Intellectual Property in M&A – The key due diligence considerations

Intellectual property (IP) is playing an ever more important role in M&A transactions, as companies become increasingly digital and a growing number of deals focus on acquiring the non-physical assets of both distressed and non-distressed companies.

Buyers acquiring IP in M&A transactions need to proceed carefully in order to ensure the deal is a success, navigating legal issues, identifying and avoiding risks and ensuring that the business is primed for a smooth post-deal integration. Even in deals where IP is the main factor, or even a major consideration, these are still things that buyers will need to pay close attention to.

Deal structure
In considering the role of IP in deals, understanding the deal structure is crucial for dealmakers to navigate legal obligations. Asset purchases, including deals in which IP assets are acquired from a business that has fallen into administration, underscore the importance of reviewing IP ownership and related agreements.

Carve-out deals and outright acquisitions require similar considerations, with a focus on integrating IP portfolios and aligning strategies. Neglecting these issues can lead to legal disputes and integration challenges, emphasising the necessity of carefully negotiating IP ownership, licensing, and dispute resolution to safeguard all parties' interests and facilitate the deal process.

Ownership
Ensuring accurate documentation of IP ownership is paramount in M&A transactions, with buyers relying on meticulous records encompassing licenses, trademarks, agreements, assignments, disputes, and consents. Without clear documentation, deals can be delayed, and post-deal IP rights assertion may be challenged, leading to costly litigation.

In cases where ownership is unclear, such as in startups with informally developed IP or collaborative ventures, determining ownership can be arduous, potentially prompting buyers to seek expert advice or abandon the deal. Even when records are diligently kept, complexities arise, especially in carve-outs or acquisitions involving joint ventures, where IP ownership may be dispersed among parent companies or subsidiaries.

Valuation
Determining the valuation of IP in M&A deals is a critical yet complex process. Valuation factors encompass tangible aspects such as exclusivity, rights longevity, and financial performance, alongside intangible elements such as market demand and commercialisation potential, posing challenges, which can be harder to quantify.

Consideration of the IP's development stage, potential risks like infringement or regulatory compliance, and strategic importance to the buyer are imperative. Distressed transactions amplify scrutiny, necessitating analysis of factors including market demand, technological obsolescence, and strategic alignment. Negotiations hinge on demonstrating valuation rationale, especially when disparities arise between parties, underscoring the need for expertise, such as from an external specialist, to navigate these complexities.


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Also read: IP as an Exit Asset

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