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Playing clever with intellectual assets

GOOGLE’S RECENT $12.5bn (£7.9bn) acquisition of Motorola Mobility has thrown the spotlight on the value of patents – and the high stakes to be played for by companies in obtaining and managing the intellectual assets they need. The acquisition, which enables Google to get its hands on around 24,000 patents and patent applications, underlines the significant impact that a strong patent portfolio can have on a company’s growth potential, competitive freedom and commercial strategy.

Such huge deals are becoming more frequent as companies look to optimise their patent portfolios through activities such as buying or licensing-in intellectual property (IP) assets to bolster existing portfolios, licensing the technologies covered by their own patents to third parties, and, in the case of Motorola Mobility, turning IP into cash through intellectual asset sales.

While many companies recognise the enormous value to be gained from acquiring the patents that support their strategic business objectives, others are realising that there is also potentially significant value to be unlocked in their current patent portfolio.

As a result, financial executives are likely to play an increasingly central role in the valuation and strategic management of IP assets. For many, this will require a deeper and more practical understanding of how IP contributes to the business and how to maximise the value of these important intangible assets.

First, it helps to understand the motives behind such mega-acquisitions. In Google’s case, was this acquisition motivated by the heavyweight size of the portfolio, used to defend against potential attacks from the competition, or by the high quality of patents in the portfolio, helping to give them future commercial edge?

Google’s search for greater ‘patent power’ began with a series of unsuccessful bids for Nortel Networks’ sizeable portfolio of 6,000 patent assets, starting at $900m (£567m) and ending curiously at pi (3.14159) billion dollars (£1.98bn). The Nortel portfolio was subsequently purchased by a six-strong consortium – made up of Apple, EMC, Ericsson, Microsoft, RIM and Sony – with the final price at $4.5bn (£2.84bn), equivalent to around $750,000 (£373,000) per patent, or $2.25m (£1.42m) per in-force patent.

Google, meanwhile, had set its sights on Motorola Mobility – owners of a number of patents, which should help Google to defend the Android mobile operating system (developed by the Open Handset Alliance, led by Google). Industry commentators have suggested that Google’s acquisition of a substantially sized patent portfolio, containing 17,000 granted patents and a further 7,000 patents pending, was primarily motivated by quantity over quality.

The purchase aligned with Google’s desire to fend off potential lawsuits from other technology companies, recognising that somewhere amongst this sea of patents, there were likely to be some offering the required protection – and even some covering aspects of their competitor’s technology, that could, if necessary, be used to counter-sue against allegations of patent infringement.

For Motorola Mobility, the deal represented a lucrative opportunity to turn IP assets into cash – and the company is certainly not alone in looking at such strategies. Eastman Kodak is also currently looking for buyers for 10% of their patent portfolio, a total of 1,100 digital imaging patents. Industry expectations are that, if successful, this portion of Kodak’s patent portfolio may sell for around $2bn (£1.26bn); and such speculation has caused Kodak’s shares to jump as, remarkably, the figure is significantly higher than Kodak’s current market capitalisation.

With such a buoyant patent market, the questions around how to optimise a company’s patent portfolio – selecting which patents to keep and protect, which to license to third parties, which to sell and, finally, which to abandon, therefore saving on maintenance costs – represent one of the most important decision-making processes companies should go through when reviewing their business strategy – thus ensuring that any current and future patent portfolios are fully aligned with the overall direction of the business.

The finance team should be part of this decision-making process, as IP can have a significant impact on the bottom line and on corporate valuations. This impact comes either through the value that technology exclusivity around its most prized IP assets brings to the company, or the revenue that can be generated from making IP that is no longer central to the business strategy work harder for the company through licensing or sale.

Asking the right questions

Patent portfolio optimisation decisions have been hugely important in a number of deals to generate large volumes of cash. For example, it has been estimated that IBM’s patent licensing revenues account for over 10 per cent of its annual net profits.

Through a comprehensive patent portfolio review process, companies can gain important insights into their IP assets and make informed strategic decisions about how best to optimise these assets, addressing such questions as:

• Which of the company’s patents are business critical and need to be protected?
• Which patents are potential future strategic assets that may become more valuable to the company over time?
• Which patents can be sold or licensed for profit?
• Which patents in the portfolio should be pruned?

Once they have the answers to these questions, companies are able to evaluate how they can better protect their prized IP assets (current and future) to safeguard and enhance the company’s competitive position, allow non-critical assets to generate additional revenue and reduce costs associated with maintaining patents that are no longer of use or little value to the company.

These are decisions that are crucial to a company’s strategic direction, commercial strength and competitive positioning. For most companies, gone are the days when they could patent everything and keep renewing every patent time after time. Today’s IP management requires more astute thinking and the ability to make informed, strategic decisions based on market developments and competitor activity. That’s the clever way to make the most of your intellectual assets.

Haydn Evans, vice president of intellectual property outsourcing, Europe, CPA Global

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