Michael D. Moberly   August 16, 2010

There’s still room to debate just what really constitutes the world’s oldest profession.  From where I sit, albeit a biased position of advocacy ’bloggerism’, it’s certainly not prostitution as many like to euphemistically suggest.  And, of course, when I use the word ‘poaching’ as I have in the title of this post, I’m not referring to poaching in the medieval European context, wherein a ‘poacher’ was one who intentionally, and with stealth, trespassed on anothers property to hunt and kill game.

In 2010, the word poaching comes to mind, but of a slightly different nature.  It’s about poaching of (for) intangible assets during the course of a business transaction, or sometimes more accurately, a faux business (transaction) interest in which one party is trying to get something (information) for nothing, that is, insights, perspective, experienced know how, etc., for perhaps only a Venti of Pike at Starbucks.  

The primary target of ’business information poaching’ today takes the form of acquiring someone elses intellectual (structural or relationship) capital, ala intangible assets and applying them for their own benefit.

So, what should prompt business management teams and boards to be leery of information poachers?  The answer lies in the economic fact that 65+% of most company’s value and sources of revenue today stem from knowledge-based intangible assets.  In most business transactions today, intangible assets and the intellectual (structural, relationship) capital embodied/embedded in those assets will not only be in play, i.e., an integral part of the transaction and will likely be shared and/or transferred under the parameters of the transaction’s contract.  But some, will surely morph into one or the other parties business operational coffers outside the boundaries of that contract.

As every business person knows, some all too well, there is risk in any transactional relationship, in part, precisely because proprietary and/or competitive advantage information (intangible assets) will be transferred and shared between parties for purposes specified in the contract.  The risk materializes though, in many instances, when that information is used by one party for purposes outside or beyond the terms of the contractual relationship.  In other words, the information will be used by the receiving party (poacher) to benefit them economically to the detriment of the other party. 

Some will surely dismiss or relegate this perspective of ‘information poaching’ as constituting just another inevitable cost of doing business, i.e., a new (additional) transaction cost of conducting business in an increasingly knowledge-based…information-driven economy wherein increasing percentages of transaction value and projected sources of revenue evolve directly from information/competitive advantage laden intangible assets.  

I’m reminded though of the computer manufacturer whose vice-president of operations announced, upon building multiple manufacturing sites in another country, that an estimated 25+% of the company’s intellectual property would be irrevocably lost (infringed, misappropriated) during the relatively brief life cycle of these newly established manufacturing sites.

Under these types of circumstances, referring to this phenomena (business information poaching) as merely constituting a transaction cost endemic to the knowledge-based economy is, at best, an understatement!

The consequences (criticality) attendant to business information poaching risks can obviously be significant and long lasting, if not terminal, for company’s today, particularly relative to supplier relations and contractual governance.   Insofar as remedies are concerned, the option of a business becoming isolationistic, i.e., not share or transfer business information under most any circumstance, is obviously neither feasible nor practical, that is, if a business wants to remain a going concern and be successful and profitable.  

However, if management teams and boards exercise prudence upfront, during the contract negotiation period, relative to what information will - will not be shared, transferred, etc., with transaction partners is as important as is the management and oversight of contractual business (transaction) relationships.  The goal of course, is, a the end of the day, control, use, ownership, value, and materiality of information-based (intangible) assets before, during, and after a transaction has concluded, remains intact.  

(This post was inspired by the work of Clemons and Hitt in their paper titled ‘Poaching and the Misappropriation of Information: Transaction Risks of Information Exchange.)

The ‘Business IP and Intangible Asset Blog’ is researched and written by Mr. Moberly to provide insights and additional views for company management teams, boards, and employees to aid in identifying, assessing, valuing, protecting, and profiting from their intangible assets.  I welcome and respect your comments and perspectives at m.moberly@kpstrat.com.

Michael D. Moberly    July 21, 2010

There are numerous reasons why a business transaction may under-produce or fail outright, e.g., not deliver the desired results or projected outcomes.  Some responsibility for a transaction’s failure or under-production lies, in my view, at the feet of management teams and boards who may not have given the consideration due, to what I believe, is the central, and perhaps greater question that has bearing on the outcome, e.g., ’what’s really in play’?

While that question may appear esoteric, theoretical, or even irrelevant to some in the over-played sense of urgency attendant to many transactions, the answer to the question ‘what’s really in play’ in my view is much more relevant than some traditionalists and conventionalists are frequently inclined to believe or accept. 

Traditionalists and conventionalists are respectful euphemisms (descriptors) I frequently use to describe the array of stakeholders that influence a business community and the deals and transactions that occur, but, whose perspectives and approaches to executing transactions remain largely embedded in tangible-physical asset domains. 

I find, as I’m confident many readers of this blog do as well, traditionalists and conventionalists are frequently respected, experienced, and often successful business persons in their own right.  They remain skeptical however, for a variety of reasons, about the notion that 65+% of most company’s value, sources of revenue and future wealth creation today actually lie in intangible, not tangible assets, regardless of it being a well settled economic fact.  In that sense, they become ‘business development gatekeepers’ of sorts.

When considering or engaging a new transaction, be it a merger and acquisition, venture capital deal, strategic alliance, or a fairly straight forward buy-sell or licensing arrangement it behooves the party to frame the transaction by considering the question at some point during the engagement discussions and subsequent due diligence, ‘what’s really in play’?  

This means drilling deeper (intellectually and practically) into the question.  The response of course, must be much more than merely a spontaneous regurgitation of the (traditional, conventional) time honored rationale ’we care about increasing revenues and making greater profits, otherwise, why else would the transaction even be considered’?

What’s really in play in a steadily growing percentage, if not most business transactions today, are intangible assets!  Thus, a significant factor in the ’business transaction and due diligence equation’ is literally, the ability to effectively achieve (address) these key objectives:

1.  Identify and effectively exploit the key intangible assets embedded in the deal along with the attendant synergies and efficiencies. 

2. Sustain control, use, ownership of those key assets and monitor (pre-post transaction) their value and materiality.

As growing percentages of company value and revenue are directly linked to - evolve from intangibles, there’s a growing body of evidence, anecdotal and otherwise, that points to management teams and boards that are dismissive or neglectful of either of the above, transactions will surely be put on a road to experiencing significant, but unnecessary, and often irreversible challenges insofar as being able to capitalize on the intangibles that are already in place.

For traditionalists and conventionalists though, crossing that chasm between the tangible/physical asset (business) world to the world now overwhelmingly dominated-driven by intangible assets, truly and respectfully presents some understandable challenges to past practice, particularly with respect to accounting, reporting, managing intangibles.  But, regardless, that chasm must crossed intellectually and attitudinally, and, the quicker the better. 

And, once conventionalists and traditionalists have crossed that chasm and arrived ’on the other side’ it’s essential that intangibles become fully and routinely integrated into the various equations in which transactions and deals are conceived, framed, and benefits/outcomes calculated.

 The ‘Business IP and Intangible Asset Blog’ is researched, written, and produced by Mr. Moberly to provide insights and additional and sometimes alternative views for company management teams, boards, and employees to aid in identifying, assessing, valuing, protecting, and profiting from their intangible assets.  I welcome and respect your comments and perspectives at m.moberly@kpstrat.com.

Michael D. Moberly    April 28, 2010

Intangible assets are increasingly valuable and exploitable commodities that allow company management teams and boards to consider and pursue an ever widening range of business transactions in which intangibles will be part of the deal, that is, they can be bought, sold, transferred, traded, assimilated, or licensed.

Business transaction management teams have those same responsibilities, only they’re elevated somewhat, due to the expectation that in most any transaction, one or both parties’ intangible assets will be in play, that is, they will be integral factors when negotiating and pricing a deal.  That’s because, 65+% of most company’s value and sources of revenue today lie in - evolve directly from intangible assets! 

However, absent effective guidance in the development of intangible assets, most would score high on the transferrability, replication, and/or imitation scale.  This makes the the assets particularly vulnerable to devaluation, or hemorrhaging, as I refer to it, that is, they become impaired in some manner relative to their ability to produce/deliver the projected value, competitive advantages, and revenue streams after the deal has been closed.

For transaction management teams, it’s absolutely essential that they be alert to the potential for, if not the probability that, some level of asset hemorrhaging can occur in both pre and post transaction contexts.  In some instances, asset hemorrhaging can literally commence before the ink dries on a transaction contract.

A key starting point to prevent and/or mitigate any asset hemorrhaging from occurring, is to avoid permitting an over-heated sense of urgency and speed to affect the transaction management teams’ responsibilities.  When management teams view a transaction primarily through a lens of urgency and speed, a frequent consequence is that the critical due diligence and asset assessments become hurried and templated and not as thorough and specific, nor examined in both pre and post transaction contexts, as they should.  Of course, in today’s hyper-competitive global business environment, where its likely there will be multiple and simultaneous suitors to a transaction, a sense of urgency and speed are almost endemic!

Transaction management teams are obliged then, to frame - structure their role, particularly the duties related to the due diligence and assessment of intangible assets, in a manner that:

1. Recognizes the ability to obtain (retain) full control, use, ownership, and value of those assets is essential to negotiating a profitable and sustainable transaction outcome.

2. Secures approval to integrate asset protection and value and materiality monitoring measures at the earliest stages, as well as, throughout the transaction negotiation process to reduce the probability of and be promptly alerted to actions that can (a.) undermine asset value, competitive advantages and the assets’ ability to continue to produce revenue, and/or (b.) trigger costly and time consuming legal disputes and challenges that can disrupt the momentum of and/or jeopardize an otherwise viable transaction. 

While the goal of a transaction management team remains the same; to facilitate stronger, more secure, and profitable transactions, its now prudent to include an intangible asset specialist on the team, who can, among other things, identify, unravel, and assess the value, risks, defensibility, and sustainability of the intangible assets that are in play.

I welcome and look forward to receiving your thoughts and comments.

Michael D. Moberly   February 22, 2010

In every business transaction today, whether its across the street or around the globe, but particularly acquisitions in knowledge-intellectual capital intensive sectors, growing percentages of the deal will inevitably consist of intangible assets. 

For acquisition management teams, the prospect of acquiring (intangible) assets that are (a.) complimentary, readily transferable and exploitable, and (b.) quickly facilitate/enable execution of strategy, should be key drivers for acqusition proposals.  This is especially relevant given the economic fact that 65+% of most company’s value, sources of revenue, building blocks for future wealth creation, and sustainability lie in and/or are directly related to intangible assets!  In other words, intangible assets will be integral to the deal’s value and outcomes, e.g., achieving the near term and strategic objectives which the acquisition team presumably foresaw.  

For the acquiring firm, not-to-be-overlooked factors that underly - add to the probability that the acquisition will be as successful, contributory, and profitable as intended, requires the acquisition team:

1. to recognize that its not solely about asset acquisition, rather it’s about their effective integration and utilization which is an exercise quite different from the acquisition of purely physical/tangible assets, because intangibles (a.) lack physicaliy, and (b.) evolve from - are embedded in intellectual,  relational, and structural capital, therefore,

2. acquisition due diligence and management should be designed and conducted to include pre and post contexts (components), e.g.,

     a. to unravel and assess the assets’ status, stability (fragility), (legal) defensibility, and transferability - integratability factors, and

   b. ensure the assets’ control, use, ownership, value, and materiality are sustainable and monitorable, particulary in post acquisition contexts.

Any acquisition today, or business transaction for that matter, in which the pre and post perspective is not considered or poorly executed, the probability that costly and morale deteriating post-deal challenges will evolve that adversely affect shareholder-stakeholder attitudes and undermine the deals’ success, are almost inevitable!

in today’s extraordinarily predatorial and winner-take-all transaction environment, these (pre-post) perspectives cannot be overstated insofar as the role and contribution of the acquisition management/due diligence team.  Why?, because (intangible) asset contributions and value are sometimes quite fragile, that is, they can rapidly erode, be undermined, and/or their potential benefits literally unravel in hours, not days or weeks. 

Michael D. Moberly  December 29, 2009

In most instances today, when owners/founders of SME’s (small, medium enterprises) sell and/or transfer their business, the intangible assets they have developed and/or acquired are literally embedded in - integral to their company’s base of value, sources of revenue, foundations for future wealth, and sustainability.  But, anecdotally speaking, those assets routinely go unrecognized or poorly addressed - factored in exit and/or transfer transactions.

For parties to buy, sell, transfer and/or M&A transactions, one of the initial, and ultimately perhaps, one of the most important issues to be addressed relative to laying foundations for ensuring projected-anticipated profitability (success) of a transaction, is executing an effective transition-merger of the intangibles to the new owner relative to their integration, useability, transferability, and contributory (added) value, etc.  The objective of course, is that the intangibles’ post transaction performance and contributions will exceed, or at minimum, be equal to the performance-value their previous owner seemingly gained.  If not, why buy - invest in them?

For those who may be inclined to characterize this consideration as being insignificant to a transaction’s strategic success, are respectfully advised to reflect upon the (global) economic fact - business reality that 65+% of most company’s value, sources of revenue, sustainability, and foundations for future wealth creation lie in - are directly related to intangible assets.  So, in a vast majority of transactions, intangible assets are in play - part of the deal.   Therefore, they’re integral to transaction equations!

So, what should (can) buyers do?  First, and foremost, ensure their due diligence process includes an intangible asset specialist who possesses the skills sets and experience to actually…

1. identify clusters-pockets-chains of of intangible assets, unravel their origins, and determine (track) their respective (current) contributory value to the sellers’ company.

2. assess the assets’ status and transferrability (useability), i.e., determine if the assets’ control, use, ownership, contributory value, and materiality can be sustained and/or enhanced, post transfer.

While the (largely subjective) dollar value assigned to intangibles in transactions is obviously relevant and should be factored, I find it consistently less (strategically) meaningful-relevant if the above points are overlooked, dismissed, or neglected.   

Michael D. Moberly   December 21, 2009

Yes, we’re in the midst (really just the front end) of a global, knowledge-based economy and, knowledge-based assets are, with few exceptions. intangible assets!  And, yes, most intangible assets are not usually included - reported in a company’s balance sheets, nor are they easily measured, but, that does not lessen, in any way, their importance and contribution to a company’s value and/or revenue by serving as internal building blocks (foundations) for wealth creation and sustainability. 

Intangible assets are especially relevant to SME’s (small medium enterprises) and SMM’s (small, medium multinationals) in a variety of ways and for a variety of reasons, the most dominant of which is the reality that a significant percentage (perhaps 80+%) of SME’s and SMM’s are in the service sector.  Service sector firms are more likely to be grounded in - dependant upon their intangible assets to (a.) represent/emphasize their uniqueness, (b.) distinguish themselves in their market space, and (c.) build competitive advantages, etc., which can ultimately serve as the basis for generating income/revenue, when utilized effectively.

Relevant research conducted by the Association of Chartered Certified Accountants (headquartered in the U.K.) found, not surprisingly, that many SME’s are unable to effectively value their intangible assets which, in turn, undermines their ability to (a.) articulate/communicate those assets’ importance, relevance, and contributory value, (b.) sell-transfer their business for its true (real) value, and (c.) access much needed financing. 

Underlying (embedded in) those not-so-surprising findings (and challenges) is another reality; many SME and SMM management teams retain a fairly narrow view (definition) of what actually constitute intangible assets beyond the conventional (proverbial) brand, reputation, image, goodwill, etc.

To advance intangible asset identification and valuation to benefit SME’s, a study conducted by ACCA’s Small Business Committee made a number of very plausible recommendations, several of which are described below:

1. Broadening SME management team (a.) awareness and recognition of the intangible assets they produce and (b.) strategies how they can be utilized, leveraged, and value maximized, etc.

2. Helping management teams develop specific language to more effectively communicate/articulate intangible assets in practical terms/contexts befitting specific (internal, external) audiences.

3. Because protection of intangible assets cannot always be achieved through conventional intellectual property rights, stress the necessity for management teams to develop alternative methods (best practices) to sustain control, use, ownership, and monitor value and materiality of their intangibles.

4. Development of a practical managerial (diagnostic) tool that would enable management teams to routinely identify, assess, utilize, and capture-maximize the value of their intangible assets. 

(Adapted by Michael D. Moberly from the work of ACCA’s Small Business Committee and its policy briefing papers on matters specifically related to intangible assets.)

Michael D. Moberly   October 22, 2009

There’s little question that intellectual property (IP) and intangible assets are now key, foundational tenents for successful business management, primarily because both IP and intangible assets can, if stewarded and overseen effectively, become potential sources of substantial/domiant (company) value, revenue, sustainability, profit, growth, and competitive advantage. 

To be sure, management teams, boards, and D&O’s who still consider IP and intangibles as merely constituting service functions and/or cost centers are well behind ‘the curve’ especially when most (prospective) investors view the presence and quality of a company’s IP and intangible asset strategy to be crucial enhancers of (a.) profit, (b.) share price, (c.) market position, and (d.) competitive advantage.  In fact, most respondents to the Howery Survey of Investor Attitudes on IP Protection assert that company’s that lack an effective IP (intangible asset) strategy can have a detrimental effect on company performance. 

In today’s increasingly know-how based business environment (economy) in which IP and intangibles are conservatively comprising 65+% of most company’s value, investors and financial analysts are giving much more weight to IP (and intangibles) when making their invest - don’t invest decisions.  In fact, one in four of the Howery Survey respondents state they have actually turned down investment opportunities due to a company’s inadequate approach to IP.  Fully 95% of the Howery survey respondents report that it is no  longer sufficient, in the context of their investment decision, for a target company to merely own IP with no (aligned, integrated) protection, managerial, or competitive advantage peripheals.

Instead, the Howrey survey respondents believe, in substantial numbers, that before a favorable investment decision is made, the target company must have specific strategies (best practices) in place to not only exploit those assets, but also, have an IP and intangible asset protection program aligned with the target company’s competitive strategies.

The proverbial bottom line (in conjunction with the Howery Survey’s findings) is this; companies that presume, solely, that conventional IP enforcement protections are adequate to attract investors are finding instead, they’re no longer sufficient (standing alone) to favorably satisfy prospective investor demands vis-a-vis their investment decision criteria.  To consistently attract serious investors, companies should also have in place (a.) comprehensive and on-going strategies to effectively safeguard those assets to reflect todays increasingly aggressive, predatorial, and winner-take-all business transaction environment, and (b.) seamlessly integrate same into a viable competitive strategy for utilizing and exploiting those assets.

(Adapted by Michael D. Moberly from the work of Howery, Simon, Arnold & White’s Survey Of Investor Attitudes on IP Protection)

Michael D. Moberly    September 18, 2009

Due diligence management teams must be fully cognizant of the reality that the control, use, ownership, value, and materiality of the targeted (intangible) assets do not remain static assets during the (due diligence) process.  They are subject (vulnerable) to being compromised, misappropriated, competitive advantages undermined, and/or value eroded if not properly monitored in both pre and post transaction contexts.  In fact, there’s good evidence to suggest asset vulnerability actually elevates during this time.

What’s more, any of those adverse events (outcomes) can occur in rapid-fire order and cascade throughout the transaction and change its entire structure, e.g., adversely impact the projected (sought after) economic and competitive advantage benefits initially envisioned for the transaction.

Another reason why its important to continually monitor intangible assets throughout a due diligence process is because the time frame when buyers and/or sellers of the intangibles can leverage - extract - realize the most value is continually being compressed.  This is due, in no small part, to the globally predatorial business intelligence and data mining operations, among other things, that can rapidly ’get out front’ of deals and/or transactions to adversely affect (undermine, erode) an assets’ (strategic) value and thereby render the transaction less attractive or severely hamper its (envisioned) viability.

The considerations described below represent additional factors that should be taken into account when management teams ’frame and structure’ a due diligence strategy, any one of which can constitute either a ‘red flag’ or signal a probability that the transaction will be effective, i.e., is there evidence of:

1. a broad company culture that genuinely recognizes the value of the core (revenue - value producing intangible) assets?

2. consistent stewardship, oversight, and management of those assets?

3. consistency in the representation of those assets, ala Sarbanes-Oxley, FASB, etc., in which risks, value, materiality, and financial performance are accounted for and measured?

4. business continuity-contingency planning that includes the core intangible assets?

5. strategic planning intended to achieve fuller utilization (monetize, extract value) from the intangible assets?

Michael D. Moberly   August 27, 2009

Designing and implementing (representation, warranty) ’convenants’ for mergers and/or acquisitions (as well as other types of business transactions) to monitor about-to-be-purchased (merged) intangible assets is a prudent and forward looking exercise that is increasingly likely to represent the difference between a successful and something less than successful outcome.  (For a comprehensive list of intangible assets see http://kpstrat.com/brochure.) 

Its well documented that a significant percentage of M&A’s do not bear the anticipated/projected fruit as the deal was initially and often enthusiastically conceived and negotiated.  In no small part, the underliers to M&A’s less than stellar track record:

1. are the various challenges associated with actually and effectively integrating-meshing the key intangible assets in the post deal environment, and 

2.  is the probability that the status, stability, value, and/or materiality of those key intangibles have been undermined, eroded, or otherwise adversely changed in the interim.  

Therefore, the rationale for introducing ‘intangible asset monitoring convenants’ in mergers and acquisitions is on two levels:

1. today, its an economic fact that 65+% of most company’s value, sources of revenue, sustainability, and foundations for future growth lie in - are directly related to intangible assets.  If the control, use, ownership, value, and stability of those about-to-be acquired/purchased intangibles are neither verified nor monitored pre, and post deal, this represents significant risks that could be mitigated and decision makers could be made aware, if effective monitoring convenants had been negotiated ‘up front’ and were being executed.

2. recognition that intangible assets’ integral to a deal’s (projected) profitability and success are vulnerable to an ever growing milieu of risks, challenges, disputes, and changes, anyone of which can adversely affect the outcome.  For example, in an acquisition, the will and ability of the target company to sustain the know how, competitive advantages, reputation, market position, goodwill, image, etc., that are integral to the deals’ value and critical to the deal’s success should be monitorable.  In so doing, decision makers can have ‘early warning’ alerts to these risks so they can be properly addressed, prevented, and/or mitigated by, among other things, renogitating deal terms.

Michael D. Moberly   July 28, 2009   

While intangible asset assessments and inventories have relevance to both the buy and sell sides of a transaction, a buyer who elects to conduct neither is elevating the transactions’ risk factors, i.e., the probability that one or more of the assets will be significantly impaired.  The reason?  Risks to transactions and the IP and intangibles in play today are far too consistent, far more likely to occur, and far too easy to execute by adversaries and competitors.  Ultimately, the assessment/inventory findings can serve to guide the transaction management team thresholds for asset risk.  For example, if the assessment-inventory reveals significant risks that cannot be sufficiently mitigated or (transaction) terms renegotiated, should the transaction proceed, and if so, what’s the probability the transaction objectives are still achievable?

Among other things, the assessment (inventory) will test the in play assets relative to their ability to sustain the transactions’ projected (a.) objectives, (b.) returns, and (c.) exit strategy under various circumstances and scenarios, e.g., embellished respresentations, fraud, misappropriation, business intelligence, and infringement, etc., by:

1. Identifying, sifting through, and unraveling any embedded - intertwined intangibles and competitive advantages relevant to the transaction…

2. Identifying and assessing any under-the-radar risks, threats, and vulnerabilities that can entangle and/or ensnare the assets in costly, time consuming, and momentum stifling disputes or challenges…

3. Assessing the adequacy and effectiveness of any asset safeguards that have been in place (pre-transaction) relative to preserving the assets’ value and usability…

Using these principles, the assessment/inventory can deliver timely and relevant insight to transaction management teams by:

1. Alerting them to significant vulnerabilities and risks that warrant immediate attention, but yet may be favorably leveraged (re-negotiated) prior to deal closure…

2. Bringing operational, economic, and strategic clarity to the intangible assets that are in play, particularly those relevant to achieving a favorable outcome…

3. Identifying the most effective asset safeguards and value preservation measures that (a.) reflect the circumstances of the transaction, and (b.) are aligned with the transactions’ objectives including the life-value-function cycle of the assets!

And, as always, the overarching objective is to enable a more secure and profitable transaction to go forward, not impede it!