Replicating Intangible Assets In Mergers and Acquisitions and Venture Capital Investments

Michael D. Moberly   November 12, 2008

In most any business transaction, particularly, mergers, acquistions, and venture capital investments, intangible assets play a key role, not only in terms of value, pricing, etc., but also in understanding more precisely what’s being (a.) acquired, or (b.) invested.  Too often, the existance, role, and contributions of intangibles falls outside or under conventional decision making radar.  That is, intangible assets are often ‘pockets of value and competitive advantage’ that are overlooked and underappreciated.

Intangible assets, in addition to being perishable. fluctuating, and costly, if not nearly impossible to renew if compromised, undermined, or devalued, are sometimes ‘company specific’.  That is, assuming they can be replicated or trying to ‘make them fit’ in another company’s operating culture or circumstance may be chancy at best.  It’s advisable then that replication (transferring) of intangible assets should figure rather prominently in a deal’s overall analysis.

Remember, a company’s intellectual property, know how, competitive advantages, and brand, etc., i.e., its intangible assets, constitute steadily rising percentages of most company’s value, and by extension, the value of any transaction (be it an acquisition or investment in a start-up or early stage firm) in which IP and intangibles are in play. Experience and research tell us that in either instance, the buyer – investor is literally hedging their analysis (i.e., due diligence, judgment, intuition, etc.) that substantial returns will result as a product of their risk!

Strategic paths to elevate decision makers’ confidence in transaction outcomes, i.e., decisions to (a.) buy – don’t buy, or (b.) invest – don’t invest, begins by examining the nuances of the targets’ intangible assets to unravel, assess, and monitor the stability, fragility, defensibility, value, and materiality changes (of the assets to:

1.  Elevate the probability that control, use, owership, value, competitive advantages, and efficiencies of those assets can be sustained (pre – post transaction), and possibly replicated…

2.  Determine if the the assets can sustain the parties’ financial interests and projected returna relative to the deals’ terms, objectives, and/or exit strategy…

3.  Leverage any (identified) IP – intangible asset risks, threats, and/or vulnerabilities in (re-)negotiating deal terms…

4.  Align post-investment IP protections and intangible asset value preservation strategies with, for example, the assets’ (a.) developmental life/value cycle, (b.) initiatives related to transfer or commercialization, etc…

5.  Monitor invested-in-research to mitigate vulnerability-probability of premature disclosure, infringement, legal entanglements or ensnarements, theft or compromise, undermining of competitive position, value erosion, adverse affects of business intelligence or economic espionage…

Due to the economic fact – business reality that in most transactions, be they a merger, acquisition, or investment by venture capitalists, intangible assets and IP are very likely to be a significant element of the deal.  In some respects today, business transactions, i.e., mergers, acquisitions, investments, etc., may be less (conventionally) driven/influenced by a targets’ low (under-valued) stock, rather by ‘bargain hunting’ for companies with unrecognized, under-valued, and unused intangible assets!  

For decision makers well versed in intangible assets and IP, such ‘bargains’ should be worthy considerations, especially if the buyer or investor can objectively identify sound opportunities for mining, leveraging, and extracting value from those heretofore under-the-radar (intangible) assets.   Regardless of a decision makers’ rationale and/or motive, having procedures, processes, and practices in place to effectively and efficiently identify and ‘bring to the surface’ value laden intangible assets, coupled with the ability to assess control, use, ownership, and value of those assets in both pre-post transaction contexts, can ‘rationally’ elevate confidence in transaction outcomes!

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