The Watercooler

Mid-Market Pros Look to Big IP Deals for Guidance

Transactions helmed by Thermo Fisher and Google underscore how intellectual property issues can often trickle down to the middle market

Thermo Fisher Scientific Inc.’s (NYSE: TMO) $13.6 billion acquisition of Life Technologies Corp. (Nasdaq: LIFE) in April was a megadeal, but the middle market can learn from the approach that bidders took toward the target’s valuable intellectual property (IP), or intangible assets, observers say.

Valuations are tightly tied to the IP rights of companies, says Michael Friedman (pictured), managing director at Ocean Tomo LLC, a Chicago investment bank that worked on the deal. However, many buyers don’t always understand the reason why, he adds.

Before Waltham, Mass.-based Thermo Fisher announced a merger agreement on April 14, in which it paid $76 per share in cash for Life Technologies, a number of private equity firms had been bidding as well. Bain Capital LLC, the Blackstone Group LP (NYSE: BX), Kohlberg Kravis Roberts & Co. (NYSE: KKR) and TPG Capital LP were each reportedly vying for the Carslbad, Calif.-based target.

“I asked if they thought about the IP of this acquisition and they said, ‘No, but why should we care?’” says Friedman, speaking at the Alliance of Merger & Acquisition Advisors' (AM&AA) Summer Conference in Chicago.

And if bulge-bracket private equity firms aren’t aware of the issues that riddle IP-rich transactions, “then there could be greater arbitrage opportunities in the middle market,” Friedman tells Mergers & Acquisitions.

The reason is because companies that fail to identify the related risk and liabilities of patents and IP assets accurately may not get the competitive advantage they’re looking for in the marketplace.

The $4.5 billion sale of bankrupt Nortel Networks Inc.’s 6,000-plus patents in telecom and Internet search, for example, proved to be a viable barrier to entry for tech players, he says. Nortel’s patents were sold to a consortium made up of Apple Inc. (Nasdaq: AAPL), EMC Corp. (NYSE: EMC), Ericsson AB (Nasdaq: ERIC), Microsoft Corp. (Nasdaq: MSFT), Research in Motion Ltd. (Nasdaq: BBRY) and Sony Corp. (NYSE: SNE) in July 2011 as a means of preventing Google Inc.( Nasdaq: Goog) from gaining an edge.

Sometimes, buyers may end up paying too much in a transaction, because IP is improperly valued, cautions Friedman.

“Wrong prices are being paid all the time,” he says. “And if you don’t do a proper assessment of a patent portfolio, then you don’t know what you’re buying.”

Recall bankrupt Eastman Kodak Co.’s IP assets were notoriously valued at $2.6 billion in 2011 before they were ultimately sold for about $525 million in December 2012.

“The rest of the world has yet to focus on intangibles,” says Hilco Streambank CEO Gabe Fried, who in 2011 advised Circuit City Stores Inc. on the sale of its patent portfolio to Imaging Transfer Co. LLC for $750,000.

Dealmakers tend to focus on “Ebitda as opposed to risk management, which is where IP comes into play,” Fried adds.

According to Ken Sanginario, founder of Corporate Value Metrics, valuing intangible assets can tack on added time to completing a deal—which may not sit well these days with dealmakers looking for a fast close. “Transactions can be a lot more fruitful, when you help those clients focus on all intangible elements,” Sanginario adds. “It’s well worth the process.”

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