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b. their susceptibility to being superseded or undermined if competitors and/or economic adversaries are able to acquire sufficient information/know how to launch a new (comparable) product or technology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.)
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