IP Valuation by xiuliliaofz

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									    “Valuation requires an intermediate
       perspective between ignorance and
       certainty, involving the exercise of
          skill, experience and judgment”
 I P

           IP Valuation Objectives

To survey the basic principles of IP
Valuation Techniques.

To develop a better appreciation for the
role of Valuation in the business and
academic environments.

To reinforce negotiation skills using
Valuation as a routine practice.

To develop and establish practical
guidelines and “Rules of Thumb” principles
for OTT licensing.
IP - a ‘Right’ or ‘Asset’ or ‘Both’ -

                      Intellectual Property (IP) refers to an
                      intellectual capital or intangible asset or an
                      innovation or an idea which may or may not
                      have a legal enforceable right. For example,
                      the legal right of a patent is valid for only 20
                      years but the technology may still be an
                      intellectual property.

                      Intellectual Property Rights (IPRs) on the
                      other hand refers to a legally enforceable
                      right. In case of a patent it authorizes the
                      patentee to prevent others from using the
                      technology for 20 years without his
                      permission. However IPR does not necessarily
                      result in to economic benefit, till it is
           Assets of Business entity

                                        Intangible Assets

Tangible Assets
                                                 Good Will

      Current                                    Trademarks
                      Cash &
                                                 Intellectual Property (IP)
     Fixed Assets
                     Property, plant,
                                                 Trade Secrets
Essentials of Recognition for Intangible Asset

        Certainty of future economic benefits

        The cost of the asset can be measured reliably
What is Value
    Value is not the price or cost, although at times they are equivalent.

    Value is all future economic benefits of ownership compressed in
    one payment.

    Value is continually changing as the future benefits increase or
    decrease with the passage of time.

    VALUE: A negotiated amount agreed by the parties.

             Seller                         Buyer
         • My Advantage           A        • Need
         • How Much to Ask        L        • Cost
         • Demand                 U        • Competition
         • Alternatives                    • Alternatives
What is Value
Determining Value is complicated

    We want to give a value to something that will take its final form and impact
    producers and consumers in the future.

    But we can understand value only in terms of today situations.

    Then we look at a valuation model that gives a present value of a future situation

The Problems
    We don’t know what will happen with the technology during the
    development period.

    We don’t know what will be the market dynamics at the time of
    market entrance.

    We don’t know how the technology will impact the producer’s

    We don’t know the future cost of money
Standards of Value

                         Fair Market Value

                         Fair Value
    Standards of Value

                         Market Value

                         Investment Value

                         Collateral Value

                         Arm's-Length Standard

                         Other Standards of Value
Premises of Value

      Highest and Best Use Criteria
      Alternative Premises of Value
       — Value in continued use, as part of a going-
        concern business enterprise
       — Value in place, but not in current use in the
        production of income
       — Value in exchange, as part of an orderly
       — Value in exchange, as part of a forced liquidation (fire sale)
 Why Value your IP?
By ascribing a value to IP and placing it on your balance sheet, your
business is more attractive to potential investors and buyers.
More specifically, if you invest the time and expense to identify and
value your IP, you will benefit by:

    Determining a better idea of the overall value of your
    Provide a tool to measure and manage your assets;
    Provide security and backing for lenders;
    Provide taxation benefits (taxation deductions); and
    Reducing the proportion of business’ net worth attributed to
    goodwill – important when selling a business.
What is IP Valuation

   It is a method/ process to leverage Intellectual
   Property to grow the business.
   To understand the potential of Intellectual
   Property, estimation of its value becomes

IP Valuation & Value of IP
  Value of IP = Price of IP

  Value of IP represents the potential current and future benefits
  to the IP user

  Price of IP represents the amount of money that ownership of
  an underlying IP would be exchanged between willing buyer and
General principles of IP Valuation

General factors
       Value defined as present value of future benefits
       derived by the owner

       Quantify future benefits and calculate present value

       Fair market value

         Highest money price prevailing

         Open unrestricted market

         Willing informed buyer and seller

         Arms length and no compulsion to transact

Purposes and Uses of IP/ Intangible Asset Valuations

         Financial Reporting
         Sale Transaction Support
         Strategic Alliances
         Infringement Damages
         Transfer Pricing
         Equity Raising
         Collateral-based Financing
The criteria for recognising IP
  To recognise, value and record your IP
       you must be able to:

     Identify your IP as a separate,
      standalone Asset;
     Sell or transfer your IP (i.e. brands
      and patents which can be sold or
     Protect your IP (this will also
      increase the value of your IP); and
     Recognise your IP as enduring in
Motivation for IP Valuation
   Traditional Bank Financing

   Angel/Venture Capital Investing


   Sale, Merger, Acquisition

   Employee Compensation, Gift


   IP Investment Holding Company
                                     Joint Ventures/Strategic Alliances
   Taxation/Transfer Pricing
                                     Capital Markets/Securitization

                                     Off-balance sheet financing
Valuation issues

  What exactly is the IP and how does the protection it affords add value to the business?

  What is the useful economic life of the IP?

  What is the strength of the IP ? Is the IP completely new, or a modification of existing IP?
  How broad are the patent claims for example?

  What is the likelihood of technological change, and what are the capital requirements for
  such change?

  Are there alternative technologies and/or competitive pressures? Are there any substitutes
  available and, if so, at what cost?

  What effect will the skills and depth of management have on the exploitation of the IP ?

  How will the market respond to the new technology? Will there be a resistance to change?
  Will there be any regulatory restrictions/difficulties?

  Are there any strategic factors at play that make the IP more valuable in the hands of the

                To understand the assets held by the organization
          1     and improve decision making, particularly in relation
                to determining future investment or development.

          2     To determine a ‘walk-away’ position in negotiations.

          3     To secure financial investment.

          4     To establish damages for infringements.

          5     For legal and accounting standards requirements.

                For taxation, particularly capital gains tax and stamp
                duty liabilities.
Benefits of value assessment
Targeted valuation of IP, technologies and products can generate significant
awareness and incremental value throughout the organization by helping
companies to:

               Choose between market opportunities;
               More effectively protect and leverage the IP portfolio and important
               technology necessary to capture innovation and future growth;
               Develop a strategy for IP development and protection that is closely
               aligned with the company’s overall strategic goals;
               Identify un-tapped value and revenue opportunities;
               Compare and select projects for the best allocation of the development
               Better utilise the IP portfolio through various commercialization
               avenues such as licensing, donation, joint ventures, divestiture, transfer
               to suppliers, set-up of subsidiaries, spin-offs, etc.
               Justify a return on investment for technology and patents;
               Reflect overall company value more accurately on financial statements.
 Identifying intangible assets
                                 Industrial Property: patents covering
                                 products or processes, TM & service marks

                                  Brands: marks, consumer goods, corporate
                                  names and identity;

                                 Copyrights: computer software,
                                 documentation of processes & business

Valuable IP Assets               Publishing Rights: magazines, books, film
                                 and music rights;

                                  Licenses: television and radio, franchises,
                                  distribution rights

Simplified Valuation Process
   Identified the source of IP
       • If outsourced, consult and seek professional Advice
       • If developed in house

    Analyse the key benefits of IP           Determine preferred to market pathway

                              Determine preferred valuation method (choose at least two)

                   Comparable            Future Income         Cost Based       Elimination
                   Benchmark                Stream                               Approach

                        Undertake market research for specific figures and compare

                              Confirmed with professional advice AND/OR test
IP Assets Valuation-Different Approach

Cost Approach:
                                                   Market Approach :
   Estimates the value of
   underlying IP asset basing on                    Based on the value of similar
   historical cost incurred in                      or comparable assets that
   developing the asset                             have been exchanged, at
                                                    arm’s length, in active
   Replacement cost                                 market.
   Reproduction cost.

                              Income Approach

           Income Approach:
           Based on the income-producing capability of underlying IP asset
              Seeks to establish the net present value (hence use of
              discounted cash flow)
Technology Life Cycle

                               Market Approach

                                                 Income Approach

             Cost Approach
                                          Increasing data availability

      Idea            Business Plan          Commercialization

The Valuation Pyramid
Any valuation exercise can be viewed as a ‘pyramid,’ where each level supports
the analysis generated on the level:

                                                         How the valuation analysis solves a business
                                                         problem or answers a specific business

                                                                 Business, legal & economic attributes

                                                                 of the IP asset are defined.


                                                                        Specific    quantification      &
                                                                        financial analysis is performed
                                                                        to generate a financial result.
          Legal          Business                    Financial

                                                                              Underlying rationale and
                                                                              key assumptions of the IP
    Purpose   Description              Premise            Standard            valuation.
Top Damage Awards for US Patent Infringement

                    Parties                      Award            Date
                                               (USD Million)
   1. Polaroid v. Eastern Kodak                    873         Jan-91
   2. Cordis v. Boston Scientific                  324         Dec-00
   3. Cordis v. Medtronic AVE                      271         Dec-00
   4. Howarth v. Steelcase                         211         Dec-96
   5. Smith International v. Hughes Tool           204         Mar-86
   6. Procter & Gamble v. Paragon Trade            178         Aug-98
   7. Exxon v. Mobil Oil                           171         Aug-98
   8. Viskase v. American National Can             164         Jul-99
   9. Hughes Aircraft v. United States             154         Jun-94
   10. 3M v. Johnson & Johnson                     129         Sep-92
Intellectual Property Valuation
  Valuation models may be broadly divided into two –

    Static models
        Estimate value of accumulated intellectual assets
        at a point in time.
         Does not differentiate temporal differences in the
         accumulated IP.
         Does not differentiate the differences among
         different categories of IA at the time of valuation.

    Dynamic models
       Take into consideration the temporal difference in
       the accumulated intellectual assets (e.g. time
       value of money and riskiness of the forecast cash
         Value investments in intangibles each at a time.
Intellectual Property Valuation

                          Projected economic income of underlying
                          IP Economic life
   Discounted Cash Flow

                          Discounting the projected economic
                          income of the discrete projection period

                          PV arrived at by the use of discount
IP Valuation Concept

Market Value – Comparative
Price in Market                                 Fair Value

                   IP Valuation Concept

     Tax Value                            Owner’s Value –
                                          Proprietor’s View
Brand vs. Trademark
                   A brand is more than a trademark or a logo. It is a trust mark.

                  The brand value is the intellectual capital or the intangible
                  assets which is built over a period of time for the established
                  quality and goodwill

                  A trademark is an IPR which authorises right of infringement
                  to protect the brand value

Market Capitalization vs. Book Value
                  Stock Market Valuation on the basis of price-earning ratio and
                  earning per share is one of the major indication of the
                  valuation of the enterprise which as a major content of
                  intangible assets, in case of technology companies and for
                  those which has established goodwill and brands. If we reduce
                  the book value from such market capitalization, we arrive at
                  the value of intangible assets. We can adjust it for market
                  volatility on certain basis.
Non – Performing IP Assets
 For-profit companies that own thousands of
 unused and unlicensed IP assets are the norm.
 To license out the unused IP assets, just as one
 would any other non-performing asset.

 They actually have a negative cash flow,
 because the company must pay their annual
 patent maintenance fees.

                              Time Period
                                    Economic Life - Product Life Cycle
                                                        — Discontinuous Innovation
                                                        — Congruent Innovation
                                    Economic Life - Technological Obsolescence
                                    Economic Life - Functional Obsolescence
                                    Legislated/Statutory Life
                                    Contractual Life
IP Valuation by ITAG

        IP Mining
        Recording and developing IP portfolio
        Valuing portfolio with utmost care and prudency
        Periodic review of portfolio to determine its
        current and future potential
        Enlightenment of the under exploited assets
   Valuation is not a science, but an external based on
    heterogeneous information pertaining IP, product and
    business project.
   The benefit dramatically, however, by the input data and the
    scientific methodologies.
   Because of the increasing importance company’s valuation,
    turning ideas and innovation profit is and will continue to be
    the biggest and the greatest reward of companies information
   Understanding the affecting value favors the best allocation of
    fuels sound strategic decision making.

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