Leveraging on Intangible Assets in a Post-Pandemic World – Strategic Acquisition of IP
(Written by: Mark Cheng)
As countries around the world prepare to open up their economies following months of lockdown, businesses large and small will need to find their feet as they seek to adjust to the new normal that confronts them.
In what is being described as the worst global decline since the Great Depression of the 1930s, the COVID-19 pandemic and the ensuing lockdowns are expected to knock almost $9 trillion off global GDP over the next two years. Singapore will not be spared, with the local economy bracing for its worst recession, and authorities forecasting shrinking projections for 2020 at between -4% and -7%.
Faced with this harsh reality, many will struggle to adapt. Thankfully, strategic leveraging of a firm’s intangible assets (“IA”) can help enterprises to weather the storm. IA generally refers to valuable assets that are not physical in nature – such as, goodwill, brand recognition, data – as well as recognized forms of intellectual property (“IP”) – such as patents, trade marks and copyright. Given their intangible nature, IA may prove to be a particularly flexible tool to help businesses navigate the post-pandemic world.
What is becoming clear is that some businesses will emerge from this pandemic stronger than others, largely due to having a sound fundamental business model and good liquidity. The second of a 4-part series, this article examines how firms in such a position can seek to consolidate their market position through strategic acquisition of IP.
An economic downturn may naturally force at-risk businesses to look into disposing some or all of its IP assets. The disposal of such assets may be part of a formal insolvency process, or may occur when a business makes a strategic decision to strengthen its balance sheet and improve liquidity by disposing of its non-core assets. In addition, the economic uncertainty created by the pandemic also means that such disposals are likely to be available at highly discounted valuations.
From the buyer’s perspective, an acquisition of IP may help the business to consolidate its market position, expand into new territories, or secure other long-term strategic advantages. For example:
- Strategic acquisition of IP (as opposed to the acquisition of a target company), allows the buyer to acquire the asset in a more surgical manner. The buyer walks away with only the brands or core technologies it requires, without having to pay for additional baggage such as operational costs, large workforces, or the burden of fulfilling existing third-party contracts. Such a targeted acquisition is especially useful in the current climate, where many businesses are looking to pivot into online retail or digital services. In such situation, the buyer need only consider purchasing the brand or associated IA around the online platform, without having to pay for other unnecessary assets.
- Businesses that are currently a licensee or supplier/distributor of a product may also leverage on such acquisitions to preserve the continuity of their licensed rights. By acquiring the IP rights surrounding the licensed product, the business guards against the risk of such rights being terminated and/or being sold to a potential competitor. Instead, the former licensee is transformed into an owner, and is no longer beholden to paying ongoing royalties to its former licensor.
- Strategic patent acquisition can also result in the settling of any active patent litigations, or remove any identified potential threats. Such a move also has the benefit of bulking up the acquirer’s IP portfolio, which can help to further ring-fence its main business, or generate new revenue streams through an effective licensing programme.
Emphasis on Due Diligence Process
While buyers may expect to find bargain bin prices, they must also be prepared to take on additional responsibilities in the due diligence process. In particular, buyers acquiring IP assets through an administration process will likely be provided with limited (or no) assistance in the due diligence process. Given the speed and volume of such fire-sale transactions, buyers will be hard pressed to get access to data rooms, requests for information or management presentations. Instead, buyers will be expected to carry out its own quantitative and qualitative evaluation of the IP asset in question. This includes taking steps in an IP Due Diligence to:
- Identifying the IP assets in question.
- Establish ownership and status of the IP.
- Asses how the IP was developed or acquired.
- Review any IP-related agreements.
- Assess the target’s IP protection and enforcement.
- Identify any IP-related disputes that the target is currently or was previously involved in
- Ensure that the buyer has the necessary freedom-to-operate when utilizing the target’s IP and IA.
- Conduct a valuation of the IP.
Given the complexities surrounding such an endeavor, potential buyers are advised to seek professional counsel before entering into any such transaction. Contact our IP Strategy Team if you’d like to find out more about conducting an IP Due Diligence, or if you require any general IA or IP assistance.
In the meantime, watch out for part 3 of this 4 part series, where we take a closer look at how firms can utilize their existing IA to pivot their business into new products or territories, even in a post-pandemic climate.