Insights

Multiplying Your Company’s Value With “Non-Core” Intellectual Property
POSTED 9.26.18 M&A

Many companies today are sitting on an untapped goldmine that could be worth tens of millions of dollars. Technology companies, in particular, are poised to benefit, especially those in Silicon Valley.

The gold is patents that are unused and not part of the core business. This intellectual property might not be valuable to the company that developed the technology, but the right Buyer would be willing to pay top dollar. And, you can start monetizing these assets now, as you’ll see in a moment.

A typical company will have dozens, maybe hundreds, of unused patents. They come by them in two ways.

First, through prior acquisitions over the years. Through acquisitions, companies build a stockpile of patents from the acquired company’s inventory of patents. 

Second, from internal development of patents through R&D; some ideas took off, some stayed on the drawing board because they weren’t really appropriate to the core business. Perhaps a printer company came up with technology more related to a phone, for example.

In standard practice, the company will hold on to those patents for years, until the business is sold. The Buyer gets all those unused patents as part of the purchase price, even if they don’t need them.

A 20%+ Jump in Value

By separating those non-core patents from the IP that is vital to the business, you can sell them in separate transactions, possibly to multiple Buyers who are interested in that technology. These “diamonds in the rough” could be worth potentially 20% to 30% – or more – of your company’s value.

If your company is valued at $100 million, you add another $20 million or more just from selling non-core IP. You can bet your board of directors and shareholders would be pretty upset if they found out these assets hadn’t been exploited.

Not many people know the potential value of non-core IP.

But the word on this emerging trend is getting out thanks to the work of people like Dr. Elvir Causevic, managing director of Houlihan Lokey’s Tech and IP advisory department. He’s one of the folks at the forefront of innovating this concept… and helping companies put it into practice.

In a recent study, published in an article in the Berkeley Business Law Journal, Elvir and co-author Ian McClure found that “non-core IP has been potentially material in at least half of over 1,000 public tech companies’ M&A deals in the past five years.”

That’s a huge number.

If you think that you’d already know if you had valuable patents in your back pocket, Elvir and Ian caution against that misconception. They say that CEOs of tech companies aren’t well-versed in monetizing or leveraging patents. And even a typical company’s IP team and general counsel “drop the ball.”

As they say in their paper, which is titled “Effectively Discharging Fiduciary Duties in IP-Rich M&A Transactions”:

“The general counsel and their IP department are typically staffed for, and focused on, day-to-day operational IP issues (patent prosecution at the various global patent offices, license agreements, and, as it arises, litigation), rather than strategic IP monetization.”

In one case mentioned in the white paper, a semiconductor company found its enterprise value boosted to $475 million from $125 million when it monetized its non-core IP.

The core business sold for $100 million. The company signed an IP license with their biggest customer for $25 million. And, most importantly, they sold about 400 non-core patents for $350 million.

Granted, that’s an extreme example. But it helps you see the potential in this course of action.

Valuing – and Cashing in – on Your Potential Goldmine

It’s clear that “spinning off” your non-core patents is a good idea.

But you shouldn’t wait until an M&A deal comes up to explore this option. If you’re negotiating with a Buyer, your hands might be tied if you don’t segregate these patents in advance because you have to disclose all your IP.

The Buyer will get suspicious if you won’t include non-core patents in the deal. They’ll wonder if they’re worth something.

Now is the time to tap into your non-core patents.

To get started…

  • First, go through all your patents and distinguish those that are essential to your business and those that are not.
  • Next, call Houlihan Lokey and give them the details on your non-core IP list. They have the most experience in this area and can give you an estimated value. (What is the value based on? How much could you sue for if it’s infringed upon is one starting point?)
  • If you’re sitting on $2 to $3 million, no big deal. But if you’re looking $20 to $30 million – that’s a good chunk of change.

At this point, it’s time to find a Buyer(s). Again, Houlihan Lokey is your best resource. They have a network of potential Buyers and have a knack for making those connections between your unused tech and those who want it.

They’ll approach the prospects on your behalf and handle the whole transaction; it’s a hassle-free process for which you pay a reasonable success fee.

The great thing about segregating your non-core IP is that there are several ways to monetize it, aside simply from selling them.

You can give access to other companies through subscriptions. You get a new revenue flow simply from sharing your patents through these licenses. And if you decide to include non-core patents in an M&A deal, you boost your asking price accordingly.

Take Advantage of this Up-and-Coming Trend

Not segregating your non-core IP before you sell your company could have you giving your Buyer millions of dollars of added value for free. It’s like having a garage sale without looking in all the boxes… and somebody digging around finds grandpa’s priceless stamp collection or a mint condition Babe Ruth baseball card.

The time is now to explore just how valuable your unused patents could be to the right Buyer.

I encourage you to check out Elvir’s white paper in depth to see best practices for segregating and selling your non-core IP. It gives you a clear path forward.

You can download it here.