-An article by Lavanya Goinka

As an outcome of M&A, two or more companies are combined into a single entity. This process does not result in any new investments. However, the parties associated in such a transaction exchange shares. In most cases, the buyer corporation, which maintains its unique identity, is the one that endures, while the seller company dies.

It is accurate to refer to a merger as an amalgamation of all of the assets and liabilities from one firm being passed on to the recipient entity in exchange for payment through the transferee company’s equity capital or debt obligations or funds. 

Mergers and acquisitions

Two or more companies are consolidated into a single entity as a result of M&A. There are no new investments as a result of this process. The parties involved in such a transaction, however, trade shares. The purchasing company, which retains its distinct identity, is usually the one that survives, while the seller company dies.

A merger is defined as the transfer of all of the assets and liabilities of one company to the recipient entity in exchange for payment using the transferee company’s equity capital, debt obligations, or finances. On the other side, the purpose of an acquisition is to secure a majority interest in the acquired company’s stock. A deal can be struck with people who have a significant position in the company’s management, stocks can be bought on the open market or privately, or a takeover proposal can be made to the supervisory board of stakeholders.

A takeover differs from a merger when it comes to corporate purchases. Takeovers take less time to accomplish since the acquirer determines the maximum price that may be offered to the target company, and the target company must agree to cooperate in order for the takeover to be successful. When it comes to the payment of consideration, there is a distinction between a merger and a takeover. Mergers and acquisitions might be regarded identical operations because each set of stockholders loses executive authority in both cases. A proposal’s objective portfolio can be classified as vertical, horizontal, circular, or conglomerate business combinations.

Through September 30th, 2019, the pharmaceutical industry was involved in two of the top three large M&A transactions. AbbVie and Allergan were valued at $86.3 billion when they merged. The US$ 89.5 billion transaction between Bristol-Myers Squibb and Celgene was the most costly.

The merger of United Technologies and Raytheon, valued at US$ 88.9 billion, was the second-largest acquisition. Despite their military beginnings, these companies are technology-driven. These acquisitions are mostly focused on intellectual property (IP).

Intellectual Property as a Major Factor

Given the importance of intellectual property dealings in mergers and acquisitions, both in terms of quantity and valuation, insights into the function of intellectual property rights in mergers and acquisitions are crucial. It’s worth noting that mergers and acquisitions take place throughout both boom and bust periods. The mergers and acquisitions operations that led to a large share of the global economy in the mid to late 1990s showed the increasing side of the issue. There has been a significant increase in the number of mergers and acquisitions involving intellectual property.

An acquirer’s principal purpose is to maximise the value of its stockholders, and taking IP into account is a crucial aspect of that strategy. As the 5th wave of mergers advanced, the number of cross-border mergers increased dramatically. Mergers and acquisitions were driven largely by the opportunity to combine intangible assets. In addition, reports claim that the value of intangible assets is higher for companies planning to expand their industry across the border, particularly for those companies.

The Grand Metropolitan of Great Britain -Pilsbury deal is one of the earliest examples of a brand value-driven M&A transaction. “In order to acquire well-known trademarks such as Burger King and Haagen-Dazs, the Grand Metropolitan of Great Britain agreed to buy Pillsbury Company for $5.7 billion.” The amount of effort and money required to develop a brand with such high values drove this deal.” Companies have realised the importance of concentrating their expansion efforts on companies having a stronger intellectual property portfolio.

There was a surge in investment in developing and purchasing intellectual property in response to assurances that IP reforms were taking place around the world as an international mandate to meet the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement. Despite the increased focus on intellectual property (IP), firms continue to overlook or fail to adequately analyse their targets’ IP assets. When determining the entire worth of its corporate asset for negotiations, the target firm may neglect the value of its intellectual property (IP) assets. Despite the fact that the situation has improved over time, intangible assets continue to be devalued.

How IP drives mergers and acquisitions

Companies are increasingly focusing on developing technology capabilities to be competitive in today’s economic landscape. Technological advancement is a two-way street. As a result, a corporation may produce better products and give better services. Another advantage is that organisations are shielded from cyber threats and the potential for interruption. In light of this, intellectual property rights have arisen as a critical consideration in the acquisition of technological companies. Industry sectors that heavily rely on intellectual property include media, health, and telecommunications (IP).

IP-driven M&A transactions are on the rise.

Mergers and acquisitions are one of the most prevalent ways to expand a company’s business (M&A). This could be accomplished by acquiring a competitor’s intellectual property (IP). Intellectual property (IP) assets are incredibly valuable in today’s corporate world, as previously said, and a strong IP portfolio is now a requirement for success. To deal with the growing rivalry in the technology sector, a strategy is required. To resist hostile attempts by Microsoft, Apple, and other Android competitors, Google had to buy Motorola Mobility in 2012.

Similarly, companies in IP-intensive industries commonly employ mergers and acquisitions (M&A) to strengthen their IP portfolios in order to remain competitive. Will IP strengthening have an effect on the role of IP-driven M&A? This query must be addressed. When a country’s IPR system is stronger, the chances of cross-border and domestic M&A involving high-tech companies increase.

Evaluation of Intellectual Property

Intellectual property must be able to be evaluated separately of the rest of a company’s assets, and even sold if it is. To separate it from other assets in the case of a business transaction or to be evaluated in its own right as an organically developed asset, intellectual property must be handled as a “stand-alone” asset.

Even though intellectual property valuations are required in a variety of situations, certain requirements remain constant, such as the asset’s ability to be sold outright or licenced, the need for legal protection to establish the strength of any vested interest in it and provide a way to transfer or assign the asset, and finally, the asset’s resilience to withstand loss.

Because goodwill must always be amortised, goodwill obtained through acquisition can be lowered, but brand value can be preserved in the balance sheet, providing a more realistic depiction of capitalization, which is the sole criterion for intellectual property valuation.

To arrive at a fair price in mergers and acquisitions, both the buyer and the seller must understand and analyse their genuine worth. A valuation report does more than just show the worth; it also describes how the value was established, including all assumptions, which provides true insight and is extremely valuable to the buyer.

The value of intellectual property assets is frequently essential to the success of mergers and acquisitions involving major intellectual property assets. The valuation of intellectual property provides for the proper allocation of value to intellectual property or other readily identifiable intangible assets, as well as improving the overall appearance of a balance sheet and raising net asset per share.

Due Diligence is Required

It is a legal mistake to assume that IP rights are immediately transferred when one company buys another. General warranties and assurances may not meet the concerns of intellectual property owners. In terms of intellectual property, transactions involving private IT enterprises present special issues (IP). Private companies’ intellectual property (IP) rights may not be publicly available in some situations. As a result, before purchasing a company’s intellectual property rights, the buyer must conduct extensive legal research.