Capturing your IP: an important source of wealth

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As intellectual property becomes an important source of wealth, how do companies value it and use it to raise and optimise capital? In troubled economic times, the focus often turns to keeping the balance sheet healthy rather than fostering innovation. But why can’t these two apparently divergent paths be combined?

Companies could be sitting on a source of capital they don’t exploit and, in some cases, don’t even realise they own: their intellectual property (IP). Simon Pearson, Lead Advisory Partner, Technology, Media and Telecoms at EY, says that large corporates quite often lose track of the IP in the business. “We’ve seen cases where as much as 65% of the IP is not being used,” he says.

IP not just relevant to high tech firms

The potential to monetise IP isn’t just linked to high-tech firms with a grip on standard essential patents (SEPs), which protect inventions that must be used to comply with a technical standard. IP has potent, but sometimes unrealised, power in a whole range of industries from big pharmaceuticals, through to leisure, entertainment and consumer products.

An example includes the recent listing of Australian in vitro fertilisation (IVF) provider Virtus - the world's first public listing of a fertility services company. IVF is Australia's largest provider, representing more than one-third of IVF cycles. Last month on 11 June, Virtus' first day on the ASX, stock closed at $6.20, up nine per cent from the $5.68 price it was bought at in the $339 million float2.

Licensing and merchandising of copyright material also has the potential to drive multi-billion dollar revenues. “Disney’s 2011 output of licensed product sales garnered US$37b in retail sales,” points out Tom Phillips, editor of Intellectual Property Magazine. “Disney is a well-known powerful protector of its own copyright.” World Bank data put the global balance of payments for royalties and license fees at US$212b in 2011. But many companies are missing out. And that’s despite the number of filings rising to record levels, topping two million for the first time in 2011.

Companies that are the most effective at exploiting their patent portfolios are more likely to have a successful IPO or be acquired in an M&A deal, according to research. “We found that companies with the strongest patent portfolios were the ones that went public or were acquired at a higher rate than those that didn’t have strong portfolios,” says Joseph Hadzima, Senior Lecturer at the Martin Trust Center for MIT Entrepreneurship. “Six out of seven of the companies that scored highest in our ratings of IP had gone public or been acquired. We were astounded it was that high.”

Determining the value of a company’s IP

Stuart Bright, Oceania Leader, Valuation & Business Modelling at Ernst & Young, says that there are three main ways in which a company can determine the value of its IP.

  1. The cost-based method

    This calculates the cost of replicating the invention. “This may be relevant where the IP is not protected, and providing you can replicate the technology without any limitations, encumbrances or restrictions.”

  2. The market-based method

    This involves looking at reference points in the market as a means of gaining a view of the value. Essentially, this is like using the sale price of the house next door to value your own home. But that’s only possible if the house next door is sold and comparable.

  3. The income-based method

    “Look at the income stream that you can generate from the IP,” says Stuart Bright. Variants of this approach are increasingly being used. These include calculating the hypothetical royalty stream that could be generated, the residual profit that would be created, litigation revenue that would come from pursuing infringements and what Stuart calls “value at risk”. “This looks not so much at the value created by owning the IP, but what value might be lost by not owning particular IP,” he explains.

Cashing in on IP

Companies looking to monetise IP face five options, says Tim Bennett, Mergers & Acquisitions Partner in Oceania - all of which have advantages, as well as drawbacks.

  1. Selling the IP – Selling your IP can harvest substantial sums. But this means that the seller loses the IP for the future.
  2. Licensing the IP - This generates a continuing revenue stream but may result in the IP reaching rival companies that could then be better placed to compete.
  3. Packaging it into a separate firm to exploit its value - This may generate both revenue streams and capital, but will require upfront financial investment and management time. One of Australia’s most famous exploiters of healthcare technology, Cochlear, was first listed after being spun out of then conglomerated Pacific Dunlop Limited - floating at $2.50 a share.
  4. Litigate to win damages from infringers - However, this poses the risk of becoming a target for counterclaims by rival companies. It can also prove expensive.
  5. Using IP as security for loans - This makes the IP work for its living as an asset, but may result in an effective loss of operational control while it is securitized.

Questions to ask yourself:

  • How does your organisation currently account for IP on the balance sheet? Are you missing opportunities to exploit the value of your IP and use it to raise and optimise capital?
  • Are you looking to list in 2013? If so, have you ensured a recent valuation of your IP has taken place? Businesses looking to list in 2013 should prepare early and move fast.

2IVF company float a winner, Greg Roberts, 11 June 2013 -