It is often not feasible to develop something new in today’s dynamic and volatile market climate. Thus organizations must look for fresh chances and ways to acquire current technologies from other companies.

Technology Transfer: Transferring technology from one organization to another is a valuable benefit of obtaining intellectual property—this aids in properly exploiting and applying the intellectual property to the entire degree possible.

Diversification: M&A explores and enhances many business areas. Mergers and acquisitions bring up new avenues for business and growth in the market. It is elementary to start a firm with pre-existing or pre-established resources, which minimizes operating costs and aids in creating a diverse asset portfolio for the company.

Innovation: The primary purpose of implementing the business strategy is to encourage growth and development while also maximizing profit, resulting in achieving the intended goals. The corporation must guarantee that its product portfolio is up to date and efficient to fulfill market demand.

Examples of M&As for IP

  • In 1988, Nestle acquired Rowntree business. It was the largest foreign takeover of a United Kingdom Company. In this deal, Nestle agreed to pay around US $ 4.5 Billion for Rowntree PLC. The main objective of this deal was to acquire famous brands i.e. Kit Kat, Yorkie, and Rolo.
  • Another Classic example is Acquisition of Luxury Italian fashion house Versace by Michael Kors. The main objective of this deal was to access new product lines and markets through an established brand and IP portfolio.
  • Motorola Mobility was acquired by Google Inc. which gave the acquirer complete control of Motorola’s patents. Later Google Inc. sold Motorola Mobility to Lenovo, but retained ownership of Motorola Mobility’s Patent Portfolio. The main objective of Google Inc. was to purchase the patents held by Motorola.

Author: Aranya Nath, Legal Intern at PA Legal.

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