There was a time, not so long ago, when tangible assets comprised the vast majority of a company’s total value. A business’ equipment, real estate and other holdings were indeed its strongest suits in securing access to working capital and ensuring liquidity. While this remains the case today for most small- and medium-sized companies, we find that among large corporations, intangible assets, including intellectual property (IP), now hold the lion’s share of value.
While this evolution has clearly occurred on a global basis, a look at data presented in the 2019 Intangible Assets Financial Statement Impact Comparison Report, published by Aon and Ponemon Institute, and the associated charts below provide further insight into the extent of this shift in the balance of value. According to the report, 84 percent of the total value of S&P 500 companies in 2018 was attributable to intangible assets. Tangible assets comprised the remaining 16 percent.
One case in the last decade illustrates, perhaps better than any other since that time, the significance of this transition of value from tangible to intangible assets. Nortel, an early tech innovator which at its peak had a market cap of close to $300 billion, filed for bankruptcy protection in early 2009. As part of that bankruptcy proceeding, the Nortel patent portfolio was auctioned off and ultimately purchased by a consortium of six technology companies in 2011. This illustrious group included Apple, RIM, Microsoft, Sony, EMC and Ericsson. The price paid for the portfolio, which contained 6,000 patents and patent applications covering wireless, wireless 4G, data networking, optical, voice, internet, service provider, semiconductors and other patents, was astonishing to market onlookers at the time. At $4.5 billion, the final cash price was more than three times the amount of industry experts’ pre-auction estimates and far outweighed the $3.34 billion paid for all the company’s other assets and business lines combined.
Our core team at Hilco IP Merchant Banking (HIPMB) is the very same team that was brought in by Nortel prior to its bankruptcy filing to evaluate and properly value its various patents. During that exhaustive process, we determined that although the company itself was in distress at the time, its patent portfolio most certainly was not. The resulting valuation that we were able to place on that portfolio, and the supporting technical, legal and market justification for that determination, directly impacted the record sale price received at auction.
In any discussion pertaining to patents, it is essential to first understand that they are a “negative right,” meaning that as a patent owner, you have the right to exclude others from using your/your company’s proprietary innovations. Patents protect inventions and patented inventions must be unique, useful and contain full instructions on their creation. Inventors must file an application to a national Patent Office where it’s validity will be assessed by technical experts, with each nation having its own specific set of eligibility criteria. Successful applications result in a granted patent with a protective term of 20 years. A patent owner must be able to clearly demonstrate from an objective, technical engineering perspective, that another party is using its innovation and is therefore required to pay a royalty for such use. HIPMB specializes in assessing the value of patent holdings. We hold the firm opinion that these valuations, themselves, must be accompanied by a level of comprehensive technical diligence comparable in scope to that which would be applied in reverse engineering of a potential infringer’s products to validate that their implementations do, in fact, violate the subject patents.
While obtaining patents that legally establish ownership of technology is a critical first step, this is only the beginning of a company’s patent journey. All too often, businesses that aggressively seek and obtain patents, for example, are far less focused or disciplined in establishing a formal plan and executing on that plan to both maintain control of and leverage the true potential of those assets.
It has never been more essential than it is today for technology companies to commit to proactively protecting and growing their businesses by engaging in the steps that enable them to understand the full content and potential of their patent portfolios and make informed product, technology and investment decisions. Doing so can unlock the true value of these assets, revealing untapped collateral that can be used for investment in, or acquisition of, cutting edge technologies. This previously hidden value can also be put to work to generate new revenue streams via patent monetization and/or divestiture efforts. Lastly, leveraging these assets can strategically strengthen a business and expand opportunities through endeavors such as mergers, joint ventures and subsidiary creation. In our many years providing patent advisory and related services across the technology landscape, we have seen that businesses that embrace this philosophy and undertake such efforts are far better prepared to create strategies that enable them to both combat competitive threats against their patents and drive significant revenue from those assets in the future.
Consider the current COVID-19 crisis in which social distancing and lockdown requirements have impeded the profitability and growth of so many otherwise successful businesses worldwide. While companies across virtually every sector and industry continue to struggle, those with intangible IP assets such as patents and thorough portfolio monetization strategies are able to leverage those assets during this period to offset revenue loss via proactive licensing, sale, strategic alliance, as well as through infringement assertion efforts.
Companies would be well-advised to seek proven expertise in developing a comprehensive and tailored patent protection and management strategy.
Such an effort should include detailed plans for:
- managing the costs of patent development and maintenance;
- leveraging the patent portfolio to support regional and global business strategies;
- benchmarking the portfolio and patenting strategy relative to the market and competitors and;
- determining the most effective patent monetization strategy.
To be considered for engagement, firms should have proven technical analysis capabilities in areas including engineering, finance and portfolio management. Firms should also follow recognized best practices in the areas of patent mining, market analysis, standards and infringement analysis, reverse engineering and lab services.