KUALA LUMPUR, Nov 10 — Whether one is a seller, buyer, licensor, licensee, lender or borrower it is critical to understand the drivers of intellectual property value. This is because market value is the keystone in all of these transactions. Intellectual property is uniquely different from any other type of property.
In 2012, a group of tech heavyweights, including Apple, Google and Facebook joined forces to purchase approximately 1,100 digital imaging and processing patents from Eastman Kodak for US$525 million (RM2.2 billion).
In 2011, Google bought Motorola Mobility, with its 17,000 patents for US$12.5 billion to protect its Android mobile operating systems from rivals.
Also the following year, Microsoft acquired 800 patents from AOL for more than US$1 billion, only to turn around and sell 70 per cent of them to Facebook for US$550 million in cash. These big deals have set the scene for intellectual property valuations. But how are companies coming up with these eye-popping valuations?
IP valuation is one of the buzzwords of intellectual property management and seems to be raising eyebrows among the Malaysian business landscape when a deal is being negotiated for licensing or investment.
There are numerous good reasons why businesses should audit and seek to value their IP assets. IP is vitally important to businesses. Some still do not recognise the fact that their trademarks, designs, and other IP assets are as valuable as their premises or stock.
For many businesses, IP constitutes their single most valuable asset and could be used as a lever to secure finance for company growth. IP valuation improves the accuracy of a business’s worth.
IP assets form collateral which can also be bought, licensed and sold. Knowing how much each trademark, patent or design is worth, alone and as part of the whole, helps businesses with their valuation (funding, transactions, joint ventures, mergers and acquisitions, bankruptcy).
In business transactions, the respective parties must know the value of IP assets if they are to be traded. If bankruptcy or reorganisation occurs, assessment of the business’s value is required and this should include the value of IP assets and the assessment of the impact of proposed re-organisation plans.
If IP assets are to be used for raising finance then an accurate valuation will be required to demonstrate to the lender the value, how it is secured and supports the future cash flow of the business.
Discerning the value of IP is not an easy task. How much is a brand name worth after years of marketing? Does a patent protect a high value unique selling point of a product or is it redundant? A well-known brand or a vital patent can be the life blood of a business and losing IP protection for these can drastically reduce its value.
Not all IP is valuable, unless they help to create, maintain or increase cash flow they may have no real value. Moreover, intellectual property rights change in value for a variety of reasons. A patent may, for example, begin its life as a unique solution to a problem, but in time, other solutions to the problem may be found thus reducing its worth.
Alternatively, with successful marketing of an effective product a great patent can become a world beater. Trademarks generally gain value as they become better known.
The value of IPRs depends on the circumstances at the given time and place. It is important to look at the nature of the intellectual property right, the purpose for which they will be used, the potential market for them and their competitors.
IP valuation methodologies
There are a number of ways to value IP rights. They all have their limitations and no method is appropriate in every case. The stage of development of the IPRs, the availability of information and the aim of the valuation all have a bearing on the method used.
One of the most difficult aspects of IP valuation is hiring a valuation consultant with the competence to perform valuation assignment with a reasonable degree of probability within the valuation industry.
It is imperative for the valuation consultant to have proper foundation to complete the valuation assignment, or the valuation consultant’s testimony may receive no weight in the matter.
For IP valuation assignments, the valuation consultant will either have a relevant background, or will use a subject matter expert well versed in the art to complete the required valuation development.
When a valuation consultant uses a subject matter expert, the valuation consultant must consider their credentials. The valuation consultant must also evaluate how those credentials relate to the valuation effort.
For example, if a valuation consultant is valuing embedded software, the valuation consultant analyst is not demonstrating competence if the valuation consultant hires a subject matter expert that has spent a career installing and configuring accounting packages or writing business software, because the development considerations for those projects are materially different from embedded software projects.
The subject matter expert should have relevant and substantial experience in the valuation assignment IP to perform the valuation competently.
As Malaysia’s economy becomes more innovation-driven, the relevant authorities are stepping up efforts to help local companies and entrepreneurs realise that IP is not just about protection of their legal rights; it is also about using it to grow their business.
They also understand that in reality most companies do not have the sufficient knowledge and expertise to accurately value their IP portfolio.
Malaysia Commercialisation Year 2016 serves to support various organisations in commercialising their intellectual property into market-ready products.
This is a good time for us to equip ourselves with the right knowledge and skill gap in the IP valuation domain to boost the various IP financing schemes and initiatives with small and medium enterprises to further expand their business by using IP rights as forms of collateral for obtaining financing.
Your feedback is welcome at [email protected]
* Biruntha Mooruthi is Vice President and Head of IPR Services of PlaTCOM Ventures Sdn Bhd, the national technology commercialisation platform of Malaysia — a wholly owned subsidiary company of Agensi Inovasi Malaysia (AIM) formed in collaboration with SME Corp Malaysia.
