Interview with David Watnick: The importance of valuing intellectual property in pricing M&A transactions
Jeff Schmidt had the opportunity to interview David Watnick on the importance of valuing intellectual property in pricing M&A transactions. Valuing patents is an especially complex subject so we have broken our interview into several posts.
Introduction: Why establish patent value?
Jeff
In the modern economy, companies increasingly rely on their intangible assets to create value. Among these assets, patents are a very important category, particularly for companies in technology businesses or technology-enabled businesses. Our guest today, David Watnick, is an expert on valuations and particularly patent valuations. Welcome David to this call. Perhaps you should begin by introducing your background and experience along with an overview of how you look at the value of patents in a company that is thinking about selling.
David
Thank you, Jeff. I've been with CDI Global (JD Merit affiliate office in Scottsdale) for about four years. My background is in valuation. I have valued public companies since early in my career for investment banks and brokerage firms. I also spend a lot of time valuing private companies. For the past 15 years, I've been focusing on valuing patents and other intangible assets, frequently for transactions or a capital raise. Typical clients include a company about to sell their patent portfolio, or license out their patent portfolio, or sell their company, or spin off a division. In all cases, our clients need a patent valuation for pricing the transaction.
Valuing patents is very, very difficult because their value depends on what's happening in the economy as well as what's happening in the client’s specific industry. Still, patents may also relate to new industries. For example, they may involve brand new inventions. Moreover, by definition, a patent must be unique, and so it's generally difficult to compare one patent against another. This is very different than valuing tangible assets where we could find many comparable assets for which prior transaction data is available. But when you have a patent, it is a unique asset.
Because a patent such as an invention has no history and may even be in a new industry, it’s not straightforward to estimate its future value. There may not be industry studies or brokerage firm reports available for a new industry. In that case, one needs to understand a patent in depth. You must know about claims analysis and prosecution history analysis, backward and forward citation analysis, drafting analysis, specification analysis, prior art analysis, priority data analysis. In other words, you need significant details about a patent. And because patent regulations and filing systems change over time, you also have to keep current in the rules for the legal jurisdictions where patents are being filed.
If a midsize company owns some patents, it’s likely the patents are currently valued relative to that business in its existing markets. Such patents protect the company’s products and that's fine. But one should also realize patents can be more valuable if they're licensed to other companies. Why? For one thing, there's only so much a mid-size company can grow organically. If they have a licensing agreement, they might grow by 10 times. Royalty fees could grow quickly in a couple of months. Of course, you must find a licensee and then negotiate a licensing agreement. On the other hand, not all licensing works out. You don't always have executed agreements. The licensee doesn't always execute. So, there's some risk. Even when an agreement is negotiated, it takes time to integrate/adapt the technology covered by your patents, apply that to their product line, get those products out the door, get those products on the market, sell them, receive revenues from them, and remit the royalties back to you.
It could take 18 months or so before you see your first dollar of royalties, but licensing is a strategy worth considering for many companies.
This may surprise many people: patents are typically monetized through assertion, that is through litigation with “infringers”. More specifically, if an inventor wants to sell his patent, he goes to a patent broker. However, the patent broker may not want to represent that inventor unless there is the ability to assert the patent – that is, the ability to pursue infringers. The reason is because it's a clear path to generating revenue. So an intermediary such as a patent broker may think it's a more effective strategy to go after people who have already been using the patent and to seek redress.
Jeff
Successfully defending a patent also discourages “would-be Infringers” and thereby hardens the patent owner’s intellectual property defense and thereby the value of that property.
Join us on another blog as we expose our readers to more about patents and acquisitions involving intellectual property.
About CDI
CDI Global is a leader in middle-market, cross-border transactions. Our international presence, industry expertise, and market command ensure our ability to help you reach your goals. From mergers and acquisitions to divestitures and capital raising, CDI Global excels in developing custom strategies that identify the best opportunities. We guide you through each stage of the transaction process, drawing on our decades of financial prowess to identify pitfalls before they arise to ensure a smooth completion. With more than 40 offices in the major financial centers of over 30 countries we are positioned to maximize the success of cross-border transactions.
