As merger and acquisition activity continues, leaders face a critical question: How can they maximize their exit value in an uncertain economic climate? The answer often lies in intellectual property strategy that begins long before diligence commences. Wiggin and Dana partner Katie Rubino maps the connection between strategic IP positioning and acquisition outcomes, demonstrating how patent protection, tactical filing decisions and portfolio alignment with potential purchasers’ needs can dramatically increase sale prices.
You’ve started a business based on a transformative idea and have continued to grow the business with an eye toward acquisition. As offers to buy your business start to materialize, you’ve wondered if you’re receiving a fair price and if there was anything else you could do to extract a larger takeaway. Is there a way to position intangible assets to drive up exit value, particularly in today’s sensitive economic climate?
The diligence process
To answer this question, entrepreneurs, legal and risk professionals must first understand what happens during the diligence process in a merger and acquisition deal, and why a company can never start preparing too early. The diligence process is a critical phase where a prospective buyer investigates the target company to assess its value, risks and readiness for acquisition.
When the diligence process commences, both parties will execute confidentiality agreements to protect sensitive information that will be exchanged. During legal due diligence, the scope of review includes an analysis of corporate structure and governance, customer lists, real estate holdings, regulatory compliance, past, pending and current legal disputes and intellectual property assets.
When investigating a target’s intellectual property, an analysis of different types of IP is reviewed to determine an inventory of patents, trademarks, copyrights, trade secrets and domain names. The chain of titles is reviewed on each asset to ensure that all IP is owned and retained by the target company. Employment agreements are analyzed to ensure that all employees have obligations to assign ownership in any IP generated during the course of employment to the company.
Third-party contributions to IP are investigated to assess any joint development or vendor-created IP that may need to be jointly owned or licensed. The registration status of the owned IP is reviewed to ensure that all registered IP is active, pending and maintained in jurisdictions around the globe. Licenses are reviewed to ensure products used by the company are properly maintained and royalties are collected for any target company IP that is licensed to others. An assessment is performed to review the scope of protection of the IP assets and to determine any gaps in protection and uncover any unprotected assets.
Creating & executing an IP strategy
When working with early-stage emerging companies, one of the first questions that should be assessed when starting out is what a company’s business objectives are. IP can add value in a multitude of ways, but careful alignment between an IP strategy and business objectives is critical for success.
Once a business objective like an exit is identified, an IP strategy can be enacted. One of the first steps to determine an IP strategy is to assess what IP a company has. Are there unique processes or methods that have been developed? Is there a new product in the pipeline that builds upon existing technology? Are there company names, logos or product lines that have been developed and not yet protected? Is there a unique algorithm or internal data aggregation tool that has been developed? Performing an IP inventory to memorialize and document core innovations is essential.
Upon completion, a review of the IP inventory should be conducted to analyze and assess the priority of each documented idea. Some ideas may be of higher importance to protect, while others may be considered more peripheral to the focus of the company and may continue to be held as a trade secret indefinitely. This is of particular importance for life sciences companies that have data-driven platforms where drugs are synthesized or where machine learning is applied to expedite a diagnosis or treatment. Generally, an algorithm may be kept as a trade secret indefinitely so that a company doesn’t publish its secret sauce in a patent application.
Once an inventory has been created, a filing strategy can be implemented. The use of provisional patents can be strategically selected when a priority date is needed to protect an innovation ahead of a public disclosure, such as when an idea is presented at a conference or published in a journal.
Before drafting of a patent application commences, a review of the IP landscape should be performed to identify what other key IP is held by a company’s competitors. This step will help in telling the story for a future acquisition, to articulate how a target company’s IP is unique and distinct from other companies operating in a given technological space.
A detailed evaluation of a potential purchaser’s IP portfolios should be completed to identify the types of IP a purchaser protects and where there might be gaps within a potential purchaser’s portfolio. This can inform a target company’s IP strategy to file IP that fills in a white space and enhances positioning for a future acquisition, ultimately driving up acquisition price.
Additionally, writing IP that creates liabilities for a potential acquirer is another way to strategically position a company for acquisition. Drafting and prosecuting patent claims that cause a potential buyer to infringe such claims can be a strategic way to open a dialogue about a future exit.
For innovations that are finalized and don’t require any future anticipated research and development, a provisional application can be skipped and instead a non-provisional application can be filed. This will help commence patent examinations more quickly and help with asset building.
For companies that have a near-term exit date in mind, filing nonprovisional applications on the Track One expedited review program can be considered. In order to qualify, a company pays more in government filing fees for a Track One application, but a final disposition is given within 12 months of filing the application, as compared to regular examination, which can take anywhere from three to five years. The key value differentiator is that a patent can be issued on the Track One program in about 12 to 18 months from filing, ensuring a quick way to strategically build assets fast.
Consider other jurisdictions outside the US for IP protection as well. The identification of where other business activity is happening around the world should be reviewed to determine locations of international manufacturers, sales channels, future jurisdiction expansion and global location of business activity of an acquirer in view of patent system strength in those countries. In situations where international protection is desired, filing a patent cooperation treaty (PCT) application can be a way to preserve patent rights in multiple countries while spreading out the costs over 18 to 30 months.
As IP assets start to be issued, selective licensing to strategic partners can be considered as a way to build alliances and drive up IP value. Collaborating with universities or labs to expand a portfolio and partner with recognized institutions can be another way to enhance strategic positioning for acquisitions.
Integration of IP into due diligence readiness
As an IP strategy is enacted, integrating IP hygiene into a company’s culture is essential to prepare for future M&A activity. Educating employees and creating a culture that incentivizes invention disclosure is crucial to encourage staff to disclose innovations as they occur. Maintaining clean ownership records to ensure all IP is assigned to the company and not individual employees is vital, especially in early stages, as founders and employees may come and go.
Performing a regular audit to track filings, renewals and enforcement actions to avoid surprises and communicate portfolio strength and weaknesses to investors is critical. Drafting IP summaries to track products and inventions is key to highlighting IP in pitch decks and explaining how IP is tied to products. Conducting a formal IP valuation can be considered to assess the monetary value of the IP portfolio in anticipation of a future exit.
Value add of IP for an exit
The strategic protection of core key IP assets can enhance positioning of a company upon exit. A recent study found that for acquisition exits, the median exit value for patent companies is 154.9% higher than it is for nonpatent companies per year on average, underscoring the powerful role IP plays in driving valuation and deal outcomes.
Katie Rubino is a partner in the corporate department at Wiggin and Dana in Boston. She frequently represents clients on target discovery collaborations, assisting in structuring spin-offs, divestitures and out-licensing from pharma, hospital systems and academic research institutions. She also counsels life sciences companies developing pharmaceuticals, vaccines, medical devices, antibody products, digital health and medical devices and advises companies raising growth capital, merger and acquisition transactions and initial public offerings. 
