2015-2019 witnessed about 3,600 mergers and acquisitions transactions totaling over $310 billion, highlighting the role of Merger and Acquisition (M&A) in companies’ growth.[1] The primary legislation governing the incorporation, management and operation of companies is the Companies Act[2]. A merger is defined as the combination of two or more corporations into a single new or an existing one. In the dynamic field of corporate law, Merger and Acquisition is a high-stake game wherein corporate transaction appears like a game of chess. In this game of chess, every piece of the chessboard represents a critical asset which plays a crucial role during merger and acquisition by companies. Among these pieces, Intellectual Property (IP) is often considered as a Queen of the game, which is invaluable although it requires a precise administration to unlock its full potential while transaction.
In the wake of innovation, development and technology, IP assets such as trade secrets, copyrights, trademarks, and patents, are becoming more widely acknowledged as essential elements of corporate value. As per the World Intellectual Property Organization (WIPO), industries relying majorly on intellectual property contribute substantially to the global economy, underscoring the crucial role IP plays in promoting corporate growth and strategic planning across variety of sectors.[3] If Intellectual property of the company is managed effectively, then it can define the trajectory of the game of M&A in the winning mode. It means that it can act both as a sword for innovation and a shield against market competition.
Role of IP in Merger and Acquisition Transactions
Over a period of time, IP has emerged as one of the pivotal elements in the modern-day corporate transaction of Merger and Acquisition. Traditionally it was not given enough importance in M&A transactions, except for some corporations where IPR is inherently involved in the business such as pharmaceuticals[4]. During Merger and Acquisition IPR was often neglected and evaluated as a separate element, which created a lot of problems for the companies later on. Therefore, now the companies are taking proactive steps for managing the issues arising out of it like taking due diligence. The corporate landscape has evolved and now IPR stands as an important asset in Merger and Acquisition deals. In the current scenario, IP complements the intrinsic value of any corporation by denoting ownership, giving exclusive right to use unique ideas or creations and much more. Effective management of IP can make or even break an M&A deal.
Intellectual property is, in fact, the most frequently mentioned reason for M&A failure. This is known as the "Winner's Curse," in which the acquiring firm overvalued an item and subsequently regrets paying so much because they systematically underestimated their own costs. [5]In this era of corporate hustle, IP assets act as a level playing field in constituting a company's total valuation. Companies seek to acquire these innovative assets for gaining an upper hand in the competitive edge. This can be witnessed from various Merger and Acquisition deals such as-
- Google’s acquisition of Motorola mobility: Google acquired Motorola Mobility in 2012, mostly to obtain access to Motorola's extensive patent portfolio.[6] This calculated purchase gave Google the intellectual property it needed to improve its technological prowess and protect its Android operating system from infringement lawsuits.
- Facebook’s acquisition of Instagram: Facebook acquired Instagram in 2012[7], in order to obtain Instagram's user base, technology, and trademarks. Through this IP-rich acquisition, Facebook was able to keep its competitive edge and improve its social media products.
- Microsoft’s acquisition of LinkedIn: in 2016, Microsoft acquired LinkedIn. It used LinkedIn's valuable data, software patents, and trademarks to grow its enterprise solutions and improve its professional networking capabilities,[8] which had a significant impact on the acquisition.
Due Diligence of IP Assets
IP due diligence is one of the crucial steps taken by corporations during M&A transactions. Due diligence is defined by Black's Law Dictionary as "the diligence that is reasonably expected from, and typically exercised by, a person who seeks to satisfy a legal requirement or to discharge an obligation."[9] It helps to critically assess the assets and liabilities of the company to analyse the merits and risks associated with the transaction.
Meanwhile to understand the use of intellectual property due diligence one should see the 1998 Volkswagen AG’s acquisition of Rolls-Royce Motor Cars Ltd. In this transaction Volkswagen paid $ 795 to buy Rolls- Royce but overlooked its trademark, which was later on sold to BMW.[10] This deal left Volkswagen without the right to the Rolls-Royce brand or engine for its vehicles, emphasizing the importance of IP due diligence. As Warren Buffet famously stated, "A sales pitch gives you the price, while due diligence gives you the value”.[11] In 2015, 65 percent of M&A transactions involving Delaware-incorporated companies that were valued at $100 million or more were challenged in the court of law.[12] Ineffective due diligence was one of the main causes of this failure.
In Nirma Industries and Anr v Securities Exchange Board of India, Nirma Industries proceed with the merger with the target company without taking any steps to mitigate the risk associated with the same. The court ruled that, in accordance with Regulation 27(d) of the Securities and Exchange Board of India (SEBI)[13] regulations of 1997, Nirmala Industries should properly investigate a target company before making an investment.[14]
The IP due diligence involves initial public record reviews to categorise the target’s company registered patents, trademark, trade secret, copyright and other assets. It ensures precision about ownership and control, economic and strategic value as well as associated liabilities. Post review, a non-disclosure agreement should be executed between the parties to protect some of the confidential transactions. After this the acquirer party can request a comprehensive IP portfolio from the other party, confirming the ownership and transferability of the same. This meticulous process of IP due diligence mitigates risk, ensures that the acquiring party is fully informed and also helps in optimizing the negotiation process.
Valuation of IP Assets
Intellectual property is generally referred to as the unique creation, which in itself has certain value. IP valuation helps to assess the true value of these IP creations[15] and therefore plays a crucial role in the process of M&A of corporations. There are three methods used to value these IP assets;[16] these are:
1. Income Method, which is calculated based on expected future earnings.
2. Cost Method, which is calculated based on the current cost of that IP creation.
3. Market Approach, which is calculated based on the value of similar IP creation.
In every M&A transaction, whether it’s Facebook acquiring Instagram, Amazon acquiring Ring or Disney’s merger with Pixar, valuation of IP assets is very important. For instance, while the acquisition of Instagram, Amazon evaluates Instagram’s trademark, copyright, software code etc. These IP creations are critical for Instagram’s functionality and its recognised brand, which helps in Facebook's growth.
Similarly, Disney’s merger with Pixar involved a meticulous valuation of Pixar’s patents, animation technologies. This integration not only expanded Disney’s animation technology but also fortified its brand[17].
Managing IP asset in the Merger and Acquisition Lifecycle
M&A transactions typically follow a structured process. However, this process is not rigid and may vary based on the transaction's complexity. However, for effective intellectual property (IP) management, it must span the entire M&A process to ensure optimal outcomes.
The M&A process is generally divided into three key phases:
- Preliminary Phase: The preliminary phase of the lifecycle of managing IP assets in M&A transactions, requires a proper well-defined IP strategy that aligns with the transaction goals. Along with a comprehensive IP strategy, it also includes a thorough IP due diligence. It deals with evaluation of target company’s IP portfolio which assesses the asset details, risk identification, and integration strategies. Due diligence is used by sellers to enhance the perceived worth of their intellectual property and by buyers to prevent any surprises post M&A transaction
.
- Transaction Phase: This phase of IP management in M&A transactions highlights to undertake the mitigating risks identified during the due diligence process and a profound planning of the integration of IP assets.
Most of the IP assets generally require the consent of the owner (target company) of the IP right to transfer the IP asset and the IP right to use them to a third party(buyer) during the M&A transactions. This is where the buyer company is called to review the legal framework, take an exact evaluation of target IP asset and IP right for the process of transfer. During the transfer, the acquiring company must gain clear titles to the IP assets it has purchased, including related domain names, trade secrets, copyrights, trademarks, and patents. During this phase, licensing agreements should also be thoroughly examined to guarantee the successful transfer and enforcement of all ownership terms and conditions.
- Integration Phase: In 2006, Pixar was purchased by Disney. Many people consider this acquisition to be among the best instances of IP integration in the entertainment sector.[18] The significance of post-merger IP integration is highlighted by the Disney-Pixar merger's effectiveness. In order to optimize the value of the acquired intellectual property, it must be properly integrated with current assets, processes, and innovative ideas. To minimise potential hazards like underutilization, resource disputes, or erosion of creative identity, the acquiring and target companies must strategically coordinate. Issues like uneven branding, unnecessary procedures, or even a decline in the value of the acquired IP can result from poor IP integration.
The interaction of Intellectual property and corporate law highlights the crucial role of IP assets in determining the outcomes of the M&A transactions. From due diligence to transfer and integration, IP management emerges as a significant component of the contemporary corporate strategy, hence acting as the queen of the corporate chessboard.
The M&A transactions as depicted through the cases of Google’s acquisition of Motorola Mobility, Facebook’s acquisition of Instagram, and Disney’s merger with Pixar elaborates the transformative potential of IP management in Merger and Acquisition transactions. This highlights how corporations use IP to unlock the true value, reduce risk, create synergies and drive long term growth. Conversely, oversights in IP management, such as Volkswagen's misstep in acquiring Rolls-Royce, highlight the significant risks of undervaluing or neglecting IP considerations.
[1] Aron Almedia, 5 Biggest Mergers and Acquisitions in India, Trade Brains, 5 Biggest Mergers and Acquisitions in India! | Trade Brains.
[2] Companies Act, 2013
[3] Economic Aspects of Intellectual Property in Countries with Economies in Transition, World Intellectual Property Organization, https://www.wipo.int/edocs/pubdocs/en/wipo_pub_transition_8.pdf
[4] Abhas Soni and Aastha Gupta, Navigating IPR In Mergers And Acquisitions - Insights From A Start-Up Standpoint, Live law, https://www.livelaw.in/lawschool/articles/navigating-ipr-in-mergers-and-acquisitions-insights-from-a-start-up-standpoint-248831
[5] Mandavi Singh, Intellectual Property: The Dominant Force in Future Commercial Transactions comprising Mergers and Acquisitions, 2 IJIPL 180 (2009).
[6] Quentin Hardy, Google buys Motorola for Patent parts, Forbes, https://www.forbes.com/sites/quentinhardy/2011/08/15/google-buys-motorola-for-patent-parts/
[7] Facebook to Acquire Instagram, Meta, https://about.fb.com/news/2012/04/facebook-to-acquire-instagram/
[8] LinkedIn’s Patent Portfolio; Looking for Hidden Gems, Intellectual Property Watch, https://www.ip-watch.org/2016/06/23/linkedins-patent-portfolio-looking-for-hidden-gems/
[9] Vikrant Pachnanda & Vineet Unnikrishnan, Due Diligence Issues that Face M&As, SCC Online, 2 (2011).
[10] BMW to get Rolls-Royce after all by acquiring the name, The New York Times, https://www.nytimes.com/1998/07/29/business/international-business-bmw-to-get-rolls-royce-after-all-by-acquiring-the-name.html
[11] Supra 9.
[12] Liz Hoffman, The Judge Who Shoots Down Merger lawsuits, The Wall Street Journal, The Judge Who Shoots Down Merger Lawsuits - WSJ.
[13] The Securities and Exchange Board of India Act, 1992, Regulation 27(d).
[14] Nirma Industries and Anr v. Securities Exchange Board of India, (2013) 8 SCC 20.
[15] Charu Atrey, All About Allocation of Intellectual Property during Mergers and Acquisitions of Tech Giants, 3.1 JCLJ (2022) 1749.
[16] Supra 4
[17] The Disney-Pixar Merger: A Deep dive into one of the biggest corporate mergers of all time, https://brandpoets.com/2023/07/25/the-disney-pixar-merger-a-deep-dive-into-one-of-the-biggest-corporate-mergers-of-all-time/#:~:text=The%20world%20watched%20in%20awe,a%20powerful%20industry%20game%2Dchanger.
[18] Study Smarter, “Disney Pixar Merger Case Study” (https://www.studysmarter.co.uk/explanations/business-studies/business-casestudies/disney-pixar-merger-case-study/