Archive for 'Mergers and Acquisitions'
Michael D. Moberly August 24, 2016 ‘A blog intersecting intangible assets and business’.
A company initiating, or even contemplating, a M&A (merger or acquisition) would be well served today if a ‘company culture assessment’ was included in their due diligence strategy!
The primary reason of course, as consistently conveyed at this blog, is the economic fact that 80+% of most company’s value, sources of revenue, and ‘building blocks’ for growth, profitability, and sustainability lie in or directly evolve from IA’s (intangible assets), which company culture is a prime example. It’s correct to assume then, that a substantial factor in the rationale of the initiator evolves around acquiring and then merging specific IA’s which the target firm presumably has already developed, and exist in some specialized form of intellectual, structural, and/or relationship capital.
From an operational perspective, intellectual and structural capital constitutes the knowhow and processes which underlie – are embedded in the target company’s means for generating revenue, competitive advantages, and creating efficiencies, etc. So, in M&A transactions, acquiring full and unimpeded control and use of these contributory IA’s represents the critical step toward realizing-maximizing the projected (anticipated, desired) outcomes.
To the uninitiated, a target company’s operational culture may be overlooked, dismissed, or even deemed irrelevant to a transactions’ projected outcome. It’s unwise for due diligence teams to assume, that should a proposed M&A transaction or strategic alliance, etc., be executed, the relevant-targeted IA’s will be wholly transferable or remain fully operable. Hence the prudence for transaction – due diligent management teams to assess – determine whether the IA’s being sought can remain intact. In short, can embedded IA’s originating-developed in one company be transferrable and operationally replicable in another company.
More specifically, transaction management – due diligence teams would be well advised to objectively study-assess the targeted company’s operating culture in personnel and temperament contexts. An objective is to determine if those (company) culture factors can readily (and rapidly) integrate and bond with the initiating company, its employees, and stakeholders? Grant McCracken, a well-known and experienced personality in this arena suggests company cultures are internal versions of a company’s brand. That’s largely attributable to a broader recognition of the reality that company culture generally encompasses its mission, vision, and values.
Understanding in advance, how company culture can impact a business, e.g., “culture is a company’s last mile” (McCracken). If believed, and I do, it makes a very compelling case that a company’s culture is marketing’s proverbial – millennial ‘silver bullet’. Certainly, no disagreement here!
But, before embarking on a company culture assessment (Margaret Mehta) the target company should be distinguished on several cultural dimensions. In a perfect world, there should be no resistance to company culture assessment as an integral component to most any transaction’s due diligence. The key is that due diligence teams are operationally familiar with the characteristics and features of company’s culture as unique convergence of IA’s, i.e., intellectual, structural, and relationship capital.
The deep and necessary insight that a company culture assessment (due diligence) brings to transaction management and oversight, in essence, prescribes a strategic path how (culture) performance will be replicated. But, transaction management (due diligence) teams should also recognize that culture performance is also a measurement mechanism that drives employee behavior.
So, if there are particular aspects of a target company’s culture that appear undesirable, non-transferrable, or un-yielding to adaptation-replication and therefore impede a transactions projected milestones for success, this should be clarified. Obviously, I am a strong advocate of conducting company culture due diligence for most any business transaction while recognizing standing alone, culture alignment may not be the singular guarantee to a successful and profitable transaction outcome.
.This post was inspired and adapted by Michael D. Moberly from the fine work authored by Monica Mehta in a February 2009 piece in Profit and Profit Online.
Michael D. Moberly January 22, 2016 ‘A business blog where attention span really matters’!
The word ‘multiplier’ as I observe it being frequently applied in both business and military contexts, requires some clarity. As an intangible asset strategist, I am inclined, for better or worse, to characterize ‘multipliers’ as often originating in distinctive/competitive knowhow and/or thinking. Preferably, management teams will recognize how these IA’s (intangible assets) are translatable – convertible into tactics or processes which measurably ‘multiply’ effectiveness, efficiency, and/or output of say, a particular operating group, specific project, or process.
More specifically, through my lens, multipliers also refer to attributes or combinations of competitive inputs often collaboratively rooted (originate) in intellectual, structural, and relationship capital, i.e., IA’s. Collectively – collaboratively these multipliers are purposefully integrated in a particular initiative, project, or even organization-wide to favorably impact efficiency, effectiveness, and/or productivity, that otherwise may not have been feasible, particularly in environments in which there is little or no receptivity for multiplier(s) to evolve, mature, become recognized or integrated due to perceived concern that doing so would disrupt the status quo or create new risk.
One example where this has occurred is the consumer package delivery sector, several of which recognized obvious gains which could accrue by integrating – coordinating both GPS and RFID technologies. Standing alone, GPS and RFID are clearly tangible-physical (asset) technologies. However, their deliverables largely manifest as contributory and competitive IA’s that facilitate-enable firms in this sector to receive, process, sort, and deliver substantially more orders and packages, more efficiently compared to competitors that have yet to incorporate same.
For those operationally familiar with IA’s, i.e., their origins, development, and integration, in most instances, can (and should) also be leveraged – exploited as, among other things, value proposition multipliers, which in turn, confer credibility and rationale to capital outlays to pursue, purchase, and integrate the multipliers, ala GPS and RFID systems, while recognizing the various IA’s such multipliers produce and/or strengthen.
So, as more operational clarity is brought to IA’s contributory role and value as multipliers, organization boards and management teams will recognize…
- their operational prerogatives will expand to correlate with IA development, utilization, and exploitation.
- decision – transaction outcomes can be more predictable and lucrative whenever, however, and wherever, IA’s are in play.
- the importance of effective OR (organizational resilience) planning to facilitate quicker and more complete economic-competitive advantage recovery following a significant business disruption or materialization of reputation risk, etc.
Mr. Moberly is an intangible asset strategist and risk specialist and author of ‘Safeguarding Intangible Assets’ published by Elsevier in 2014, email@example.com View Mr. Moberly’s videos on YouTube at ‘safeguarding intangible assets’ or his CNN and CNBC videos at his webpage http://kpstrat.com
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!
Comments regarding my blog posts are encouraged and respected. Should any reader elect to utilize all or a portion of this post, attribution is expected and always appreciated. While visiting my blog readers are encouraged to browse other topics (posts) which may be relevant to the circumstance. And, I always welcome your inquiry at 314-440-3593 or firstname.lastname@example.org
Please watch for Mike’s book ‘Intangible Assets: Security Managers Roadmap’ to be published soon!
Michael D. Moberly August 9, 2012
As stated in this blog on numerous occasions since its inception in mid-2008; it’s crucial for business decision makers to recognize that in a vast majority of transactions they will initiate or become engaged, correctly identifying and assessing intangible assets plays an increasingly significant role in achieving a desired and sustainable outcome!
The reason of course, is that steadily rising percentages (65+%) of most transactions’ value resides in intangible assets. So, if a transaction management team overlooks intangible assets, it’s tantamount to excluding how/where value is created, revenue is generated, and strategic planning is executed.
This makes it all-the-more-important, perhaps rising to a fiduciary responsibility, at the decision maker level, to determine if a transaction management team is incorporating intangible assets in their task. If so, are intangible assets being addressed in a due diligence, inventory, auditory, or valuation context? If a transaction management team is doing neither, it’s fair to say it’s time to elevate their operational familiarity and understanding of intangible assets.
As readers know, there is an abundance of research that consistently paints a convincing picture that if and/or when a merger, acquisition, or other type of transaction ‘goes south’, evidence of impending problems and challenges will surface quite early and will likely stem from one or more intangible assets.
One technique to remedy, or at least mitigate this, is for decision makers to receive an advance ‘heads up’ from their transaction management team by ensuring an ‘transaction impact analysis’ is part of their task. As the term implies, an asset impact analysis can provide decision makers with a more definitive picture of potential outcomes, should a risk(s) materialize and adversely affect one or more of the key (intangible) assets. This can be achieved…
- collectively, i.e., that reflects the inter-relatedness of intangible assets’ contributory value and associated risks.
- individually, i.e., if a key asset is identified as being impaired in some manner, or is found to be already misappropriated or infringed.
- by assessing the probability that particular risks will materialize to adversely affect the projected economics, competitive advantages, and/or synergies of a transaction with emphasis on mitigation and containment.
- by assessing the resiliency and sustainability of key intangible assets
The rationale for incorporating an transaction impact analysis is for decision makers to anticipate circumstances – scenarios that if a risk has or will materialize to the point it impairs or otherwise adversely affects key (intangible) assets. I tend to advocate asset impact analysis’ be initially focused on what I believe to be the three, most challenging intangible assets to sustain – preserve their contributory value, i.e., intellectual, relationship, and structural capital.
Too, a transaction impact analysis can reveal other cautionary circumstances/scenarios while retaining the option to proceed with a (a.) plan for risk mitigation, or (b.) re-negotiate the deals terms in light of the risk(s) and/or asset impairment(s). The objective essentially remains the same, that is to facilitate a more secure and profitable transaction going forward, not impede it!
Michael D. Moberly May 24, 2012
It’s important for management teams, c-suites, and boards to recognize that merely because a deal or transaction has progressed to the due diligence stage, there is absolutely no guarantee the projected values, synergies, and competitive advantages the targeted assets are projected to bring, an increasing percentage of which will be intangible, will sustain those projections.
In today’s globally competitive, aggressive, and predatorial business transaction environment, it is quite naïve in my view, to assume the full control, use, ownership, value, and materiality, etc., of the targeted assets will remain fixed throughout the transaction period without close monitoring and risk mitigation in both pre and post transaction (due diligence) contexts.
In large part, that’s because a potential, but, I might add, an increasingly routine by-product of business transactions is that they produce uncertainty at all employee levels as well as among stakeholders and investors. Uncertainty, individually or collectively can, influence individuals to assume demeanors, exhibit behaviors, or engage in acts that otherwise are considerably less likely if/when uncertainty is not present.
Put bluntly, uncertainty can manifest itself in many ways, some of which are adverse when change (i.e., a business transaction) is pending or eminent. Too, in business transactions and the uncertainty it frequently sparks, can manifest as asset compromises, misappropriation, and/or undermining of competitive advantages. Perhaps more so when due diligence teams are dismissive, unaware, or conclude the monitoring necessary to prevent or mitigate such circumstances is beyond (beneath) their mandate. That’s irrespective of evidence that suggests asset vulnerability elevates during periods of (company, employee) uncertainty. To be sure, commencement of due diligence is well-recognized as an indicator that change (and uncertainty) within a company and/or business unit are fully under consideration or eminent.
What’s more, uncertainty, and the various ways/contexts it manifests, can occur in rapid-fire order and cascade throughout a company. Due diligence team ‘radar’ should surely recognize any adversity and modify the way due diligence will be structured and executed. This is especially relevant if the transactions’ envisioned (projected – desired) economic and competitive advantage benefits decline.
Admittedly, I am not an advocate of using the uninitiated or inexperienced to conduct due diligence. It is far too important. Neither do I subscribe to the view that there is a one-size-fits-all template (for efficiency sake) to conduct due diligence.
So, for those, and other considerations, some of which are described below, I have identified various issues that should definitely be on the radar of every due diligence team. Any one of the following for example can be a signal that a higher probability exists that a transaction will be successful, 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 (asset) risk, value, materiality, and financial performance are measured and accounted for?
4. business continuity-contingency (organizational resilience) planning that includes the due diligence targets’ core intangible assets?
5. strategic – internal planning and execution that achieves recognition and utilization of intangible assets as source of value, revenue, and ‘building blocks’ for growth and sustainability?
While visiting my blog, you are respectfully encouraged to browse other topics/subjects (left column, below photograph) . Should you find particular topics of interest or relevant to your circumstance, I would welcome your inquiry or comment at 314-440-3593 or email@example.com
Michael D. Moberly January 6, 2012
When negotiating – executing any business transaction, i.e., merger or acquisition, it’s a safe bet today that intangible assets and intellectual property (IP) will be in play and part of the deal. That’s because 65+% of most targets’ value, sources of revenue, growth potential, and ultimately pricing lie in – evolve directly from intangible assets which include IP, reputation, brand, goodwill, relationship capital, and intellectual capital, etc., to name a few.
It should therefore, be in the interest and responsibility of the acquiring party’s due diligence team to identify and assess those (intangible) assets’ status, i.e., their stability, fragility, defensibility, and what I refer to as their contributory value. The purpose of this not-to-be-overlooked exercise is, among other things, to determine if control, use, ownership, and value of the assets being considered for acquisition are sustainable, practically and legally, in both pre and especially post transaction contexts.
It’s equally prudent for M&A due diligence teams to:
1. Unravel each (intangible) asset to verify its origins, ownership, and identify/assess if any (problematic) legal restrictions and/or liabilities exist that could:
a. inhibit complete and unrestricted utilization and/or commercialization of the assets
b. undermine the assets value, competitive advantages, and market position, or
c. add substantial (post transaction) costs for litigation and/or remedies (fixes)
2. Identify and assess the existence of any circumstances in which the value of the assets are at risk of being diffused or eroded due to:
a. the breadth of the current field of those assets’ underlying/supporting technologies, or
b. their susceptibility to being superseded or undermined if competitors and/or economic adversaries are able to acquire sufficient information/know how to launch a new (comparable) product or technology that would render those assets’ either commercially obsolete or unattractive to consumers and ultimately shorten their projected life-value-functional cycle
3. Determine if:
a. any component of the acquired assets are – will be exported, and, if so,
b. current legal protections are in place in the U.S. and internationally, otherwise, additional legal – regulatory compliance events could be triggered that may cause delays and additional costs
4. Determine if significant asset (IP) infringement, counterfeiting, piracy, misappropriation, theft, and/or other types of asset compromises have occurred either before or as a reaction to the M&A transaction that exceed the acquiring party’s threshold for risk.
5. Determine if key intellectual-human capital ‘drivers’ (i.e., personnel) are leaving the company in advance of the M&A (e.g., going to competitors, etc.) that could adversely impact projections of near term viability and profitability of the transaction, i.e., sustainability, efficiencies, value, defensibility, and revenue generating capability of the assets, post transaction.
(Mr. Moberly adapted this paper from the excellent work of L. Burke Files.)
While visiting my blog, you are respectfully encouraged to browse other topics/subjects (left column, below photograph) . Should you find particular topics of interest or relevant to your circumstance, I would welcome your inquiry at 314-440-3593 or firstname.lastname@example.org
Michael D. Moberly July 23, 2010
What do I mean by designing and executing monitoring covenant’s in merger and acquisition representations and warranties? It’s somewhat akin to the the statement routinely misattributed to Peter Drucker, i.e., if it can’t be measured, it can’t be managed.
So, similar to Druckers’ perspective, in M&A’s, if control, use, ownership, and value of about-to-be-acquired/purchased (intangible) assets of a targeted company are not monitored and found to be sustainable (pre and post transaction) then there’s a reasonable probability the desired outcomes and/or projected returns, synergies, and efficiencies, etc., will be significantly impaired, diminished, or left unrealized altogether.
It’s not that intangibles are particularly unstable in comparison to tangible or other types of assets. Rather, it’s due to the fact that the contributory value and competitive advantages intangible assets can bring to a deal have become essential to its success. But, in today’s globally competitive and highly predatorial business (transaction) environment, intangible asset value and competitive advantages can be rapidly undermined, erode, or irrevocably lost, if there are no monitoring (representation, warranty) covenants in place for oversight.
Conservatively, when 65+% of most company’s value, sources of revenue, and foundations for future wealth creation today lie in – evolve directly from intangible assets; it seems a ‘no brainer’ that in a majority of instances, the essence of an M&A, i.e., what’s really being merged or acquired, are intangible assets!
An effective way for M&A professionals then to increase the probability that the desired – projected returns will be achieved is to ensure that M&A planning and due diligence not be focused solely on a company’s balance sheet that tends to roll up intangibles into a single heading of goodwill. Rather, decisions to merge-acquire or don’t merge-acquire should include the question, how fragile and sustainable are the intangible assets under consideration? In other words, is asset value and materiality vulnerable to erosion or undermining prior to, or immediately following, deal closure which, in either instance, will adversely affect projected returns?
Again, in today’s M&A environment, a seller’s or acquisition target’s intangible assets carry a readily exploitable liquidity that outpaces and utterly disregards conventional intellectual property enforcements. This of course, elevates asset vulnerability to many different forms of internal-external compromise that serve as preludes to (asset) value erosion which can literally sabotage deals.
If either occurs prior to M&A finalization, the value of the about-to-purchased or acquired (intangible) assets can quickly hemorrhage and sometimes ‘got to zero’. At that point, M&A terms will certainly necessitate change based on a determination (assessment) of the extent of asset deterioration or whether the intangibles can rejuvenate to sustain the buyer’s original objectives.
To effectively mitigate such vulnerabilities-risks, its important for buyers and equity sources to have in place, a highly proactive ‘deal impact analysis’ process (capability), e.g., monitoring covenants. Such (negotiated) covenants are intended to permit monitoring of key intangibles so that the parties can be alerted, in a timely manner, to any acts and/or events that adversely affect changes in the assets’ value or materiality.
If impairments or discrepancies arise, the terms may be re-negotiated as warranted without necessarily losing deal momentum, timing, or resorting to costly and time consuming dispute resolution options. Most traditional forms of M&A due diligence still constitute ‘snap shots in time’. That is, they do not provide buyers-sellers with the level of on-going monitoring that’s necessary to address the easily exploitable and nanosecond liquidity (value erosion vulnerabilities) now common in transactions in which intangibles are in play.
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 email@example.com.
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 January 5, 2009
When negotiating – executing any business transaction, its increasingly likely intangible assets and intellectual property (IP) will be in play, if not, they should be!
Merger and acquision due diligence that focuses specifically on intangible assets and IP is particularly relevant today because 65+% of M&A value – pricing are embedded in intangible assets and IP! Presumably, its in the interest of the ‘acquiring’ party’s due diligence to fully assess the status, stability, fragility, and defensibility of those assets to determine if control, use, ownership, and value can be sustained (practically and legally) pre and post transaction.
In addition, its equally prudent for M&A due diligence teams to examine the assets to:
1. identify and assess the existance of any ‘me too’ aspects in which the value of the assets will diffuse or erode due to (a.) the breadth of the current field of those assets’ underlying technologies, or (b.) being readily superseded (undermined) if competitors – economic adversaries were able to acquire – launch new technologies that would render those assets’ commerically obsolete, i.e., significantly shorten their projected life-value-functional cycle…
2. determine if (a.) any component will be subject to export, and, if so, (b.) proper/current legal protections are in place in the U.S. and internationally, otherwise, additional legal – regulatory compliance events could be triggered along with significant costs attached…
3. fully unravel – verify their origins and identify/assess if any (problematic) legal restrictions and/or liabilities exist that could inhibit their (a.) complete and unrestricted utilization and/or commercialization, (b.) undemine its value, (c.) erode its competitive advantages and market position, or (d.) add substantial (post transaction) costs for litigation and/or remedies (fixes)…
4. determine if significant asset (IP) infringement, counterfeiting, piracy, misappropriation, theft, and/or compromises (above normal business risk thresholds) have – are occurring either before or as a reaction to the M&A transaction…
5. determine if key intellectual-human capital ‘drivers’ (i.e., personnel) are leaving the company in advance of the M&A (e.g., going to competitors, etc.) that could adversely impact projections/assessments for near term viability of the transaction and strategic sustainability, efficiencies, value, defensibility, and revenue generating capability of the assets, post transaction…
(Mr. Moberly adapted this post from the excellent work of L. Burke Files.)
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?