Understanding the Role Intellectual Property Plays in Mergers and Acquisitions
The term ‘Intellectual Property (IP)‘ basically refers to the creations of the human mind that are intangible in nature. In simple terms, it pertains to the original creations of the human intellect, including inventions, symbols, designs, artistic works, literary works, and so on. In Article 2 of the WIPO Convention, 1967, Intellectual Property Rights (IPRs) relating to scientific works, literary works, artistic works, broadcasts, phonograms, performances of performing artists, scientific discoveries, inventions in the field of human endeavor, trademarks, service marks, commercial names, commercial designations, industrial designs, protection against unfair competition, and all other rights emerging from intellectual acts are defined well. Now let us define IPRs. They refer to the exclusive and legal rights safeguarding the unique creations of the human intellect for a specific period. Such rights confer an exclusive right to the owner of the IP asset to utilize his unique creation fully for a given period. They play a crucial role in businesses, specifically technology and biotechnologies companies, and constitute a considerable portion of their profits and overall strategies. IP, undoubtedly, has a vital role to play in establishing the worth of a company in the industry by carrying its innovation, product value, and brand value and safeguarding its brand name in the market.
In the simplest form, a merger refers to an agreement wherein the assets of two or more already existing businesses or companies are either vested into one company or, altogether, come under the control of one company. Such transactions usually happen between companies of similar sizes and where a company recognizes the benefits the other company offers based on increasing productivity, efficiency, capability, and sales. The terms and conditions of a merger are generally fair, mutually agreed to by the businesses and companies involved, and they become equal partners of the new venture.
Merger transactions are of the types specified below:
- Horizontal– A horizontal merger occurs between companies or businesses offering the same product line and those staying in direct competition. It usually takes place with the assumption that it shall enhance the cost efficiency of the new venture. This type of merger transaction helps increase the market size of the business.
- Vertical– A vertical merger occurs between companies or businesses providing supply chain functions for a common product or service. In most scenarios, a vertical merger usually gains more control in the supply chain process and lifts up the business. This type of merger transaction generally leads to increased levels of productivity and efficiency and overall reduced costs.
- Conglomerate – A conglomerate merger occurs between companies operating or functioning in unrelated business activities. It generally occurs between companies within different industries located in different places. Conglomerate mergers are further classified into two types, namely pure and mixed. A pure conglomerate merger occurs between companies having nothing in common, while a mixed conglomerate merger occurs between companies focusing on product and market extensions.
- Concentric – A concentric merger occurs between companies with different product and service lines; however, operating within the same market to sell to the same customers. Such companies are indirect competitors, although they sell different products and services. This type of merger can help the new entity expand its product lines and increase the market share as the individual companies involved have similar distribution channels.
In the simplest form, an acquisition occurs when a company buys most or all of the shares of another company, intending to gain control of the target company in question. The acquiring company, in this scenario, gets the power to make decisions concerning the acquired assets without seeking approval from the acquired company’s shareholders. Herein, the term ‘acquisition’ is nothing but an effort made by one company to gain a majority interest in the other. Reasons for acquiring a company or business may include seeking economies of scale, having a greater market share, and experiencing cost reductions.
Acquisitions can be further classified into the following two types:
- Stock Purchase– The acquirer, in a stock purchase, buys the target company’s stocks from its stockholders. The acquired company remains intact but comes under new ownership.
- Asset Purchase– The acquirer, in an asset purchase, buys the assets and liabilities of the target company mentioned in the purchase agreement. The structure, in this scenario, is desirable to the acquirers because they can choose only the assets they desire to purchase. In general, acquirers use the asset purchase strategy when they are willing to acquire a division or unit of a business within a company. Acquirers benefit from asset purchase acquisition in terms of increasing the market size and expanding the product line.
The Role of IP in Mergers & Acquisitions (M&A)
- Value Enhancement– One of the most crucial roles played by IP in M&A is that it leads to an increased value for the acquiring company. It helps the company grow in the market and achieve its business strategies and objectives. Without any doubt, innovations and inventions take a lot of hard work, effort, money, and time, making it arduous to come up with them every time in an inconsistent market. Companies, therefore, must look at the opportunities coming through M&A. If an already existing technology or innovation of one company is acquired by another, it is a win-win situation for both of them, creating greater chances of their expansion in the market.
- Technology Transfer – The buying of IP assets helps access the acquired company’s technology and provides a level of exclusivity in the ongoing market, which, in turn, helps the acquiring company promote development by commercializing the said technology. It also aids in the transfer of crucial data and business intelligence.
- Development & Growth – Development and growth are the essential aspects of every corporate strategy for profit maximization. In M&A, IP promotes the growth and development of the business when companies acquire assets like trade secrets, copyright, patents, etc. Companies must keep a check on the IP asset and its products so that they work as per the business requirements.
- Diversification – The corporate strategy of M&A helps companies explore, enhance, and expand into multiple new fields and diverse sectors of businesses. Through M&A and purchase of IP assets such as trademarks and copyright, a company gets pre-established policies, strategies, and resources to explore new areas, which helps reduce the cost of procedure or operation cost and other costs needed in the course of action. ✅ For more visit: https://www.kashishipr.com/