AAA Valuing intellectual property

Valuing intellectual property

It is hard to grasp the importance of intangible assets except in the cases when important assets were missed or when the acquirer has bought itself a lawsuit.

But with a rise in interest in open innovation, collaboration and a service economy built on intellectual property (IP) and intangible assets has come a slew of issues.

One of the biggest concerns has been over so-called patent trolls that buy up registered IP and then sue or block third parties from developing their products.

Other issues include discovering and valuing IP correctly. Online auction company eBay’s purchase of internet phone operator Skype for more than $3.1bn in 2005 came without an important piece of intellectual property, some software code for peer-to-peer phone calls, held in a separate company, Joltid, and licensed to Skype.

The owners of Joltid were also the founders of Skype and Niklas Zennström, co-founder of Skype, said he was protective of its intellectual property rights.

As claims from both eBay and Joltid were fled, a majority of Skype was sold by eBay back to Zennström and a private equity consortium in September 2009 for a $2.75bn valuation.

The case followed an earlier legal issue over computer server company Cisco’s purchase of router maker Linksys (pictured) for $500m in March 2003. Complaints were made that Linksys was indirectly violating a requirement to make parts of its software code originally developed by third parties available to open-source programmers. Linksys subsequently made the code available.

And open-source software can be valuable to companies. Roger Burt, IP law counsel for IBM in Europe and a past president of the IP Federation, in September told delegates at the Knowledge Transfer Network’s "Intellectual Property – extracting the value" event that IBM spent $500m a year on maintaining open source, such as the Linux platform, for its products but this would be far more without public-domain code.

Ammon Salter, professor of technology and innovation management at Imperial College, part of the University of London, told the same event that IP alone could not create value but depended on the business model applied.

He said IP could secure access upstream and value then could be captured commercially downstream.

Iain Redford, co-managing partner at UK-based law frm Bristows, said companies needed to understand whether they really owned all their IP rights before potentially using IP as a source of value creation.

Stephen Robertson, chief executive of consultancy frm Metis Partners, said a company could have critical intangible assets, such as the technical papers for how to build a product, by thinking of how much time and cost it would cost it would take a customer to fnd another supplier.

This type of creative value creation can provide revenues or be used as security for lenders to provide further loans or working capital.

Graeme Sands, director of acquisition fnance at Clydesdale Bank, said unsophisticated lenders looked just at the proft and loss of a company before deciding whether to lend rather than seeing the causes behind a potential loss and whether the enterprise value of the business might be growing.

He said IP "is one of the key things I look at to see if there is value and a company has value as a going concern".

But while services has been growing in importance such thinking by lenders outside of Clydesdale, Silicon Valley Bank and a number of specialists, about where value in a knowledge, or IP, economy remains relatively rare.

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