Valuing a Patent or Trade Mark Portfolio
There are numerous strategic and legal reasons why a company might need to assign a monetary value to its patent and trade mark portfolio.
Research In Motion bids for Certicom
The maker of the Blackberry device, Research In Motion last week announced a hostile takeover bid for the security firm Certicom. Certicom is best known for its Elliptic Curve Cryptography (ECC) IT security, which provides technology to companies such a Motorola and IBM to protect information using complex mathematical equations. The core asset behind Certicom’s operations is a patent portfolio of over 100 patents concerning its proprietary ECC technology. In the case of Certicom, the value of the company is largely a function of the value of the underlying patent portfolio. The fundamental question for Certicom, and for Research In Motion is now a question of how to best value the intellectual property (IP).
Why value IP?
There are numerous strategic and legal reasons why a company might need to assign a monetary value to its IP assets. From a strategic point of view, IP can be valued to help in assessing the complete value of a company, beyond the tangible assets. From the point of view of financing, IP valuation can provide security to financiers, such as banks, or increase the asset base of a company, and hence realise value for shareholders.Studies have shown that at least 50% of the asset base of an average company can be attributed to intangibles such as IP.
With respect to takeovers and mergers, IP valuation can be used to extract a higher price for the business stakeholders, or alternatively, in the instance of hostile takeover offers, IP valuation can be used as a “shark repellent” to ward off an unwanted raider, by inflating the company valuation.
How should IP be valued?
Unlike other asset classes, IP assets cannot always be valued purely as a function of cash generation, or replacement cost, as some IP assets provide value through cost savings, or competitive advantages, which are not assessable through a traditional discounted cash flow approach. Three of the most commonly used IP valuation tools are outlined below:
- The Cost Method
The cost method applies a value to an IP asset by estimating the cost of replacing or reproducing the asset. The cost method may include research and development (R&D) as well as expenses which were incurred whilst creating the IP asset, such as patent attorney and patent application costs. The cost method is useful for IP assets that do not generate an explicit income, such as some patents, which may be used defensively to prevent competitors from operating in a given field.
- The Income Method
The income method is beneficial when valuing an IP asset that actively generates income. This method may be used with regard to the sale of patented articles, or alternatively for income generated through patent licence royalties. The income method estimates future revenue by considering factors such as market size; competition; inflation; changing technology and product life.
- The Market Method
The market method determines the likely market value of an IP asset by comparing it to sales of comparable IP assets. Whilst the market method is theoretically the most accurate, the information required to make such comparisons is often not publicly available on account of the confidentiality surrounding license agreements. In addition, in many technology fields, comparable products are not available and hence the requisite data is non-existent.
Conclusions
There are numerous strategic advantages associated with accurately valuing IP. However, there is no single method of valuing which works best in all scenarios. In practice, the best valuations generally come from weighing up all available data regarding the asset and pricing it using two or more of the above identified methods.
Please contact Cotters if you would like any further information about the changes or if you wish to request examination on any pending patent applications.
By Chris Atichian
Cotters Patent & Trade Mark Attorneys
15 December 2008
