Using IP to Achieve Your Business Strategy

Serena TierneyWragge & Co

IP from a business perspective• IP is a valuable financial asset for many businesses – much greater

proportion of assets than was the case historically • Businesses with good IP management outperform their competitors by up

to 30%

• IP assets are often not identified or valued, thus– under-utilised as possible collateral/security – or to support pension

obligations– effectiveness of internal investment priorities cannot be assessed – performance targets may be set too low – or high– assets may be sold at too low a price– may be fragmented across a group, reducing their value – enforceability may be compromised– tax risks may not be identified in time – holding structure may reduce value achievable in an insolvency

Changing environment for intangible assets – ‘… and goodwill…’ no longer good enough

• Intangible assets subject to far more attention by regulators - consequence of Enron scandal in USA

• Accounting standards are now tighter: IFRS 3 and EU equivalents

• Corporate governance requirements have been introduced: Sarbanes Oxley in US; best practice in EU

• Tax authorities have spotted the opportunities• No longer possible to ignore management of

intangible assets

A new focus for IP – secured lending

• International Trade Rules – UNCITRAL guide to secured lending – IP annex– modernisation and harmonisation of rules on international business:

new rules to facilitate use of IP assets as security for lending on both domestic and international basis

“The Guide is based on the premise that sound secured transactions laws can have significant economic benefits for States that adopt them, including attracting credit from domestic and foreign lenders and other credit providers, promoting the development and growth of domestic businesses (in particular small and medium-sized enterprises) and generally increasing trade.”

• ISO –Brand valuation standard under development- Basic requirements for methods of monetary brand valuation ISO/DISS 10668; also patent valuation standard under development

IP strategy starts at the top

– IP strategy is integral part of business strategy

–Align IP policy to business objectives

–Need buy-in from CEO / COO / CFO

How do you get the CEO’s attention?

• Intangible assets are 50% -70% overall value of company – efficient management essential to best in class performance

• Corporate governance • Financial reporting compliance• Impact on corporate tax bill• Provide funding opportunities• Strategic advantage in M&A

Most of the value of listed companies is intangible assets

• 2003 study by PwC showed that intangible assets made up 74% of the average purchase price of companies acquired in that year

• Market capitalisation of FTSE 100 on August 31st 2007 was 3 times book value*

* Deloittes

What are intangible assets?

• Generally-accepted categories include those relating to different operational functions of the business. Many are not formal IP rights but are essential supports for those rights.

Efficient management essential• Well-managed technology or brands and customer

relationships are principal drivers of corporate value• Failure to identify and understand these assets risks:– Loss of confidence by investors and funders/Vulnerability

to takeover – Investment on IP protection and enforcement may be

misdirected– Poor market return – Setting performance targets too low/inability to achieve

high performance delivery– Poor strategic decisions on internal investment priorities– Selling assets at too low a value

An under-valued brand

• In 1996, Allied Domecq sold its ‘Plymouth Gin’ brand to a group of investors for a £9m

• The investors put resources into reviving the brand• In 2001, it had become the UK’s best-selling premium

gin brand and they sold a 50% interest in it for £20m• Allied Domecq missed out on the opportunity to

make a far better return on their investment

Corporate governance• Sarbanes Oxley – US business operations

Companies need to recognize any transactions that may impact intangible assets, establish a process to value them, and implement an adequate control system. They must find the relationship between the company's intangibles and its financial outcome.

• EU corporate governance requirementsMany EU companies have business operations in the US and have to comply with Sarbanes Oxley. As a result, best practice in Europe follows the same principles and is increasingly expected by investors and lenders.

Financial reporting compliance

• International Accounting Standard – IFRS3– Requires companies to value all acquired intangible assets

for their balance sheets. – Any impairment to those assets must be stated each year

in the company’s annual report– Brands, technology and other intangible assets must be

valued by a company independent of the business and auditors

• Equivalent standards are under consideration or have been adopted in many other countries

IP impacts the corporate tax bill

• Specially favourable taxation rules in many jurisdictions– R&D tax credits– Low tax rates on IP in e.g. Republic of Ireland;

Luxembourg; Netherlands• BUT BEWARE - there are also risks of

increased tax bills – Withholding taxes on royalty income – may be

relieved by double taxation treaties– Transfer pricing rules on intra-group use of IP

Strategic advantage in M&A

• Understanding value of intangible assets enables management to appreciate and negotiate correct value for company– Can save embarrassment and loss of confidence

such as when eBay had to write off $1.4bn of $2.6bn investment in Skype*

• It can help in planning future expansion by identifying suitable technology for acquisition

*Wall Street Journal 3rd October 2007

Designing a strategy for IP as a financial asset

• IP strategy reinforces overall strategy – different at different stages of the company’s development– Establish a new market?– Become a significant player in an existing market?– Develop your market share vis-à-vis your competitors?– Maintain your market share in a mature market?– Build your company by organic growth?– Build your company by acquiring others?– Protect your company from acquisition by others?

Components of an intangible assets strategy - checklist

• Board involvement – strategy for use and development of IP

• Exploitation strategy• IP protection strategy• IP enforcement strategy• Intellectual assets management processes• Tax strategy• Finance strategy• M&A strategy

Conclusion

• Identifying, valuing and managing IP as a financial asset enables– improved company performance– reduced tax risk– new funding opportunities