Jeremy Mekdhansarn10 May 2010

IEOR 190G Chapter Summary

Chapter 24: Patents on Wall Street

Chapter 25: Creating Tomorrow

Chapter Summaries

Chapter 24: Patents on Wall Street

The Role of Investment Bankers

Strategic Advice

• Explores corporate strategy, M&A opportunities, and financing options

Negotiation

•Represents client in discussions between potential partnerships or acquisitions

Due Diligence

•Performs research on subject’s industry and operations in order to provide qualitative value

Valuation •Performs pro-forma analyses to provide quantitative value

Deal Structuring

•Helps structure balance of payment method to optimize capital structure

Why Some Bankers Undervalue IP

Circumvention

•Many bankers maintain the idea that all patents can be avoided in at least the short-term, making value difficult to calculate

Lack of Experience

•Many bankers lack the experience and knowledge of patent law to effectively pitch their worth

Abstraction and Priorities

•CEOs themselves often have a hard time seeing the value in patents, leaving patents low on their list of priorities

IP as a Corporate Asset and Strategic Weapon

As firms create new inventions, patents are an offensive and defensive play

Moore’s law hascaused companies

to create newinventions at an

unprecedented rate

Increase in M&A activity has allowed companies to see the

importance of acquiring patents

Competition

Pace of Innovation

Market Dynamics

Three key factors are driving the importance of IP to CEOs

General Electric’s Aggressive Patent Strategy

Whirlpool and InglisWhirlpool and Inglis

NintendoNintendo

• Created high costs for Nintendo to continue using patents• Despite technically losing the case, GE still hindered Nintendo’s operations, thereby succeeding

• Fought case for three years• Appealed case numerous times• Ultimately lost, but demonstrated it was willing to defend IP aggressively against competitors

Aggressive patent

strategies can help companie

s maximize revenue

and remain

competitive

IP and the Role of the Strategic Advisor

Determining Value and Maximizing

Cash Flows

Understanding the True Nature of

Patent

Provide Insight for Clients

Advisors help determine the profit potential of patents and can help companies explore cash flow alternatives (selling, licensing, etc.). They can also help determine the maximum or minimum purchasing price that is fair.

By understanding patents in different industries, advisors can help clients by explaining whether competitors have filed to defend the company or act aggressively in the market. This can significantly alter a company’s strategy.

This allows strategic advisors to provide better advice for the clients they serve. For many industries, where patents play a large role, neglecting to see the importance of patents can be costly for companies.

IP Value Categories

Augmenting

These assets provide new business opportunities for companies that are looking to create new revenue streams. This allows companies to grow and diversify their businesses.

These assets provide new business opportunities for companies that are looking to create new revenue streams. This allows companies to grow and diversify their businesses.

Enabling/Facilitatin

gThis category involves assets that are not absolutely essential to a company’s business to operate, but are still important and help the company. They not cripple other companies to the point of monopolization.

This category involves assets that are not absolutely essential to a company’s business to operate, but are still important and help the company. They not cripple other companies to the point of monopolization.

Getting/Must Have

These assets are absolutely critical to an organization. They give the company a competitive advantage, protect, and allow it to thrive in the market. Key example is Coca-cola’s secret ingredient.

These assets are absolutely critical to an organization. They give the company a competitive advantage, protect, and allow it to thrive in the market. Key example is Coca-cola’s secret ingredient.

Not Relevant/

Cash Value

These are assets that a company finds unrelated to its core offering or is not looking to monetize off of. It may be looking to sell or license the patent’s use.

These are assets that a company finds unrelated to its core offering or is not looking to monetize off of. It may be looking to sell or license the patent’s use.

Defensive

These patents help protect companies from other companies that might file law suits in order to “freeze the market.”

These patents help protect companies from other companies that might file law suits in order to “freeze the market.”

Valuing Patents for Clients

The chart indicates qualitative reasons for the price variation of a Norwegian grammar scanner

Cost Benefit Analysis of Various Options

Chart performs an analysis of possible dollar outcomes for infringement and purchasing a license

Chapter 25: Creating Tomorrow

Patents and Corporate Strategy

Offensive Strategy

Defensive Strategy

Growth Opportunities

Patents

• Allows firm to gain market share• Creates cash flow alternatives such as selling and licensing

• Allows firm to protect operations against competitors• Allows firm to deplete competitor cash flows over litigation

• Allows firm to freely experiment with new products and ideas

International Investors and Patent Policies

The largest companies in the world operate in multiple countries, where different patent laws exist. Each of these companies make numerous acquisitions each year.

International investors are constantly looking for companies that can yield the highest return for their investment.

Gaining patents internationally makes these companies attractive in the eyes of larger companies and investors

Experts and Intermediaries

Experts and Intermediaries

Company A

Company B

Company C

Many companies collect patents and create portfolios without true understanding of their value or usefulness

Due to high profile cases including TiVo vs. Dish/Echostar and GE vs. Whirlpool, companies are now beginning to understand their importance

Those with expert knowledge of patent law and intermediaries that can help manage the process will be increasingly valuable

Many companies collect patents and create portfolios without true understanding of their value or usefulness

Due to high profile cases including TiVo vs. Dish/Echostar and GE vs. Whirlpool, companies are now beginning to understand their importance

Those with expert knowledge of patent law and intermediaries that can help manage the process will be increasingly valuable

Countries that Foster Innovation

Chart illustrates the percentage of research (papers and citations)

Patents and Corporate Valuations

Chart illustrates the percentage of patents for yearly sales. As revenue influences key multiples for valuation, patents

play an important role

Positioning and Partnerships

Chart illustrates the positioning strategy that firms choose base off their relative patent phases