Mergers and Acquisitions (M&A) and Intellectual Property (IP) have historically been two separate legal disciplines, seemingly separated by impenetrable walls. But with the emergence of the modern “idea economy,” the value of intellectual property in trade and its contribution to the financial stability of companies has seen a rapid increase.
IP is now valued by organisations on par with, if not higher than, actual assets. It has been demonstrated that investing in IP rights can transform a company’s commercial destiny in addition to being a lucrative financial opportunity.
M&A helps organisations increase their market opportunities, combine their resources, and consolidate their operations. Contrarily, the term “intellectual property” (IP) refers to a wide range of exclusive rights over intangible properties, including patents, trademarks, copyrights, geographical indications and appellations of origin, design rights, protection of plant varieties, traditional knowledge, and trade secrets. These are the numerous sorts of protection that the law provides on various subject-matter. Every sort of intellectual property has a unique set of rights that can only be used by the owner of that type of property. Every IP essentially establishes a monopoly on commercial use of the subject matter over which the IP right has been issued and forbids any other person or entity from doing so without the IP owner’s authorisation.This “monopoly over commercial use” carries a great deal of economic weight.
Because all businesses today own some sort of intellectual property, whether registered or not, there is a connection between IP and M&A. Therefore, some sort of IP transaction is a necessary component of any M&A deal.
In essence, mergers happen when two businesses of comparable sizes combine to establish a new organisation. These deals typically involve two organisations of comparable size that are aware of each other’s advantages in terms of boosting sales, efficiency, productivity. In many cases, the terms and conditions of a merger are reasonable and mutually acceptable, and the two companies or businesses join the new venture as equal partners.
When a company buys the majority or all of the shares of another company to take control of that target company, the transaction is known as an acquisition. This gives the acquiring company the authority to decide what to do with the acquired assets without seeking approval from the acquired company’s shareholders. Acquisition is essentially an effort made by one company to acquire a majority stake in another. Businesses buy out rivals for a variety of reasons, including cost savings, increased market share, and scalability. In an acquisition, one firm buys the other; there is no stock exchange or formation of a new company.
The term “due diligence” refers to the process of looking into matters such as party ownership, asset identification, asset appraisal, and whether the business will be advantageous to us. Due diligence is thus required before any M&A transaction because it enables the business to understand the advantages and disadvantages of any commercial activity. Due diligence on IP is crucial since, as is well known, IP serves as the primary source of a company’s asset portfolio. IP due diligence aids the business in developing new business strategies. There are certain challenges with IP due diligence, such as the fact that the process itself moves so quickly that it is challenging for the individual performing the due diligence to keep up with it even when they are an expert in due -diligence.
The Acquirer’s ability to assess the value of the Target IPs is aided by the IP due diligence process, which also aids in the identification and ownership verification of IP assets. The Acquirer can also examine third-party claims and be aware of any prior IP disputes. The IP due diligence also reveals the extent of IP protection, the territory where IP is applicable, and the duration of IP. Due diligence on IP benefits both buyers and sellers. It ensures that neither party is spending money to maintain any IP that is not being used, and it informs sellers of any potential risks or problems with IP that can impede sales.
The Volkswagen and Rolls-Royce Motor M&A deal is the most well-known instance of poor IP due diligence. Due to their carelessness with IP due diligence, Volkswagen suffered a great deal of embarrassment in this transaction. Volkswagen purchased Rolls-Royce Motor Cars for 780 million US dollars. Later, they learned that Rolls-Royce PLC, not Vickers LTD, possessed the trademark of Rolls-Royce, and that Rolls-Royce PLC had transferred the property to BMW for 66 million US dollars. While producing Rolls-Royce vehicles under licence, Volkswagen is not permitted to use the Rolls-Royce name. Later, Volkswagen struck a deal with BMW, agreeing to allow BMW to utilise Bentley.
Enhancement of the company asset portfolio: The primary source of a company asset portfolio is intellectual property. Intellectual property increases a company’s value and has the potential to boost profitability. It is quite difficult to come up with a new invention in the current market conditions, thus the company tries to merge with another company or buy another company to expand their IP portfolio. It is crucial for an acquirer to assess the target company’s IP portfolio to see if it aligns with the goals of the business.
Competitive Edge: The company’s IP gives it a competitive edge in the market. The corporation may obtain special abilities, innovations, or any secret formula through mergers and acquisitions, giving it a competitive edge in the market. The corporation is in a dominant position in the market thanks to their advantage over their rivals, and this raises the quality of their products and services, which increases sales and dividends.
Technological Transfer: Through mergers and acquisitions, it is possible to transfer technology from one company to another. The companies collaborate with one another, sharing technological secrets, business algorithms, and other information that aids both businesses in growing. The companies can take advantage of market prospects and fully utilise their intellectual property with the transfer of technology.
Diversification: Businesses can broaden their operations in several industries with the aid of mergers and acquisitions. Mergers and acquisitions aid in the diversification of the business. Diversification is a risk management technique since it reduces business risk through investment diversification, and intellectual property (IP) is the best source for boosting a company’s asset portfolio.
Growth: The primary goal of any corporate operation is business growth. In order to improve sales and optimize profit, IP plays a significant part in every merger and acquisition process. When one firm buys another, they also gain the other company’s intellectual property, such as patents, trademarks, and copyrights, as well as brand recognition and goodwill. Everything said enables speedy business growth.
The importance of intellectual property in mergers and acquisitions cannot be overstated. Because it is a company’s primary source of assets and its primary intangible asset, intellectual property aids in corporate growth. Therefore, it is crucial for each business to safeguard its intellectual property rights. The appropriate use of intellectual property requires extensive due diligence, and any mistakes made during this process might cost businesses millions of dollars. IP aids mergers and acquisitions in reaching all of their goals, which include diversification, growth of the firm, acquiring new skills and talents, growing their consumer base, and boosting their asset portfolio. Thus, we can say that IP plays an important role in mergers and acquisitions.