Michael D. Moberly December 4, 2012
First, when structuring and executing any deal and/or business transaction today, particularly the due diligence component, it’s essential to recognize that IP and other forms of intangible assets are going to play increasingly significant roles insofar as affecting outcomes.
Second, when either, i.e., deal structuring, due diligence, and execution, etc., is conducted in a gratuitously hurried fashion as if one really believes the Christmas season retailer hype of ‘buy now, only two at this price left’, then it’s quite likely the opportunity (vulnerability) and probability that asset hemorrhaging will occur, possibly substantial, rises, particularly in today’s increasingly aggressive, predatorial, and winner-take-all global transaction environment.
Having been actively engaged in information – intangible asset protection and risk – threat management for 20+ years, my counsel is straightforward. Decision makers responsible for deal structuring, i.e., c-suites and boards have fiduciary responsibilities that include sustaining control, use, ownership, and monitoring value and materiality of the about-to-be-purchased (acquired) intangible assets.
In my view, these responsibilities must and should commence at the point in which the deal/transaction is being initially structured and due diligence planned. That’s because today, 65+% of most company’s value, sources of revenue, and ‘building blocks’ for growth, profitability, and sustainability lie in – evolve directly from intangible assets!
Thus recognizing and making preparations to mitigate the vulnerability and probability there will be financial – competitive advantage hemorrhaging of any of the about-to-be-purchased (intangible) assets before the ink dries on a transaction agreement, is an essential factor to achieving the desired (successful, profitable, sustainable) outcome.
The kind of (intangible) asset hemorrhaging I am referring to broadly consists of theft, misappropriation, and/or infringement of proprietary assets, e.g., intellectual, structural, relationship capital and operational knowhow, anyone of which can undermine assets’ contributory value, competitive advantages, market space, or reputation, that likely prompted the transactions’ initial conceptualization.
Intangible asset hemorrhaging (in deals and transactions) is frequently facilitated, in my experience, when two frequently held attitudes held by decision makers converge, i.e.,
- unnecessarily high or unjustified sense of urgency attached to deal execution. (Urgency and speed often mutate to become a dominant driver of a transaction which in turn can constrict – impede a thorough due diligence, especially with respect to unraveling the origins, stability, sustainability, value, and ‘mergability’ of the intangible assets in play.)
- assumption that deals-transactions can be consummated and revenue streams commence before the (intangible) assets in play (in the form of intellectual, relationship, and structural capital and proprietary operational know how) will fall prey to theft, misappropriation, or simply walk out the front door with departing employees.
Again, because overwhelmingly rising percentages of company value and revenue evolve from intangible assets, any short-cuts or ‘rush job’ due diligence routinely leads to grief, frustration, and disappointing (asset) performance. That’s why it’s so essential for asset buyers (and that, in my view, is precisely what’s occurring in business transactions, i.e., the purchase of bundles of intangible assets) to ‘get out front’ of a transaction by acknowledging and preventing the aforementioned attitudes from adversely influencing how a transaction will be structured, due diligence conducted, and ultimately executed.
Readers who remain unconvinced are encouraged to think about transactions in this context. If a company’s decision makers and/or legal counsel convey dismissiveness about the attitudes described above and their potentially adverse effect on transaction outcomes, they presumably would have to know precisely, the most opportune time…
- when acts of (intangible asset) misappropriation, theft, infringement, misappropriation will occur, and,
- required for an adversary to integrate the misappropriated – stolen (intangible) assets into a competitor’s or economic/competitive advantage adversary’s products and/or services as enhancements, efficiencies, and competitive advantages.
In other words, decision makers would need to possess psychic powers in their prognostications, which I am skeptical and certainly reluctant to award.
Exacerbating these increasingly probable events even more, is the rarity that asset buyer’s due diligence plan will include asset value and competitive advantage monitoring components to alert, stop, or stabilize the inevitable asset hemorrhaging or recover compromised assets before substantial and many times irrevocable asset value loss, harm, and/or reputation risk ensues.
The fact is, the lost and/or compromised intangible assets constitute a ‘head start’ of sorts for those engaged in their illicit acquisition and use. While actual asset losses in these circumstances, i.e., dollar value, remains largely subjective, it’s pragmatic, in my view, to try to measure it less in dollar values, and more in in terms of the speed which such adverse acts can and do frequently occur, i.e., hours and days, not weeks, months, or quarters. So, is a well-constructed and thorough due diligence plan warranted, specifically one that fully addresses intangible assets,you bet!
Unfortunately, there are numerous actual and would-be (intangible) asset buyers that I characterize as being engaged in ‘permissive neglect’ with respect to identifying, monitoring, and safeguarding, about-to-be purchased intangible assets, by erroneously assuming…
- any economic and/or competitive advantages an economic or competitive advantage adversary or employee of the about-to-be-purchased or merged firm may glean from the (intangible) assets they compromise or illegally acquire will be short-lived and/or outpaced by the rapidity of changes in consumer and market demands which only the legitimate (asset) originator will be able to deliver, and,
- intangible assets are (readily) renewable resources.
Respecting the narrowness of (profit) margins today, in any business transaction, management teams, legal counsel, c-suites, and boards alike, would be prudent to re-consider both assumptions!
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Please watch for Mike’s book ‘Intangible Assets: Security Managers Roadmap’ to be published soon!