A recent Harvard Business Review article states the following: “Deal making is glamorous; due diligence is not” [1]. The article goes on to say: “That simple statement goes a long way toward explaining why so many companies have made so many acquisitions that have produced so little value”. One of the most extreme examples of IP due diligence-gone -wrong happened in 1998, when German car maker Volkswagen purchased the assets of Rolls Royce and Bentley automobiles for about $900 million. Volkswagen did not realize until after the deal was closed that the IP assets did not include the right to use the Rolls Royce trademark… The trademark was owned by another car maker, BMW, pursuant to a prior agreement. Volkswagen had therefore acquired all the rights necessary to manufacture the car, but did not have the right to brand it as a Rolls Royce! This story highlights the critical role of IP Due Diligence in the acquisition process, and should serve as a reminder to M&A corporate teams, especially with the recent rise in acquisition activity.
The San Jose Mercury called 2010: “the season of billion-dollar deals…”[2] From HP’s $1.1 billion purchase of Palm Inc. to Symantec’s $1.3 billion acquisition of VeriSign. Many large Silicon Valley companies are emerging from the recession with large cash reservesand are looking for opportunities to reshape their businesses around emerging technologies. According to Dealogic [3] technology companies have bought over 1,500 firms for over $50 billion this year. This represents a significant increase over the same period last year, when sector companies bought just about 1,000 companies for a little under $30 billion.
Frankly, acquisitions are risky deals. In a seminal 1987 study, Harvard Business School professor Michael Porter found that companies sold off many more acquisitions than they kept. He also found that companies with acquisition strategies reduced, instead of creatingshareholder value. Later studies reinforced Porter’s conclusions. A KPMG study conducted 15 years later found that over 80% of mergers were unsuccessful in producing any business benefit, as measured by shareholder value. That study further identified due diligence as one of three key activities that successful acquirers had prioritized in the pre-deal phase, and that had a tangible impact on their ability to deliver financial benefits from the deal (synergy evaluation and integration project planning were the other two).
Although big companies often assemble large teams and spend lots of money analyzing the size and scope of a deal in question —the fact is, the momentum of the transaction is hard to resist once senior management has the target in its sights. Due diligence all too often becomes an exercise in verifying the target's financial statements rather than conducting a fair analysis of the deal's strategic logic and the acquirer's ability to realize value from it. Seldom does the process lead managers to kill potential acquisitions, even when the deals are deeply flawed. The lack of prioritization of IP due diligence further compounds the problem. Corporate, tax and accounting issues often take precedence, and by the time the deal team gets to dealing with the IP, the deal structure has already been set.
The topic of IP Due Diligence was discussed in a recent panel moderated by Foresight Valuation Group, as part of the IP Summit, which took place in Silicon Valley. The panel included some of the Valley’s largest corporate buyers (Intel, Cisco, Juniper) along with corporate lawyers and IP consultants with knowledge of M&A due diligence activities. The panel members have all agreed that the process of IP Due Diligence, in the context of corporate M&A deals, should be prioritized, both in terms of timeline (earlier in the deal) and importance. The panel identified several major topics that could be addressed to streamline the IP Due Diligence process:
1. Education about the risks associated with the IP portfolio. Given the general risk associated with acquisitions, tech deals are even riskier than average, because of the complexity of the products involved. The IP portfolio is a key asset in technology deals, much more so than in any other deal. IP due diligence is therefore absolutely critical to managing risks associated with the deal. Knowing the risks associated with a flawed IP Due Diligence process can go a long way towards encouraging senior management to allocate more resources to the process. The panel members brought examples of serious problems with IP portfolios of acquisition targets (lack of licensing rights, forged inventor assignments) that could have devastated the post-deal integration had they not been found through the due diligence process.
2. IP Assets should be incorporated in the valuation of the target. IP assets are treated as an afterthought, and usually do not drive the value of the target. A deal is not driven by the IP assets, but vice versa, and this is an unacceptable situation when it comes to high tech acquisitions. Several of the panelists mentioned the fact that investment bankers and other financial advisers participating on the deal often sideline issues that could alter the value of the deal, or complicate the process. It is therefore the case that IP assets are not evaluated and priced separately from the target, but are rather priced after the deal is concluded, often for accounting purposes, where the price of the deal needs to be allocated among the various assets purchased with the target. IP Valuation is a general issue that hinders many transactions, due to the lack of efficient markets for IP (no comps) and the lack of transparency when it comes to reporting IP deals, and the valuation considerations that went into pricing them. Improving the transparency through better reporting of IP deals will go a long way in improving IP transaction markets, and will also help with M&A due diligence and the quantitative assessment of IP assets in the pre-deal phase.
3. Integrate the seller in the process. Considering the seller’s post-deal indemnifications exposure with respect to the representations and warranties given in the transaction agreement, sellers should have a vested interest in the IP Due Diligence process. Sellers should be integrated in IP Due Diligence in a way that would help both sides streamline the process in a more efficient and cost effective way. Panel members representing buyer organizations actually mentioned that, from a seller perspective, better presentation of IP assets will help the sellers in getting better terms for the deal, which is not necessarily in the buyer’s best interest. That is an interesting point to keep in mind, as the buyer’s and seller’s objectives aren’t always aligned.
[1] “The Secrets of Great Due Diligence”
[2] Silicon Valley Companies Make Billion Dollar Deals
[3] Intel, Dell Acquisitions Come Amid Mounting Tech Takeovers
Tuesday, November 2, 2010
Wednesday, September 1, 2010
How can Paul Allen Help a Billion People?
A couple of days ago we were invited to the graduation ceremony of Singularity University (SU), a Google-Autodesk interdisciplinary program operating out of the NASA Ames base in Mountain View, CA (at the heart of Silicon Valley). SU’s mission is:”to educate and inspire leaders to understand and facilitate the development of exponentially advancing technologies in order to address humanity’s grand challenges.”
This is SU’s second year running their summer program, attracting 80 students from 35 different countries. This year’s students spent the majority of the 10 week program dealing with the mission of creating a project that could positively impact the lives of a billion people in 10 years, by leveraging exponentially advancing technologies. Teams presented a host of business plans, in five project areas: Upcycle, Water, Energy, Food and Space. The project resulted in an incredible array of innovative ideas: from a company addressing the world’s hunger problems that would allow you to grow a tomato in your own kitchen overnight, to a company that addressing the world’s recycling problems by “upcycling” materials, in the same way that a nature’s food chain deals with waste. At the heart of all of these ideas lies a powerful concept of harnessing technologies that already exist (or that may be specifically developed in the future) and using them in a new and creative way to improve the lives of a billion people. That was the main and primary goal of each of the ventures created by the graduates.
We came out of that event truly awed and inspired…such a refreshing concept, reminding all of us why technologies are developed in the first place.It was ironic, then, that on the same day, I came home and read a WSJ story about Paul Allen, the billionaire co-founder of Microsoft, suing a host of companies over four patents:
A firm run by Microsoft co-founder Paul Allen is suing Apple, Google and 9 other companies alleging they are violating patents Mr. Allen financed more than a decade ago…The 57-year-old software guru … sued much of Silicon Valley, claiming Internet giants such as Google Inc., Facebook Inc. and eBay Inc. have built their businesses around what he says is his technology. … Mr. Allen, a pioneer of computer software, didn't develop any of the technology himself but owns the patents. The four patents named in the suit were developed at Interval Research Corp., a Palo Alto, Calif., lab and technology incubator Mr. Allen financed with about $100 million during the Internet bubble, but which closed down about a decade ago….
Now, here’s a paragraph that specifically caught my eye in that story:
Mr. Allen's lawyers said a team has been reviewing his patent portfolio for years, seeing what's relevant to the current marketplace and parsing the technicalities necessary to complete the lengthy patent process. During that time, some patents were sold or licensed.
So here is a simple but powerful idea for Mr. Allen – instead of engaging in lengthy, expensive litigation, why don’t you bring your patents into the hands of a venture that could improve the lives of a billion people? One way of doing that would be to engage the same team of lawyers reviewing Interval Research Corp’s patent portfolio, and find the ones that can match some of the ventures that were conceived by the Singularity graduates. The patents could actually be licensed or sold to companies generating a significant amount of money out of them, and so this is not necessarily an act of charity; that being said, you still get the added bonus of helping a billion people eat, drink clean water, recycle their toxic waste and live a better life! Some food for thought…
This is SU’s second year running their summer program, attracting 80 students from 35 different countries. This year’s students spent the majority of the 10 week program dealing with the mission of creating a project that could positively impact the lives of a billion people in 10 years, by leveraging exponentially advancing technologies. Teams presented a host of business plans, in five project areas: Upcycle, Water, Energy, Food and Space. The project resulted in an incredible array of innovative ideas: from a company addressing the world’s hunger problems that would allow you to grow a tomato in your own kitchen overnight, to a company that addressing the world’s recycling problems by “upcycling” materials, in the same way that a nature’s food chain deals with waste. At the heart of all of these ideas lies a powerful concept of harnessing technologies that already exist (or that may be specifically developed in the future) and using them in a new and creative way to improve the lives of a billion people. That was the main and primary goal of each of the ventures created by the graduates.
We came out of that event truly awed and inspired…such a refreshing concept, reminding all of us why technologies are developed in the first place.It was ironic, then, that on the same day, I came home and read a WSJ story about Paul Allen, the billionaire co-founder of Microsoft, suing a host of companies over four patents:
A firm run by Microsoft co-founder Paul Allen is suing Apple, Google and 9 other companies alleging they are violating patents Mr. Allen financed more than a decade ago…The 57-year-old software guru … sued much of Silicon Valley, claiming Internet giants such as Google Inc., Facebook Inc. and eBay Inc. have built their businesses around what he says is his technology. … Mr. Allen, a pioneer of computer software, didn't develop any of the technology himself but owns the patents. The four patents named in the suit were developed at Interval Research Corp., a Palo Alto, Calif., lab and technology incubator Mr. Allen financed with about $100 million during the Internet bubble, but which closed down about a decade ago….
Now, here’s a paragraph that specifically caught my eye in that story:
Mr. Allen's lawyers said a team has been reviewing his patent portfolio for years, seeing what's relevant to the current marketplace and parsing the technicalities necessary to complete the lengthy patent process. During that time, some patents were sold or licensed.
So here is a simple but powerful idea for Mr. Allen – instead of engaging in lengthy, expensive litigation, why don’t you bring your patents into the hands of a venture that could improve the lives of a billion people? One way of doing that would be to engage the same team of lawyers reviewing Interval Research Corp’s patent portfolio, and find the ones that can match some of the ventures that were conceived by the Singularity graduates. The patents could actually be licensed or sold to companies generating a significant amount of money out of them, and so this is not necessarily an act of charity; that being said, you still get the added bonus of helping a billion people eat, drink clean water, recycle their toxic waste and live a better life! Some food for thought…
Monday, August 9, 2010
The Green IP Revolution
Governor Arnold Schwarzenegger recently celebrated over a report released by the Cleantech Group and Deloitte which showed that California’s clean tech companies received the highest venture capital funding in the second quarter of 2010.
“California has led the world in enacting policies that harness the private sector to create the clean and renewable technologies needed to combat climate change and reduce our dependency on oil. And our efforts are paying off, as illustrated by a wave of green innovation all over the state that is spurring investment and creating jobs. These numbers showing California is getting the most clean tech investment is just the latest example that we are moving in the right direction of building our green economy and creating a brighter, more sustainable future for us all.”
The report’s preliminary 2010 second quarter results showed that clean technology venture investments in North America, Europe, China and India, totaled $2.02 billion across 140 companies. For North America, California led the way with $980 million in investment, more than two thirds the total share. As the Green revolution heats up in the Golden state, we at Foresight are keeping an eye on what this means for innovation and IP. Entrepreneurs and business owners know the importance of ideas and intellectual assets, which are often the result of years of research and development. Their IP lies at the heart of their Cleantech company’s competitive advantage.
Late last year the Obama administration, with an eye on Cleantech being the growth engine for the economy, developed a pilot program to accelerate the examination of green technology patent applications at the U.S. Patent and Trademark Office (USPTO). We had learned earlier this year that the Kappos Administration has been heavily involved in streamlining the USPTO and this appears to be an area of particular importance. This is what Commerce Secretary Gary Locke said when the program was announced:
“American competitiveness depends on innovation and innovation depends on creative Americans developing new technology. By ensuring that many new products will receive patent protection more quickly, we can encourage our brightest innovations to invest needed resources in developing new technologies and help bring those technologies to market more quickly.”
The average examination time in the past had typically been 30 months for green technologies. Not only has the time frame for examination been accelerated, barriers have also been lowered for what qualified as "Green Technology" subject matter for patent applications pending before the USPTO. When the Green Technology Pilot Program was announced in December 2009, the program was limited to inventions in certain classifications in order to assist the USPTO in balancing the additional workload and to gauge the resources needed for the program. The USPTO has determined that the classification requirement is unnecessary because the workload has been balanced with other mechanisms, and the requirement was causing the denial of petitions for a number of green technology applications that would have otherwise qualified for the program.
The Program is available to the first 3,000 applicants and ends on December 8, 2010. The Patent Office estimates that approximately 25,000 of the currently pending patent applications meet the requirements needed to be classified as a Green Patent. To date, more than 950 requests have been filed by applicants who wish for their application to be eligible for the Green Technology Pilot Program. Only 342 of those have been granted, primarily because many of the inventions weren’t in classifications that were eligible. The lifting of the classification requirements is expected to allow many more applications to be eligible for the program. If interested, applicants should act quickly and carefully weigh the Program's benefits against the requirements needed--most notably, claim limitations, abbreviated restriction practice, and early publication.
Thursday, June 3, 2010
Federal Labs Take Center Stage at TechComm™ 2010
“The greatest invention of the 19th century was the invention of the method of invention.” - Alfred North Whitehead (1861-1947)
And what about all of these inventions? How does one find, nurture and catapult ingenuity to the next level, in this case, the subtle translation of technology into fuel for today’s sputtering economic engine?
Clues to some of these answers presented themselves last week in a premier event organized by the Silicon Valley Chapter of the Licensing Executives Society,
TechComm™ 2010 was an invention in its own right. An idea conceived by Larry Udell and supported by Craig Smith of Sandia National Labs and Advisory Board member of the Licensing Executives Society, Silicon Valley Chapter, this event showcased the start up technologies of the Federal Labs that are poised for commercialization partnerships. In addition to this objective and perhaps the most refreshing item of the day was the discussion on public policy and the need for modifications at the federal level that move these business- to- government partnerships forward in a more efficient manner.
Karina Edmonds, Technology Transfer Coordinator of the US Department of Energy opened the day with her keynote presentation. This position, created by the Energy Policy Board Act of 2005 is the first time that the Department has appointed a full time person to fill this role. Dr. Edmonds is responsible for working with the Departments’ National Laboratories to accelerate the process of moving discoveries from the lab to the private sector “ensuring that America’s scientific leadership translates into new, high paying jobs for American families.”
The Labs, observed Edmonds are “a national treasure” but right now, a lot more needs to take place in order to bring inventions to the private sector. Still mired in academic tradition, inventors within the system still find it “easier to apply for a grant than to apply for a patent” as observed by Tom Brennan of Sandia National Labs. Emerging slowly are the tools from DOE, the first of which is a mission statement which will be the critical blueprint and will provide long term stable programs that are needed. Other policy modifications should include a re-examination of the conflict of interest policy which is needed but outdated in its current form.
With over 700 technology inventories throughout the system, only about half have any strong commercial value. The morning panel was comprised of entrepreneurs- in- residence (EIR’s) who have worked within the lab system. Paul Dickerson, the panel’s moderator, framed the discussion along the backdrop of China’s public sector research and development activities which, for the first time in history, outpaced the US private sector investment in R&D.
Michael Bauer, a former EIR at Oak Ridge National Laboratory was part of the first wave of professionals who entered these roles. His experiences at that time, consisted of observing an “academic oriented environment where people worked away in the labs but this work not translating into invention.” The missing link, he mentioned, was faith: “the faith agent being an entrepreneur” -- the person that can take the technology and turn it into a profitable business. The key rests in not simply looking to “start a company” but really looking at the business proposition and finding and marketing to a company that would be interested in the technology. Labs, he observed, would fare better if they treated the technology the way a product manager would within a firm. Other panelists, also former EIR’s echoed similar observations.
The afternoon panel consisted of the lab sponsors who talked about their efforts: The Federal Lab Consortium, Idaho National Laboratory, the Joint BioEnergy Institute, Lawrence Berkeley National Laboratory, NASA Ames Research Center, Lawrence Livermore National Lab, National Renewable Energy Laboratory, and Sandia National Laboratories. Additional business sponsors of the event included Blackstone Discovery, The Silicon Valley Business Journal and WilmerHale LLP.
An action plan? The purpose of TechComm™ 2010 was to bring together the labs to showcase their “star” performers – the technologies that are ready for commercialization and the interested investors. The event fulfilled that purpose succinctly and in a forum that brought to light the many challenges of the Federal Lab System. The test of success will emerge in the upcoming year as to whether or not the lab system can rise to the political rhetoric and be a catalyst for helping to spur growth, jobs and a vibrant economy.
And once again, the question on the success of this event will rely on what panelist Michael Bauer referred to as “science meets faith:” will entrepreneurs, whether in the federal labs or beyond, have the fervent faith, the belief in themselves and in their product that they can make all of this attractive to investors and ultimately, to serve a greater good?
Stay tuned for the next episodes: Udell and the many TechComm™ 2010 creators and sponsors are very bullish on creativity and the entrepreneurial spirit.
Guest Blogger Franca Gargiulo is the Silicon Valley Chapter Coordinator for the Licensing Executives’ Society.
And what about all of these inventions? How does one find, nurture and catapult ingenuity to the next level, in this case, the subtle translation of technology into fuel for today’s sputtering economic engine?
Clues to some of these answers presented themselves last week in a premier event organized by the Silicon Valley Chapter of the Licensing Executives Society,
TechComm™ 2010 was an invention in its own right. An idea conceived by Larry Udell and supported by Craig Smith of Sandia National Labs and Advisory Board member of the Licensing Executives Society, Silicon Valley Chapter, this event showcased the start up technologies of the Federal Labs that are poised for commercialization partnerships. In addition to this objective and perhaps the most refreshing item of the day was the discussion on public policy and the need for modifications at the federal level that move these business- to- government partnerships forward in a more efficient manner.
Karina Edmonds, Technology Transfer Coordinator of the US Department of Energy opened the day with her keynote presentation. This position, created by the Energy Policy Board Act of 2005 is the first time that the Department has appointed a full time person to fill this role. Dr. Edmonds is responsible for working with the Departments’ National Laboratories to accelerate the process of moving discoveries from the lab to the private sector “ensuring that America’s scientific leadership translates into new, high paying jobs for American families.”
The Labs, observed Edmonds are “a national treasure” but right now, a lot more needs to take place in order to bring inventions to the private sector. Still mired in academic tradition, inventors within the system still find it “easier to apply for a grant than to apply for a patent” as observed by Tom Brennan of Sandia National Labs. Emerging slowly are the tools from DOE, the first of which is a mission statement which will be the critical blueprint and will provide long term stable programs that are needed. Other policy modifications should include a re-examination of the conflict of interest policy which is needed but outdated in its current form.
With over 700 technology inventories throughout the system, only about half have any strong commercial value. The morning panel was comprised of entrepreneurs- in- residence (EIR’s) who have worked within the lab system. Paul Dickerson, the panel’s moderator, framed the discussion along the backdrop of China’s public sector research and development activities which, for the first time in history, outpaced the US private sector investment in R&D.
Michael Bauer, a former EIR at Oak Ridge National Laboratory was part of the first wave of professionals who entered these roles. His experiences at that time, consisted of observing an “academic oriented environment where people worked away in the labs but this work not translating into invention.” The missing link, he mentioned, was faith: “the faith agent being an entrepreneur” -- the person that can take the technology and turn it into a profitable business. The key rests in not simply looking to “start a company” but really looking at the business proposition and finding and marketing to a company that would be interested in the technology. Labs, he observed, would fare better if they treated the technology the way a product manager would within a firm. Other panelists, also former EIR’s echoed similar observations.
The afternoon panel consisted of the lab sponsors who talked about their efforts: The Federal Lab Consortium, Idaho National Laboratory, the Joint BioEnergy Institute, Lawrence Berkeley National Laboratory, NASA Ames Research Center, Lawrence Livermore National Lab, National Renewable Energy Laboratory, and Sandia National Laboratories. Additional business sponsors of the event included Blackstone Discovery, The Silicon Valley Business Journal and WilmerHale LLP.
An action plan? The purpose of TechComm™ 2010 was to bring together the labs to showcase their “star” performers – the technologies that are ready for commercialization and the interested investors. The event fulfilled that purpose succinctly and in a forum that brought to light the many challenges of the Federal Lab System. The test of success will emerge in the upcoming year as to whether or not the lab system can rise to the political rhetoric and be a catalyst for helping to spur growth, jobs and a vibrant economy.
And once again, the question on the success of this event will rely on what panelist Michael Bauer referred to as “science meets faith:” will entrepreneurs, whether in the federal labs or beyond, have the fervent faith, the belief in themselves and in their product that they can make all of this attractive to investors and ultimately, to serve a greater good?
Stay tuned for the next episodes: Udell and the many TechComm™ 2010 creators and sponsors are very bullish on creativity and the entrepreneurial spirit.
Guest Blogger Franca Gargiulo is the Silicon Valley Chapter Coordinator for the Licensing Executives’ Society.
Wednesday, May 26, 2010
The Oprah Winfrey Network – Deal or No Deal??
An IP Valuation Case Study (Part 1 of 2)
We would like to present the case of The Oprah Winfrey Network (OWN) as an example of how the values of intangible assets can sometimes be found in daily news stories. This case presents some interesting valuation questions and provides a rare glance into a highly publicized joint venture based primarily on intangibles.
The following story first appeared on USA today in January 2008:
“Oprah Winfrey is getting her own cable channel, called OWN: The Oprah Winfrey Network. A deal announced Tuesday with Discovery Communications will create a 50-50 cable and Web venture. In the cashless transaction, Discovery will contribute its Discovery Health Channel, to be converted to OWN in late 2009 and simulcast in HD. Launched in 1999, the channel reaches more than 70 million cable and satellite homes. Winfrey's company, Harpo, will kick in her website, Oprah.com. “ 1
Putting our IP valuation experts’ hat on, we ask ourselves: is this a fair deal? For a 50-50 cashless deal to be fair, each party’s contribution needs to have about the same fair market value. OWN will be structured as a joint venture partnership where each party makes an” in-kind” contribution of assets - in this case: mostly intangible assets – in lieu of cash. It is this unique structure that makes it a very interesting IP valuation case study …
Let’s look at what each party is contributing to the deal:
1. Discovery – is contributing its Discovery Health Channel, which, by its own admission, was a struggling media entity at the time the deal was announced:
The table shows a wide variation in the value per subscriber metrics: while NBC paid $23 a subscriber for Bravo, it only paid $13 a subscriber for Oxygen (some analysts called the Oxygen deal a “bargain”). However, the table also shows that prices seem to be more correlated with the annual cash flow generated by the network, with a ‘cash flow multiple’ (=total value/annual cash flow) of around 8-9. While Discovery Health Channel has 70 million subscribers (it’s part of the large Discovery family of channels), that particular channel has been around since 1999 but only turned a profit in 2007, generating a mere $7 million in cash annually. It does not seem right to compare it on a value per subsriber basis to Oxygen, with a similar number of subscribers, since Oxygen generates almost 15 times as much cash flow as Discovery Health. It seems more appropriate to apply the cash flow multiple to the cash flow generated by Discovery Health (about $7 million a year), as that ratio is better correlated with acquisition prices:
Discovery Health’s Fair Market Value ($mill) =
We would like to present the case of The Oprah Winfrey Network (OWN) as an example of how the values of intangible assets can sometimes be found in daily news stories. This case presents some interesting valuation questions and provides a rare glance into a highly publicized joint venture based primarily on intangibles.
The following story first appeared on USA today in January 2008:
“Oprah Winfrey is getting her own cable channel, called OWN: The Oprah Winfrey Network. A deal announced Tuesday with Discovery Communications will create a 50-50 cable and Web venture. In the cashless transaction, Discovery will contribute its Discovery Health Channel, to be converted to OWN in late 2009 and simulcast in HD. Launched in 1999, the channel reaches more than 70 million cable and satellite homes. Winfrey's company, Harpo, will kick in her website, Oprah.com. “ 1
Putting our IP valuation experts’ hat on, we ask ourselves: is this a fair deal? For a 50-50 cashless deal to be fair, each party’s contribution needs to have about the same fair market value. OWN will be structured as a joint venture partnership where each party makes an” in-kind” contribution of assets - in this case: mostly intangible assets – in lieu of cash. It is this unique structure that makes it a very interesting IP valuation case study …
Let’s look at what each party is contributing to the deal:
1. Discovery – is contributing its Discovery Health Channel, which, by its own admission, was a struggling media entity at the time the deal was announced:
“Discovery Health faced an uncertain prognosis. It is drawing fewer than 200,000 prime-time viewers at a time when cable and satellite services want to cut payments for channels with small audiences. "They need audiences to jump-start (Health)," said SNL Kagan's Derek Baine. He said that Discovery Health became profitable in 2007, with $7.4 million in cash flow on revenue of $141.8 million. Discovery spokesman David Leavy said those numbers are "a bit high" but would not be more precise.” 2
2. Oprah – Winfrey's company, Harpo Productions, is contributing the website, Oprah.com, a very popular websites at the time the deal was announced, according to several sources:
“OWN will feature mostly original, nonfiction programming… focusing on topics Winfrey is known for -- health, love, spirituality, child-rearing and personal growth. The channel will coordinate with Oprah.com, Winfrey's Web site, which averages about 6 million unique visitors per month.” 3
“Oprah.com offers extensive expert advice, interactive workbooks, photos, video, inspirational stories, books and features to more than six million unique visitors with more than 80 million page views per month.” 4
What is the fair market value of each of the parties’ contributions into the OWN joint venture? Since we have no access to any of the parties’ detailed financial data (Harpo is privately owned), our analysis will be based on publicly available information.
Discovery Health Network. A cable network is a media property that includes a bundle of tangible (equipment, infrastructure) and intangible (broadcasting rights, content, and subscribers) assets. The most valuable asset for cable networks is their subscriber list, which is an intangible asset. Cable network values are often benchmarked using valuation metrics such as the ‘value per subscriber’, or ‘cash flow multiple’. We have looked at some transactions involving similar cable networks, and found two relevant data points relating to similar “lifestyle” channels: Bravo and Oxygen (another media venture backed by Winfrey), both purchased by NBC 5.
“OWN will feature mostly original, nonfiction programming… focusing on topics Winfrey is known for -- health, love, spirituality, child-rearing and personal growth. The channel will coordinate with Oprah.com, Winfrey's Web site, which averages about 6 million unique visitors per month.” 3
“Oprah.com offers extensive expert advice, interactive workbooks, photos, video, inspirational stories, books and features to more than six million unique visitors with more than 80 million page views per month.” 4
What is the fair market value of each of the parties’ contributions into the OWN joint venture? Since we have no access to any of the parties’ detailed financial data (Harpo is privately owned), our analysis will be based on publicly available information.
Discovery Health Network. A cable network is a media property that includes a bundle of tangible (equipment, infrastructure) and intangible (broadcasting rights, content, and subscribers) assets. The most valuable asset for cable networks is their subscriber list, which is an intangible asset. Cable network values are often benchmarked using valuation metrics such as the ‘value per subscriber’, or ‘cash flow multiple’. We have looked at some transactions involving similar cable networks, and found two relevant data points relating to similar “lifestyle” channels: Bravo and Oxygen (another media venture backed by Winfrey), both purchased by NBC 5.
Discovery Health’s Fair Market Value ($mill) =
9 x 70 mill subs = $63 million
>> we believe that the fair market value of the Discovery Health Channel in early 2008 was probably less than $100 million,
Oprah.com Website. A website is a bundle of intangible assets (domain, content, code, back links, etc), that are mostly protected by Copyright laws. Websites can largely be classified into E-commerce sites (selling goods & services online, ie. Amazon.com) and content driven sites. There are various models for valuing Content-driven websites, most of which are primarily based on web analytics related to traffic (ie, are a function of the number of unique visitors, number of web pages viewed, etc). The Oprah.com website can be classified as a Content-driven website, and therefore, we have turned to comparable transactions around the time the deal was annoinced to figure out the prices paid for similar web properties.
>> we believe that the fair market value of the Discovery Health Channel in early 2008 was probably less than $100 million,
Oprah.com Website. A website is a bundle of intangible assets (domain, content, code, back links, etc), that are mostly protected by Copyright laws. Websites can largely be classified into E-commerce sites (selling goods & services online, ie. Amazon.com) and content driven sites. There are various models for valuing Content-driven websites, most of which are primarily based on web analytics related to traffic (ie, are a function of the number of unique visitors, number of web pages viewed, etc). The Oprah.com website can be classified as a Content-driven website, and therefore, we have turned to comparable transactions around the time the deal was annoinced to figure out the prices paid for similar web properties.
An analysis of news articles from the 2005-2007 time period reveals that an often-quoted average ‘value per unique monthly visitor’ in web content deals was around $38 per visitor 6. In addition, larger sites seemed to be generating a higher price per visitor than smaller sites, ranging anywhere from $20 to over $200 7. We found two relevant data points related to transactions that took place in late 2007, and involved large content driven web properties:
We believe that the Oprah.com site should be valued at least at the average price of $38/visitor, but more likely at the $55-$65 range (or even higher, since it’s larger than both deals presented above) using the 6 million unique visitors, as reported by Harpo:
Oprah.com’s Fair Market Value ($mill) =
$38 x 6 mill unique visitors = $230 million
$60 x 6 mill unique visitors = $360 million
>> we believe that the fair market value of Oprah.com website in early 2008 was at least $200 million, and probably higher than $300.
Our analysis leads to an interesting valuation “puzzle”: why would Oprah Winfrey, one of the savviest business people in the world, be entering a 50-50 joint venture where the fair market value of her contribution is at least two or three times that of her partner’s?
While we cannot give a definite answer, we think that we have a few possible explanations, which we will share with our readers in Part 2 of our discussion of the OWN deal. In the meantime, we would be interested in your opinions - what would you advise Oprah Winfrey: Deal, or No Deal ?!…
$60 x 6 mill unique visitors = $360 million
>> we believe that the fair market value of Oprah.com website in early 2008 was at least $200 million, and probably higher than $300.
Our analysis leads to an interesting valuation “puzzle”: why would Oprah Winfrey, one of the savviest business people in the world, be entering a 50-50 joint venture where the fair market value of her contribution is at least two or three times that of her partner’s?
While we cannot give a definite answer, we think that we have a few possible explanations, which we will share with our readers in Part 2 of our discussion of the OWN deal. In the meantime, we would be interested in your opinions - what would you advise Oprah Winfrey: Deal, or No Deal ?!…
---------------------------
1 http://www.usatoday.com/money/media/2008-01-15-oprah-cable-channel_N.htm
2 Ibid.
3 http://www.washingtonpost.com/wp-dyn/content/article/2008/01/15/AR2008011501562.html
4 http://www.targetmarketnews.com/storyid01160802.htm
5 http://www.nytimes.com/2007/10/10/business/media/10oxygen.html?_r=2
6 For example: http://www.websitebroker.com/articles/website-valuation/simple-ways-to-value-your-website
7 http://seekingalpha.com/article/92809-valuation-metrics-of-large-vs-small-website-acquisitions?source=article_lb_author
1 http://www.usatoday.com/money/media/2008-01-15-oprah-cable-channel_N.htm
2 Ibid.
3 http://www.washingtonpost.com/wp-dyn/content/article/2008/01/15/AR2008011501562.html
4 http://www.targetmarketnews.com/storyid01160802.htm
5 http://www.nytimes.com/2007/10/10/business/media/10oxygen.html?_r=2
6 For example: http://www.websitebroker.com/articles/website-valuation/simple-ways-to-value-your-website
7 http://seekingalpha.com/article/92809-valuation-metrics-of-large-vs-small-website-acquisitions?source=article_lb_author
Monday, May 17, 2010
Developing IP Culture in Start-Ups
Picture this: you enter a meeting with a prominent VC fund to pitch your revolutionary idea, with your non-disclosure agreement (NDA) in hand… and they refuse to sign it! One of the worst fears many entrepreneurs have is that someone will steal their idea. However, a recent Kauffman Firm survey of close to 5,000 companies that started in 2004 shows that only about 2% of these companies have any form of patent protection! What most start-ups don’t realize is that it is relatively easy and inexpensive to establish some basic intellectual property (IP) best practices that would protect their innovation when dealing with investors, competitors, and employees.
IP can be a mystery to most people since they don’t think they have a direct hand in creating it. The first thing to realize is that virtually all employees within a company participate in creating, managing and maintaining IP. Even sales and marketing personnel are involved in tracking competitor’s products and may be the first to learn about possible infringement of the company’s patents. So, beginning on Day One, start-ups need to establish a strong IP Culture and develop a cradle to grave workflow process for establishing their IP position. Below are seven steps in getting the process started:
1. Don’t let your IP walk out the door. You need properly drafted contracts that assign IP rights to the company. Everyone needs to sign one, from company founders to employees. And don’t forget the contractors… If an agreement is not in place, an independent contractor typically owns the work product.
2. Manage your IP holistically – Competitor intelligence from the sales team, or method improvement from the manufacturing floor, are all forms of IP. Although most employees may think they do not have a hand in directly developing IP, it is a smart idea to take a “holistic” approach and teach employees across all functions about the importance of IP. In addition, create a centralized depository for ideas and innovation from all departments
3. Be like Coke – Protect your Trade Secrets. Since 1886 the formula for Coke has been protected by a trade secret. Identify your company’s information that constitutes trade secrets. Ensure that the information is recorded, filed away and secured against unauthorized access. Mark all documents with “classified” or “confidential”.
4. Codify your innovation. It is absolutely critical that researchers and engineers keep journals and documents to track their R&D work: research notes, product plans, etc. This establishes a paper-trail for the company which may be needed in case of defensive or offensive legal action in the future. This will also facilitate the invention disclosure process when it is time to file patent applications.
5. Know your IP landscape – It is recommended to run a patent landscape search to gain an accurate assessment of what patenting activity is going on in your industry. Information concerning competitors' IP should be updated on a regular basis and shared internally so that informed decisions concerning IP strategy and product development can be made. There are several patent landscaping tools available to conduct the search, and many service providers have special rates for start-ups.
6. Don’t jump the gun on provisional applications – Many start ups rush to file a provisional patent application that establishes a priority filing date for a year, without properly planning their IP filing strategy, or “roadmap”. However, if you file a provisional application prematurely, before the scope of your invention is clear, you may find that the provisional was a waste of time and money because it did not disclose the correct claims.
7. Plan for the long term– Even if your start-up venture fails, the venture’s IP is still a valuable asset. Investing in IP creates a long lasting asset that survives most intangible assets in case of bankruptcy. Today’s IP marketplace is very dynamic, with patents, trademarks and other types of IP being transacted regularly between companies, through brokers, in auctions, and in various other venues. Think carefully about your IP filing strategy with that long term asset in mind.
Visit us at www.foresightvaluation.com
IP can be a mystery to most people since they don’t think they have a direct hand in creating it. The first thing to realize is that virtually all employees within a company participate in creating, managing and maintaining IP. Even sales and marketing personnel are involved in tracking competitor’s products and may be the first to learn about possible infringement of the company’s patents. So, beginning on Day One, start-ups need to establish a strong IP Culture and develop a cradle to grave workflow process for establishing their IP position. Below are seven steps in getting the process started:
1. Don’t let your IP walk out the door. You need properly drafted contracts that assign IP rights to the company. Everyone needs to sign one, from company founders to employees. And don’t forget the contractors… If an agreement is not in place, an independent contractor typically owns the work product.
2. Manage your IP holistically – Competitor intelligence from the sales team, or method improvement from the manufacturing floor, are all forms of IP. Although most employees may think they do not have a hand in directly developing IP, it is a smart idea to take a “holistic” approach and teach employees across all functions about the importance of IP. In addition, create a centralized depository for ideas and innovation from all departments
3. Be like Coke – Protect your Trade Secrets. Since 1886 the formula for Coke has been protected by a trade secret. Identify your company’s information that constitutes trade secrets. Ensure that the information is recorded, filed away and secured against unauthorized access. Mark all documents with “classified” or “confidential”.
4. Codify your innovation. It is absolutely critical that researchers and engineers keep journals and documents to track their R&D work: research notes, product plans, etc. This establishes a paper-trail for the company which may be needed in case of defensive or offensive legal action in the future. This will also facilitate the invention disclosure process when it is time to file patent applications.
5. Know your IP landscape – It is recommended to run a patent landscape search to gain an accurate assessment of what patenting activity is going on in your industry. Information concerning competitors' IP should be updated on a regular basis and shared internally so that informed decisions concerning IP strategy and product development can be made. There are several patent landscaping tools available to conduct the search, and many service providers have special rates for start-ups.
6. Don’t jump the gun on provisional applications – Many start ups rush to file a provisional patent application that establishes a priority filing date for a year, without properly planning their IP filing strategy, or “roadmap”. However, if you file a provisional application prematurely, before the scope of your invention is clear, you may find that the provisional was a waste of time and money because it did not disclose the correct claims.
7. Plan for the long term– Even if your start-up venture fails, the venture’s IP is still a valuable asset. Investing in IP creates a long lasting asset that survives most intangible assets in case of bankruptcy. Today’s IP marketplace is very dynamic, with patents, trademarks and other types of IP being transacted regularly between companies, through brokers, in auctions, and in various other venues. Think carefully about your IP filing strategy with that long term asset in mind.
Visit us at www.foresightvaluation.com
Tuesday, May 11, 2010
The IP Valuation Spectrum
This is the first in a series of blogs about IP valuation. We wanted to address this topic because we’ve found it to be one of the most misunderstood topics in the management of intellectual assets. During our 15 years of working as IP consultants, we saw the migration of IP valuation from being a tool for estimating IP damages into more “main stream” applications. In order to understand the process we need to lay out the framework for thinking about IP valuation. Although the first question I always get after presenting myself as an IP valuation expert is: “how do you value patents”? I believe that it is actually the wrong question to ask, or at least, it should not be the first question. There are two fundamental questions that should be asked and answered first, in order to put the valuation into the right framework:
1. Why do you need to value the IP in question?
2. When do you need a valuation expert?
The answer to the first question requires a bit of a history…
With its roots in the IP litigation of the 1980’s and 1990’s, the valuation of IP (primarily patents) was initially limited to damages calculations in legal cases involving claims, such as patent infringement. With the introduction of tax planning involving IP, such as transfer pricing and patent donations, the need for IP valuation increased and the valuation of intangibles became critical in non-litigation circumstances. In tax reporting, companies now had to include the fair market value (FMV) of IP involved in transactions, such as the inter company transfer of IP or the donation of a patent to a university. New accounting rules related to business combinations, introduced in the mid- 2000’s, expanded the need for IP valuation even more, as companies were now required to report the Fair Value (FV) of intangibles that were purchased as part of a target in an M&A deal.
In addition to the above circumstances – tax, accounting, and litigation –, which we refer to as “Compliance” situations, there are other situations where an IP valuation could be beneficial for transactions, commercialization decisions, licensing, or general corporate planning. During the same timeframe, which saw the proliferation of tax and accounting rules mandating the valuation of IP, IP management teams were beginning to gain momentum in US corporations. Large companies with large patent portfolios were becoming increasingly sophisticated in managing their IP portfolios and had the need for IP valuations. The types of transactions they needed a valuation for included: spin-offs, in kind contributions, licensing, patents sales, and other commercialization activities. Since there are no governing regulations (such as IRS, SEC or other agencies) controlling the process, we refer to these IP valuation circumstances as “Non-Compliance”.
With regards to the second question – when do companies need to hire an IP valuation expert – the answer is two fold: when there is a very high degree of scrutiny, and when the opinion needs to be “bullet-proof” with the highest level of accuracy. Most Compliance circumstances fall under this category, and so the recommendation or requirement under these circumstances would be to hire a third party, independent IP valuation expert. The non-compliance situations are more of a “gray” area… the higher the degree of scrutiny of the level of accuracy required, the more likely the valuation cannot be done in house and an expert needs to be brought in.
The chart below displays the IP Valuation Spectrum, the compliance vs. non compliance situations and our recommendation on when as expert may be needed. The Compliance situations are highlighted in a box, with the rest being the Non-Compliance situations:
Visit us at www.foresightvaluation.com
1. Why do you need to value the IP in question?
2. When do you need a valuation expert?
The answer to the first question requires a bit of a history…
With its roots in the IP litigation of the 1980’s and 1990’s, the valuation of IP (primarily patents) was initially limited to damages calculations in legal cases involving claims, such as patent infringement. With the introduction of tax planning involving IP, such as transfer pricing and patent donations, the need for IP valuation increased and the valuation of intangibles became critical in non-litigation circumstances. In tax reporting, companies now had to include the fair market value (FMV) of IP involved in transactions, such as the inter company transfer of IP or the donation of a patent to a university. New accounting rules related to business combinations, introduced in the mid- 2000’s, expanded the need for IP valuation even more, as companies were now required to report the Fair Value (FV) of intangibles that were purchased as part of a target in an M&A deal.
In addition to the above circumstances – tax, accounting, and litigation –, which we refer to as “Compliance” situations, there are other situations where an IP valuation could be beneficial for transactions, commercialization decisions, licensing, or general corporate planning. During the same timeframe, which saw the proliferation of tax and accounting rules mandating the valuation of IP, IP management teams were beginning to gain momentum in US corporations. Large companies with large patent portfolios were becoming increasingly sophisticated in managing their IP portfolios and had the need for IP valuations. The types of transactions they needed a valuation for included: spin-offs, in kind contributions, licensing, patents sales, and other commercialization activities. Since there are no governing regulations (such as IRS, SEC or other agencies) controlling the process, we refer to these IP valuation circumstances as “Non-Compliance”.
With regards to the second question – when do companies need to hire an IP valuation expert – the answer is two fold: when there is a very high degree of scrutiny, and when the opinion needs to be “bullet-proof” with the highest level of accuracy. Most Compliance circumstances fall under this category, and so the recommendation or requirement under these circumstances would be to hire a third party, independent IP valuation expert. The non-compliance situations are more of a “gray” area… the higher the degree of scrutiny of the level of accuracy required, the more likely the valuation cannot be done in house and an expert needs to be brought in.
The chart below displays the IP Valuation Spectrum, the compliance vs. non compliance situations and our recommendation on when as expert may be needed. The Compliance situations are highlighted in a box, with the rest being the Non-Compliance situations:
Visit us at www.foresightvaluation.com
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