Importance of Intellectual Property in Mergers and Acquisitions

Last month, Google astonished quite a few analysts when it announced the acquisition of Motorola Mobility for $12.5 billion. The hefty amount meant that the software giant parted away with nearly a third of its $39 billion cash reserves. It also meant that Google deviated from its earlier M&A strategy of acquiring small companies with superior technologies which it could easily integrate into itself as it did with Android in 2005. It also signified a major upheaval in its operating strategy because now they have not only increased their headcount by 66% but they have also entered a space which they have relatively very little experience in and one whose dynamics are way different than the one they are used to. The question is despite such large differences, why did they take such a decision? While some may argue Google is trying to go the Apple way by making its own hardware and software (which if true, might take some time coming), the reality lies in Motorola’s intangible assets - patents and 24,500 of those (17,000 approved and 7,500 pending approval). Google believes that this portfolio can be used as a leverage to ward off the increasing number of patent litigations from Apple and Microsoft against the Android-based phone manufacturers like HTC and Samsung and thus build confidence in these manufacturers to continue using them.

Technology-Driven M&A Deals

Welcome to the world where the M&A transactions transcends the boundaries of products and customers and enters into intellectual property (IP) as a huge value addition prospect. In this knowledge economy where innovation is touted to be one of the supreme drivers of growth, IP protection takes centre stage because this model has been widely successful in encouraging innovation. So, when an M&A acquisition involves parties which are technology-driven, IP is bound to be a key asset whose importance will influence the deal in a big way.

When we talk of technology-driven M&A, we are talking of huge numbers. According to PwC, the total value of the technology deals i.e. in internet, IT services, hardware and software in US alone was $77 billion in 2008 (yes, this was the year when the world faced an economic downturn!), $53 billion in 2009 and $107 billion in 2010. If one takes the pharmaceutical sector alone where patents are considered to be the backbone of any company, there have been 1345 deals in the last 10 years with a cumulative deal size of $694 billion. When one comes to think of patents being at the heart of these companies, it’s difficult to ignore the value it can play in an M&A deal. According to Nader Mousavi, a leading IP transactional lawyer who has worked with big law firms like Sullivan & Cromwel and Wilmer Cutler Pickering Hale & Dorr in the US, “IP as a percentage of deal value in M&A has been growing over the last 30 years. IP rights have gone from, as a percentage of overall value of S&P 500 companies, in the teens to 85 % or more.”

Significance of IP in M&A Strategy

Reducing Pressure on Internal R&D – In this knowledge economy, more and more companies are turning to an open innovation process in which they buy or license innovations to supplement and even replace their internal R&D. With the increasing emphasis on innovation and decreasing technology life-cycles, it’s imperative that a company looks into the ROI of its internal R&D. This will not only help them manage their R&D expenses better but also increase the number of innovation available to them and increase the speed of their product introductions. For this, it’s essential that the companies study the patent landscape and implement strategic analyses. These analyses will help them in identify the target which is active in the desired technology domain.

Bridging the Technology Gap in the Core Business – Companies are always looking at ‘synergy’ in any M&A deal. Many a times this synergy can be derived from complementary technologies. The addition of this technology to their portfolio would mean end-to-end integration of all components required to launch the product in the market. Take the case of the acquisition of SwitchOn networks by PMC-Sierra for $ 450 million. SwitchOn was a pioneer in wirespeed packet classification and inspection technology. It provided standard semiconductor and software components to enable applications such as QoS, Load Balancing, URL Switching Firewalling, etc. at wire speeds exceeding OC-48. It also had a patent pending on this technology, which on being granted would provide it the right to exclude any other company from using this technology. PMC-Sierra, on the other hand had expertise in broadband communications and has worldwide technical and sales support network. The addition of SwitchOn's packet classification expertise was complementary to PMC-Sierra's broadband communications strategy. With SwitchOn’s acquisition, it also acquired its patent which helped it achieve the strategic leverage in its domain.

Mitigating IP Litigation Risks – In a recent survey of Wall Street professionals conducted by CRA International, 75% of respondents indicated that patent litigation exposure was “important” or “very important” in valuing investment opportunities. Well, who could be in a better position to vouch for this than our beloved Google! In order to protect itself from the barrage of patent litigations involving Android, the count of which had reached 37 by March this year, it was no less than desperate to look for a strong patent portfolio. After the Nortel loss, when it bid an amount of $‘Pi’ billion for 6000 patents, it would have realized the actual seriousness which surrounds such patents not only in terms of money but also the business sense that they make. Its acquisition of Motorola Mobility is testament to the fact that a sound patent portfolio is one of the best cushions to have in the technology space. 

Patent Trolls – Strong patent portfolios have been the targets of several non-practicing entities (NPE) also referred to as trolls. These NPEs acquire companies having strong patents but are in either in distress or are ready to be acquired (read: sell their patents) for the amounts offered by the NPEs. However, the NPEs do not develop any products around those patents. They initiate patent litigations against the practicing companies with the sole intention of receiving generous settlement amounts. While the jury is still out on the ethical part of this business model, as far as it legal, a few companies continue to do it and successfully so. Firms like Intellectual Ventures, MOSAID, Tessera etc. have portfolios running into thousands of patents. All they do is find a hot patent and assert it against large companies.

Non-Technology Driven Deals

All the technology-driven M&A deals would tend to focus on the patent portfolio which is at stake. However, there are other forms of IP like copyrights and trademark, which can figure in the strategic objectives of a company. Here are a few reasons which would cause IP to influence a company’s M&A strategy:

Improve Distribution Channels – The merger of AOL and Time-Warner was one which involved equals in their respective industries. Time-Warner had a huge collection of copyrighted entertainment media including content magazines, movies, books, music and programming. However, with the increasing penetration of internet it was looking at alternate distribution channels to reach out to its audience. Thus, the decision to merge with AOL, which had become a huge brand in the internet space made a lot of sense.

Build a Brand Presence – When Indian tea-maker Tata was faced with the decision of expanding its foothold in the lucrative US and European market, acquiring a famous brand in these regions was the obvious answer. Thus, the acquisition of Tetley saw the light of the day. The deal catapulted Tata Tea into the global arena, as Tetley is an international brand with a presence in over 44 countries. Tetley has a presence in India, Canada, the US, Australia and Europe, and is the world's second largest tea brand. The acquisition helped Tata to cash on the widely recognized Tetley trademark and use its expertise and infrastructure in sourcing teas worldwide for the Indian market too.

IP Related Issues in M&A

Valuation - There has already been a paradigm shift in the IP due diligence process which is currently being undertaken by firms that identify IP as central to their long term objectives. They look at it from a value addition perspective rather than the traditional transactional perspective and thus, conduct a comprehensive due diligence using the latest tools and analyses. However, valuation still remains the trickiest part. This is so because IP valuation has no fixed model and is largely contextual. Risks, timing, cash flows, option value, alternatives and intended use (e.g., defensive, offensive) of specific IP assets form the pillars on which the valuation may be based. At the same time, CFOs are confronted with an ever-changing landscape of tax, financial and regulatory reporting requirements that impose differing and sometimes ambiguous standards for valuing IP.

Anti-trust Regulations – Most anti-trust laws prohibit M&A which will significantly ‘lessen’ the competition or lead to a monopoly in the market. Such issues are more serious when it comes to patents, as they by nature provide the holder the right to exclude anyone from practicing the patent.

With the growing importance of a knowledge-economy in today’s context it is beyond doubt that IP will be a key consideration for the companies as they carve out their strategic objectives. IP will thus, play an increasing role in fuelling the future M&As especially in the technology-intensive industries. 

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Public Sector & Management Consulting: An emerging paradigm

Birth of Government Consulting 

Since the inception of Management Consulting in early twentieth century, for seven decades, predominantly all the growth was in the private corporate sector. Consultants popularized the approach now commonly referred to as ‘best practices’. By nature, the private sector has always been a competitive sphere, and hence the value associated with adoption of best industry practices was immense. In the last two decades, however, there has emerged an interesting trend in the consulting world. More and more public sector concerns are beginning to hire management consultants. Governments across the globe- US pioneered the movement and UK and India followed suit- are recognizing this as a quinine tablet for many strategic and operational challenges.

There are several stories of this strengthening relationship. McKinsey & Company handled the transformation endeavored by North Carolina’s Department of Transport. Among other makeovers, it dramatically cut down a mammoth $440 million shortfall in 2005 to $2 million in 2007. In Germany, Booz is revamping Public-Sector Occupational Pension Plan, and aiding the Ministry of Education and Research in launching nationwide university projects. UK is no alien to the trend, nor is India, where McKinsey has played important roles in major sectors like infrastructure and railways. Deloitte and Booz Allen have strategic penetration in sensitive sectors like defense, in UK and US respectively.

Strengthening hold in public sector 

Kennedy Information, an American firm that monitors the consulting industry, estimates that the public sector now accounts for over 30% of the global consulting market. Kennedy forecasts that the public sector business will grow by 6-9% for each of the next three years; private-sector business, it says, will grow by only 1-4% over the same period.

Britain's Management Consultancies Association (MCA) reckons that the value of public-sector consulting to its members grew by 46% last year, while private-sector business grew by only 4%. Two-fifths of the British consulting business of Deloitte, one of the Big Four accounting firms, is now for the public sector.Mitt Romney, US presidential candidate for 2012 elections, had told the Wall Street Journal, he would have no qualms hiring McKinsey or Bain, to advise him on how to reorganize the government. Ian Davis, former managing director of McKinsey has long been known as a strong proponent of role of consultants in running the government’s businesses. In 2007, he wrote a famous article ‘Government as a Business’ which attempted to break down the complex and chaotic world of federal governments and apply learnings from the business world to achieve efficiency and productivity in government organizations.

The Indian landscape

In India, we see a two pronged trend in management consulting in public sector. On one hand, private players like McKinsey, BCG, and Bain are being increasingly hired by federal and state governments to work on varied projects. BCG, for instance, has been involved with the Central Bank, and made recommendations to streamline the public food distribution system. In parallel, there is a rising trend of establishing public sector consultancies under the ministries of central government. To name a few: Agricultural Finance Corporation, Natural Resources Management Consultants India Pvt. Ltd., Educational Consultants India Limited, are all initiatives of different ministries. While their rise inspires confidence in government’s effort to improve public sector efficiency, critics have remarked, this might as well be an attempt to evade overt scrutiny and interference by global private consultants. Understandably, this is more for time to tell than experts to predict.

Another very interesting initiative is the Consultancy Development Center, headquartered at India Habitat Center, New Delhi. This organization has been set up for promotion, development and strengthening of consultancy skills and capabilities in the country including enhancement of export of consultancy and professional services. Opportunities are being discovered and analyzed not only in India but other countries across continents. Projects are being taken up in countries like Kazakhstan, Morocco, Israel, and Turkey. Specialized training programs on consultancy management are being launched and start-up ventures in this space being promoted.

Criticism

In this hour of rapidly rising acceptance of consulting paradigm in the public sector affairs, however, there are strong opponents too. David Cameron, the current prime minister of UK, though more diplomatic today, had openly condemned the ‘rotting’ influence of this fast settling norm on UK government’s functioning. “For the last decade or so, in the name of modernization, rationalization and efficiency, we have been living under a regime of government by management consultant and policy by PowerPoint. The result has been an explosion of bureaucracy, cost and irritation, endless upheavals and pointless reorganizations.” he said in a speech to the Campaign to Protect Rural England.

Similar strong emotions were voiced by the famed but controversial journalist Johann Hari, when he targeted McKinsey on the firm’s involvement in the global drive for saving rainforests. He mocked the firm’s much publicized policy on confidentiality and pointed out data that seemed to corroborate his fears on company’s vested interests rising from its mining consulting division, straining the mission to conserve rainforests. On other occasions too, there have been similar and parallel arguments like inability of management consultants to go beyond the idea of financial efficiency and view public sector affairs in a holistic light.

A different approach

Almost as if apprehending this concern, Booz Allen Hamilton, the largest public sector consulting firm in US, has traditionally divided its business into two streams; one for public-sector work and one for the private sector. It recruits separately for the two streams, and employees follow different career paths and different pay structures.

Jess McMullin of boxesandarrows takes on the challenge of consulting the public sector, and breaks it down into:

Appreciating the differences- realizing that ROI in public sector is more complex than simple finance, and involves political returns too, which often outweigh finances in terms of significance

Understanding the culture- making sense of the complex hierarchies of different governments, and making connections at all levels

Finding your niche- adapting and innovating core strengths to suit the public sector demands

All in all, these developments depict growing awareness and interest in the field of consulting. Focusing on the Indian arena, they offer opportunities both for new ventures and lively debate on policy and paradigm! Figure out what is in it for you!

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