This blog often covers patent litigation topics. One of these topics, intellectual property due diligence, was covered in a few prior posts. The most recent post was a basic overview of IP due diligence, but this post will focus on prioritizing IP due diligence in mergers and acquisition transactions.
First, IP refers to a company’s intangible assets, as opposed to their hard, real assets, like chairs, buildings, etc. IP, those intangible assets, are, usually, the most valuable asset class, which includes technology patents, trade secrets, etc. IP is the “special sauce” that separates one company from another, which is why it is so important in mergers and acquisitions (i.e., when another company buys or merges with another).
Patent-protected product litigation
The value of IP is not just the value of the IP itself, but also the value of the litigation associated with patent-protected product litigation. If one company owns a patent that another, much larger, company is violating, the monetary value of that litigation could add significant value to an M&A transaction. And, the inverse is also true, which could kill a deal.
IP due diligence, a priority
This litigation value (when combined with the IP value itself) is why IP due diligence should be a priority. As such, one of the first steps in M&A transactions should be examining the company’s IP portfolio to asses pending and future patent litigation, the value of the IP itself and its transferability.
Why companies do not prioritize IP due diligence
Unfortunately, IP due diligence is usually left until the end of the M&A process. This is because there are so many other considerations in the transaction, including financial and cultural risks, environmental, legal and real estate. Plus, IP due diligence is expensive. In fact, it is so expensive that some want to wait until the end to ensure that the deal will go though. Though, undervaluing IP can threaten negotiations and destroy a M&A transaction, which defeats the entire reason for waiting. Plus, significant litigation may threaten that very IP that the M&A transaction is based on.
Our Mountain View, California, readers should remember the Foxconn-Sharp acquisition implosion that imploded because the IP due diligence revealed deal killing patent infringement litigation at the end of the transaction. This deal is a prime example of why IP due diligence should be prioritized up front.