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Due Diligence of Intellectual Property in Mergers and Acquisitions

The importance of due diligence in any merger and acquisition is important as it investigates the viability of the transaction. Intellectual property is one of the major assets that get transferred during the merger and acquisition (M&A). It is different from that of goodwill which is an intangible asset. Intellectual property can be sold independently unlike goodwill which comes as a part of the deal. Intellectual property includes patents, trademarks, copyright, trade secrets, etc. Assessment of the true value of the intellectual property or IP is important as it adds to the commercial value of the organisation.

Due diligence study on the IP in M&A is the process of analysing the various aspects of the IP that is to be acquired including its ownership, usability, competitiveness, legality, etc. Due diligence requires the expertise of a patent attorney, domain expert, financial expert, marketing executive and others depending on the type of the IP that is to be transferred. Acquisition does not mean that the other party is willing to part with the IP that is related to it, unless otherwise mentioned.

If the seller reveals his willingness to part with the IP, then the experts have to analyse the marketability of the same. The asset that is being acquired must be adaptable to the environment of the buyer. Marketability and the current development of the asset is a major determinant in deciding the value of it. The duration of the time for which the company enjoys the sole rights depends on the type of the IP the seller has to offer. For example, a patent is valid for 20 years, trademark for 10 years, but can be renewed on its expiry; copyright is valid till the lifetime of the author plus an additional 60 years, industrial design for a period of 10 years and a five year renewal, etc. The patent attorney has to make sure that the IP has been registered and identify the place of filing. For example, patent can be filed under the Indian law, US patent office, and other institutions.

Ownership of the IP has to be investigated to prevent the violation of the third party rights. The patent attorney has also to make sure that it is transferable to the buyer and that it does not have any past record or scope for future litigation. The value of the IP is determined by its environment. It is said that there are around forty factors that affect the brand value. Some of them are the technical know-how, customer expectation, economic and market conditions, government policies, etc. If the IP is time bound, the chances for renewal after the stipulated time must be evaluated. If the company that is to be acquired or merged is a foreign company, the legal experts have to study the laws that have an impact on the IP, its transfer and other related activities.

On the assurance of the viability of the IP, the cost of the asset can be calculated on the basis of the original cost after depreciation, or on the basis of the value of the sale of a similar product in the market or on the basis of the potential earnings of the asset. The cost so determined must be added to the cost for acquisition.

In short, the due diligence study has a great impact on the ownership rights and future income of the company.

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