Firmex Harvesting Intangible Assets
Transcript of Firmex Harvesting Intangible Assets
©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 1
Firmex Webinar Series
May 22nd, 2012
1:00p.m. to 2:00p.m.
Andrew J. Sherman, Esq.
Jones Day
51 Louisiana Avenue, N.W.
Washington, D.C. 20001-2113
202-879-3686
Harvesting Intangible AssetsUncover Hidden Revenue in Your Company’s Intellectual Property
@Firmex, #FirmexMC
©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 2
About FirmexFirmex is focused on providing the best virtual data room
solution for managing corporate transactions and financial
compliance
Who uses Firmex?
• Firmex community includes
over 200,00 users worldwide
• Conducted over 10,000 deals
in the last 18 months
Why offer an M&A Master Class?
• As part of our value-added service, we believe it is important
to offer educational resources to our expanding community
Joel LessemCEOFirmex
©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 3
Andrew J. ShermanMr. Sherman is a partner in the Washington, D.C. office of Jones Day with over 2,700 lawyers worldwide.
He is the author of 23 books on business growth, capital formation and the leveraging of intellectual
property. His twenty-second (22rd) book, Harvesting Intangible Assets, Uncover Hidden Revenue in Your
Company’s Intellectual Property, (AMACOM) was published in October of 2011.
Other recent titles include the best-selling Mergers and Acquisitions from A to Z, third edition was
published by AMACOM in 2010. He is also the author of the 2nd edition of the Due Diligence Strategies
and Tactics, which was published in the Spring of 2010. His Twenty-third book Essays on Governance,
will be published June of 2012.
He has appeared as a guest and a commentator on all of the major television networks as well as
CNBC’s “Power Lunch,” CNN’s “Day Watch,” CNNfn’s “For Entrepreneurs Only,” USA Network’s “First
Business,” and Bloomberg’s “Small Business Weekly.” He has appeared on numerous regional and local
television broadcasts as well as national and local radio interviews for National Public Radio (NPR),
Business News Network (BNN), Bloomberg Radio, AP Radio Network, Voice of America, Talk America
Radio Network and the USA Radio Network, as a resource on capital formation, entrepreneurship and
technology development.
He has served as a top-rated Adjunct Professor in the Masters of Business Administration (MBA)
programs at the University of Maryland for 23 years and at Georgetown University for 15 years where he
teaches courses on business growth strategy.
He has served as General Counsel to the Young Entrepreneurs’ Organization (YEO) since 1987. In 2003,
Fortune magazine named him one of the Top Ten Minds in Entrepreneurship and in February of 2006, Inc.
magazine named him one of the all-time champions and supporters of entrepreneurship.
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Introduction:
Challenges, Opportunities, Myths
and Call to Action
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The Risks and Challenges of the
Intangible Asset Class
• The markets have trouble understanding that which they can’t touch or feel – yet the
paradigm shift continues at a rapid pace driven by technology and social media
• Investors have not figured out yet how to properly value intangibles, banks have not yet
figured out how to lend against intangibles as collateral and the accounting profession
has not yet figured out how to treat these assets properly on financial statements (Lev)
(The Extinction of Goodwill)
• Companies of all sizes and types, universities, governments, NGO’s, trade associations
don’t know how to properly manage these assets nor do they have systems and
strategies in place to drive stakeholder value, new business models, markets and profit
centers (a crisis of strategy, systems, governance and leadership) (AOL)
• So … our economy is increasingly being driven by a vehicle that nobody knows how to
properly drive and which has no clear path forward….
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The Opportunities
• The increasing strategic importance of intangible assets in our society as
drivers of shareholders value
• Trillions of dollars worth of intangible assets already exist and are waiting to
be harvested to foster innovation, economic growth, productivity and job
creation on a global basis (but some will rot on the vine or spoil if not harvested
on a timely basis) (the Dangerous Assumptions of Complacency and RITA)
• Even a modest effort can create tangible and measurable results (“P&G’s $3
billion sideline” WSJ March 20, 2012)
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The Opportunities (Cont’d)
• Intangible assets are becoming the premier driver of business strategy
and M&A (Google® buys $12.7b of Motorola® patents)
• The capital efficiency of most intangible asset harvesting strategies and
the access to the credit/equity markets for companies of all sizes and types
as the financial markets better understand the value and strategic
importance of this asset class will be a key driver of growth and profitable
margins
• Uptick in patent litigation and trolls (over 2,800 patent infringement
lawsuits in 2010 – doubled in 10+ years)
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The Myths
• It’s not just about money (it’s about attitude/culture/passion/ time
management) (The Tao of Steve Jobs)
• It’s not just about patents (brand equity, systems, know-
how, processes, channels, relationships, databases, best
practices, culture, governance, etc. are all critical strategic intangible assets
that drive shareholder value)
• It’s not just about break through innovation (most intangible assets offer
pathways to incremental opportunity)
• It’s not just about the private sector (look at the AUTM ratios and upside
potential, governments, trade associations, etc.)
• It’s not just about economic reward (the advancement of society, culture, even
our ability to co-exist relies on a human race that wants to innovate for psychic
reward, peer recognition, career accomplishment, legacy, etc.)
WebEx CLE Verification Code: 051512
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Some Insights From One of the World’s
Greatest Innovators
“Innovation has nothing to do with how many R&D dollars you
have. When Apple came up with the Mac, IBM was spending at
least 100 times more on R&D. It’s not about money. It’s about the
people you have, how you’re led, and how much you get it.”
-- Steve Jobs
RIP – 10/5/11
1. Do What You Love (Passion is everything)
2. Put A Dent In The Universe
(How will you define your legacy?)
3.Kick Start Your Brain
(What is the definition of insanity?)
4. Sell Dreams. Not Products
(Understand what your customers truly want)
5.Say No To 1000 Things
(Discipline. Rigor. Focus. Screens and Filters. Prioritize. VC
Model.)
6.Create Insanely Great Customer Experiences and Master the
Message
(Define and build your brand)
7.Inspire Evangelists
(No man is an island)
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Key Economic Trends and
Intangible Assets
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The Shift From a Tangible Asset-Driven Economy
to an Intangible-Driven Market is Well Under Way
Source: Ocean Tomo
Intangibles information
gap
Intangible book value
Tangible book value
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The Shift Is Taking Place In Multiple Industries
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Energy
Materials
Industrials
Consumer Disc
retionary
Consumer Staples
Health Care
Financials
Telecommunications S
ervices
Informatio
n TechnologyUtili
ties
Intangible Value as a % of Total Market Capitalization
by Sector
1975
2005
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Source: Ocean Tomo
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Intangibles +/- 70% in M&A
Ernst & Young: Acquisition Accounting – What’s Next for You? (global data from 2007).
Tangible, 30%
Intangible, 23%
Goodwill, 47%
…another version of the intangibles
information gap
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Here’s What’s Really Happening
15
Source: Corrado and Hulten (2010). Last point plotted is 2007.http://www.conference-board.org/data/intangibles
.02
.04
.06
.08
.10
.12
.14
.16
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003
Percent of NFB output
Intangible
Tangible
Intangible capital
• Computerized information
– Software
– Databases
• Innovative property
– R&D, broadly defined
– Copyrights and licenses
– Designs
• Economic competencies
– Marketing and branding
– Strategic firm practices
Intangible vs. tangible investment rate
rises over time in the United States
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This Investment Created a New
(albeit invisible*) Kind of Capital
16
Total Corporate
Value
Financial Capital
Tangible Capital
IntangibleCapital
*not on the balance sheet
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It’s about
knowledge
assets
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Understanding Intangibles
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Intangible Assets
• The drivers of shareholder value that we can’t touch or feel
• Assets that transcend the four buckets of intellectual property law
• Assets that transcend the definition of goodwill and traditional
balance sheet accounting
• Assets that all companies of all sizes and all industries have access
to, but rarely fully engage
WebEx CLE Verification Code: 051512
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Types of Intangible Assets &
Intellectual Property
Cultural Assets
• Leadership and Governance
• Organizational Norms and Habits
• Trust and Integrity
• Mission, Vision and Values
• Communication and Goal-setting
• Accountability
• Transparency
• Reward and Compensation Systems
• Decision-making Systems
Human Assets
• Investment in the advancement and
interchangeability of workforce
(career advancement)
• Skill expertise of workforce
(competence and experience)
• Special
certifications, awards, security
clearances, etc.
• Functionality and performance of
teams
• Commitment, motivation, attitude
and loyalty
• Problem solving skills
• Creativity
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Types of Intangible Assets &
Intellectual Property (Cont’d)
Relationship Assets
• Corporate reputation and external/internal
brand image perception
• Status, strength and influence over channel
partner relationships
(VAR’s, dealers, distributors, wholesalers, f
ranchisees)
• Vendor relationships
• Customer relationships
• Investor/banking relationships
• JV and Alliance Partners
• Sales, Marketing and Branding Strategies
• Customer Relationship Management
Systems
Practices and Routines Assets
• Know-how and show-how (codified in
manuals and informal procedures and
tacit rules on workplans)
• Systems and processes
• Information transmission, flow and
management
• Knowledge, management and capture of
best practices
• Training systems
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Branches of Intellectual
Property Law
Trademarks &
BrandsCopyrights
Trade
Secrets
Trade
Dress
IP
Patents
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Evolving Strategic Views Towards
Intellectual Assets (IA)
Traditional
View
Enhance the company’s competitive advantage and strengthen its ability to defend
its competitive position in the marketplace (IA as a barrier to entry and as a shield
to protect market share) (reactive and passive approach)
Current
View
Should not be used merely for defensive purposes but should also be viewed as an
important asset and profit center which is capable of being monetized and
generating value through licensing fees and other channels and strategies,
provided that time and resources are devoted to uncovering these opportunities
(especially dormant IA assets which do not currently serve at the heart of the
company's current core competencies or focus) (proactive/systemic approach)
Future
View
Premiere drivers of business strategy within the company and encompass human
capital, structural/organizational capital and customer/relationship capital. IAM
systems need to be built and continuously improved to ensure that IA assets are
used to protect and defend the company's strategic position in domestic and global
markets and to create new markets, distribution channels and revenue streams in a
capital efficient manner to maximize shareholder value (core focus/strategic
approach)
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Why are so many companies typically so
bad at leveraging their intellectual capital?
• Lack the time (too busy)
• Lack the desire (too lazy)
• Lack the skills/expertise/systems (too ignorant or disorganized)
• Lack the vision (too focused on their niche)
• Lack the resources (too capital-constrained)
• Lack the leadership (too thin at the top)
• Lack the market (too focused on technical excellence)
• Lack the demand (clients do not require innovation or value if in the delivery services)
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Intellectual Asset Management (IAM)
(The IP Discovery, Management and
Mining Process)
• IAM systems facilitate collaboration and help break down silos in communications regarding new product development, the harvesting of intellectual assets and provides training to employees at all levels on the importance of the protection and leveraging of intellectual property.
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Reviewing Current IAM Practices
• What is the real commitment to R&D and innovation at all levels within the company? Are strategies and budgets focused only on “home runs” or “singles and doubles?”
• What IAM systems, procedures and teams are in place now?
• How and when were these systems developed? Are they obsolete or no longer consistent with the company’s current strengths, focus or growth objectives?
• Who is responsible/accountable for managing these systems within the company? Who is empowered to make decisions as to which projects will move forward and which will not?
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Reviewing Current IAM Practices
(Cont’d)
• What are the ideas/technology harvesting, filters and procedures for innovation decisional analysis (as to whether to move forward/budget allocation/timetable, etc.) currently in place? How does information about creative new ideas flow within your company? Where does it start? Where does it end?
• Is the strategy and the process for harvesting and leveraging intellectual assets more reactive or proactive?
• What are the real or perceived internal (politics, red tape, turfmanship, budgeting processes, organizational structure) and/or external (market conditions, state of the art moving quickly, competitor's strategies, etc.) silos, barriers and hurdles that stand in the way of better IAM practices and procedures?
• What can be done to remove or reduce those barriers?
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IAM System Goals
• Catalogue and manage the inventory and status of the company’s proprietary and intangible assets
• Use of technology (software, intranet, telecommunications, IM, etc.) to encourage and support communication and data-sharing about new intra-company and industry-wide innovation and intellectual property
• Internal processes, filters (including resource allocation) and decision-making systems for intellectual asset development and harvesting
• Foster innovation which strengthens customer relationships and builds shareholder value
• Open-ended brainstorming on new applications and value-added improvements to existing products, services and technologies
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IAM System Goals (Cont’d)
• Roles and accountability for creating, implementing and enforcing IAM system standards (internally and externally)
• Management of strategic interdependent relationships
• Determining how IP assets will be owned (holding companies, tax issues, etc.)
• Analysis and implementation of strategies to leverage and monetize these assets
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IAM System Goals (Cont’d)
• Defending what you own via IP litigation and enforcement (including licensing)
• Defending claims of infringement by others
• Identifying opportunities for “licensing in”
• Periodic “pruning” of dormant IP assets
• Viability/Staleness/Obsolescence
• Too far away from current core focus
• (Sale/Licensing/JV’s/Donation)
• Reducing costs of R&D/Patent maintenance and filing costs
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Intellectual Assets Drive Growth
Strategies and Generate Revenues
• Spin-off new companies
• Joint ventures, strategic
partnerships & alliances
• Technology & software licensing
• Outright sale of new technology
• Co-branding
• Franchising
• Enter new markets
• Develop new products
• Brand-extension licensing
• Technology transfer
• Cooperatives, consortiums,
federations
• Training & consulting services
• International expansion
• Government contracts
Possible Market Opportunities
and Revenue Sources
• Patents
• Trademarks
• Copyrights
• Trade dress & trade secrets
• Distribution channels
• Show-how & know-how
• Databases & customer info.
• Software & proprietary algorithms
• Customer & partnerships
• Proprietary processes & systems
• Knowledge & technical workers
• Exclusive licenses/access to
technology
Protectable
Intellectual Property
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Questions & Answers
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It used to be that the fate of private companies, and the entrepreneurs and teams who built them, rose and fell based on their “connections.” Did the founder know the right people? Did the right buyers know they even existed? Were they in the right place at the right time? That undemocratic and completely unscientific way of sourcing, managing and executing financial transactions has led to tens of thousands of companies suffering from missed opportunities and poor outcomes.
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