Importance Of Ipr In Company Valuation.docx

IMPORTANCE OF IPR IN COMPANY VALUATION BY BARKHA SHRAVANI SAHU Roll noDiploma in Intellectual Property: Law and Management Gujrat National Law University Introduction The main motive why a company exists is to make profits, the secondary motives may be to serve the society or to provide better services or goods but no company is made without this motive of making profits. In order to maximise the profits they tend to adopt various ways, big corporations do it by one of the ways; by innovations. This brings a revolution in that industry and the protection through IPR Laws further leads to increase in the profits that the company makes. Such a profit along with the value of that intangible asset increases the company value. We must understand that the intangible assets include the brands, the Research and development strategies, the portfolios and the copyright material of a company. Other significant intangible assets are invested in a company’s human capital, its knowhow, and include such things as its databases, manuals, product specifications and manufacturing guidelines. All of these intangibles have a value and some effort should be made to quantify them so that when technologies are transferred or a business is bought or sold, or a merger takes place, then a fair market price can be realised. When something new is invented be it some invention or some novel idea or thought which is of great use to the general public, the corporation inventing it protects them and registers them in their names, this restricts any other industrialist to use the knowledge except in return of heavy amount of royalties, for many years, therefore, the IP rights constitute the major portion of profits and value of any big corporation. 1|Page

The value of IPR in any Company The Use of the Breakthrough The inventions, particularly Patents which explore the new arenas of technology, that was much needed or the invention of what will result into the life of the people getting really standardised, easy and quick, would have more value in the corporate world. This could be anything, ranging from, the first Xerox machine or the new drug to cure Cancer, its value is so much that, such an inventor gets monopoly status in the industry, and the value would now be what the competitor to that firm would pay as royalty to use that invention.

The Term of Protection It really matters as to for how long the invention or the literary work is being protected, since for that number of years the company shall be able to yield extra ordinary profits and the royalties from other firms, thus increasing the stock value of that company. Therefore, it has to be taken into account while valuing the company’s worth. The number of earlier Innovations When there are already existing inventions and patents in a particular field of innovation then it affects the stand alone value of a patent of a company. If there are similar or slightly developed innovations then they won’t affect the choice of the consumers that much, the consumers would get something to compare and they would choose a technique which is beneficial and has crossed the patent term of prescribed years, so they could even get them on less price. The cost involved in the Innovation The value of the patent as well as the value of the company on the basis of such patents would also depend upon the resources invested in the research and development of the invention, if it took too high an investment and on top of that the profits generated are not satisfactory such a patent would not lead to any increase in the value of the company. Intellectual Property as an Asset to a Company 2|Page

Since, the past decade there has been a shift in the mindset of the Corporate Moguls, the mentality that was reared in the minds of a few in the post world war II era, is now realised and followed by many corporate houses now. New form of companies called the Non- performing entities have come up, and they focus more on the IPR field and the ways to develop it. They’ve shifted their focus from developing and commercializing the product to the innovations and inventions. Such new companies don’t resort to the general funds of their companies rather they invest the money from the monetisation of IPR which they have already developed by the efforts in that regard. The protection and the increased profits that the companies earned made more and more firms jump into the same trend of enhancing the IPR assets in the companies, increased investment in this field was induced and the value of important Patents rose. This is how the IPR took up the role of an asset for the company to earn profits on. IPR could be involved in every aspect of the company’s business, it can enhance every aspect of marketing, sales, product development etc. provided it being realised by the people having a stake in the company. Therefore, efforts must be made to enhance and improve the IPR assets so that the proper use of it could be made. The involvement of IPR in the success and profit earning of various top- notch companies could be easily seen in the form of companies like Samsung, Philips, Sony, IBM, Monsanto, DuPont etc. who have most of their profits made because of their excellent IPR Management, the technical Know-How, the Brand Name, patents etc. A survey conducted in 2002 declared that 45% to 75% percent of the profits of top 500 fortune companies come from their Intellectual Property Rights. How can Companies Increase their Value through the IPR The only one solution is to maintain a proper and strong patent portfolio. This would protect the company’s innovations and would also, help increase the revenue. It not just improves the current revenues but also ensures the revenue streams for the future, not only this, the IP portfolio also increases the shareholder interests in the company and leads to increased stock value, adding up to the total worth of the company. After a patent is granted, the company has exclusive rights to use that technique and to restrict any other firm to use its invention, generally the time period for a patent is 20 years, which gives the company an upper hand in the usage and the granting of licence of its usage to other firms and accepting returns. The IP portfolio also puts a firm in a competitive advantage over the other firms in the area of the patent therefore, the company must 3|Page

keep on developing the portfolio and explore and innovate new things that would help in increasing its Value. Even when there is an acquisition or merger the IP Assets Portfolio helps in increasing the value of the company. Setting up of Knowledge Laboratories It is not that the trend of Inventions and making profits thereof is an Idea only since the past few years, the idea has seen its origin since, the beginning of the 20th century, the 1900s. The companies at that time had invested a large amount of funds in the setting up of knowledge laboratories, which would emphasise on the inventions and protecting those inventions through the IP rights. Companies like DuPont, sought to develop the knowledge not for itself but for the purpose of developing new products and improving the existing once. It was Edison who had developed this idea, he had built a laboratory in the 1876, it was managed by him and was called an “invention factory”. DuPont had had two such Knowledge Factories by 1903, this had made its dominance in the chemical industry by 1958. It was not just DuPont but there were other companies as well, like, General Electrical which developed its Laboratory in 1900, the AT&T developed one in 1907 and Westinghouse in 1903, this led to employment of a staff of around 70, 000, which itself suggests the worth and Value of the companies that would have rose, since, they have to pay them as well. Knowledge is Profit This trend has now developed that whatever the company does with the knowledge it has would result into the profits to that company. Knowledge is now not only power but also the source of profit for the Huge Corporations. The management aspects have changed in such a manner in the present day that even the consultants are hired by the companies to tell them about the management of the IP Assets. To look at an example to it, the companies who had invested in the development of the IP portfolio had seen great returns in the post World War 2 era. DuPont retained its dominant position in the Synthetic fibre industry. IBM’s investment in it was really impressive and it saw the fruit of it, it was in control of around 65 to 70 percent of the World Computer Market, this revealed its dependence and the importance of IP assets in its value building. Trademarks and Goodwill as a factor for Valuation of the Company Every company is known for by their names and the name is built up by the quality of services and the products that company provides. The trademark is the feature or a symbol, sign or graphics 4|Page

that are unique to the identification of a company. Sometimes the products are sold on the mere mention of the companies name and its trademark. Such is the importance of a trademark to a company. The Goodwill and the trademark both are related and complementary to each other. The trademark is known to the people because of the goodwill the company has earned over a period of time, after the trademark is known to most of the people in the market, the goodwill rises without much efforts being done to further improve the quality of the product. Such elements also come under the IP assets and prove to be an important factor while the valuation of a company is done. We see various examples in the present corporate world; there is one major deal of all times that between the German Pharmaceutical Mogul, Bayer and Monsanto, Bayer had offered $62 Billion to Monsanto, but the Latter has rejected the offer, calling it as, “Incomplete and Financially inadequate”, as the negotiations for the deal still continues. Further, another, similar deal is between Microsoft and LinkedIn, the former seeking acquisition of the latter for $28.1 Billion. This led to increase in the stock prices of LinkedIn by 47%. There is a reason why such huge prices are decided in order to purchase the other company, because of its trademark and its goodwill. Conclusion In a nutshell, we see that the IPR is nothing but a protection given to a novel idealist to gain recognition, have the benefit of his invention and to encourage similar innovations, but when done in the corporate world by the companies, it results into a boost in the revenue, market value and the overall worth of that company, no wonder the present day corporations are striving hard and investing heavy amounts in R&D. Therefore, the maintenance of the IP assets portfolio is necessary not just for the increase in the profits and the revenue but also for the increase in the value of the company.

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