Move IP Considerations to Front of M&A Process Or Suffer Consequences
This is a real story but the names have been changed to protect the vulnerable.
Recently a public company contacted IPVision and inquired about our ability to support their activities in mergers and acquisitions. They were surprised by the answer.
The company’s historic business was a “cash cow” whose activities take place in the “physical world.” Steady and reliable growth in an industry that is continuing to expand.
Senior Management of the company realized that the company’s physical world activities were starting to migrate to the “electronic online world.” The company needed to think strategically about using its historic business franchise strength and cash flow to position itself in this emerging growth market. The following factors were favorable for the company:
- Cash. Sufficient cash on hand and debt capacity to make “all cash” acquisitions
- Stock. Its stock price strength was well positioned for stock based acquisitions
- Target Rich Environment. A reasonable set of venture backed companies developing product and technology in the target space
- Customer Acceptance. Its historic business customer base was already looking for “electronic space” solutions due to some underlying industry and legal trends.
- Prior Good Experience. A prior acquisition in a related space had proved to be very successful from a product, profitability and growth potential prospective.
Senior Management committed sufficient resources to develop and implement this new strategy initiative. The company hired in three experienced consultants from big name consulting firms and beefed up the general counsel’s office with a M&A attorney from a major law firm. This new M&A Group working with Senior Management identified a sector of the “electronic space” to explore. They assembled a list of 10 target companies for acquisition ranging from a company with $200M+ in revenue to a startup with no revenue but interesting technology. They conducted extensive traditional first pass M&A analysis and identified the $200M revenue company (“Big Target”) as the best strategic target for the following reasons, among other:
- Revenue Level. Big Target’s $200M in trailing 12 month revenue would “move the needle” as a short run increment to the company’s $2B revenue.
- Rapid Revenue Growth. Big Target’s revenue has increased at a 35% compound rate over the past 3 years and was projected to accelerate.
- Customers. Some overlap with the company’s existing customer base but significant new customer opportunities.
- Solid Management. Big Target’s management team had worked together effectively for over 5 years and could be incented to continue on
- Accretive. The projected EPS of the combined entity was immediately accretive.
Following traditional M&A approaches it was only after the M&A Group had done its first pass due diligence that it decided to check out the intellectual property. The M&A Group contacted IPVision because one of the newly hired consultants knew of our ability to provide rapid analyses of multiple target opportunities. They did not inform us about the results of their due diligence and their interest in the $200M+ revenue company.
Two days later we met with the company and recommended from an IP viewpoint that they acquire a different one of the 10 targets - a $20m revenue company (“Smaller Target”). As identified in patent position assessment screens (IPVision’s Level 1 and Level II assessments). This company held key patents in this emerging space and had built a strategic patent portfolio. Their pending patent filings suggested significant existing and potential innovation.
The M&A Group asked “what about Big Target – there are all of these great financial and synergy aspects we identified?” We said “that may be but if you acquire Big Target now you are setting yourself up for a high risk of patent litigation that will be disruptive and in which you may not prevail at all or at an acceptable price. Consider acquiring Smaller Target first to lock up the IP rights in this space and then use that as a consideration in pricing the acquisition of Big Target”.
Morale of Story: Bring IP Considerations to the Front End of M&A
Fortunately the company had not made an offer to acquire Big Target before checking on the IP, however that happens more times that you would think. Patent analytic tools have evolved such that more extensive, time sensitive and cost effective reviews can be moved to the front end of the mergers and acquisition process. This enables a consistent, repeatable review of alternatives. You would never think about an acquisition before considering EBITDA and accretion impact – these are metrics that help a company make consistent evidence based decisions. The time has come to apply appropriate metrics to IP to identify opportunities and avoid problems.