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.