IMPORTANCE OF IPR IN COMPANY VALUATION

BY

BARKHA SHRAVANI SAHU

Roll no-

Diploma 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.

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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

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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

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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
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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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