Academic journal article Research-Technology Management

Using Patent Citation Analysis to Target/value Mergers and Acquisitions Candidates

Academic journal article Research-Technology Management

Using Patent Citation Analysis to Target/value Mergers and Acquisitions Candidates

Article excerpt

According to Mergerstat LP, there were nearly 19,000 Merger & Acquisition (M&A) transactions in 1999 and 2000. Many of these mergers involved companies whose success depends largely on the strength of their R&D. Recent examples include Dow-Union Carbide, J&J-Alza, and Deutsche Telekom-Voicestream. In most of these cases the press focused on characteristics of the merger such as combined sales and supposed synergies in product lines. Less attention was paid to whether the R&D labs were of equal caliber, whether the underlying science and technology were compatible, or whether the partnership overcame any R&D weaknesses of either firm.

In this article, we describe how analysis of company patent portfolios can aid the evaluation of these often-neglected aspects of mergers and acquisitions. We refer to a number of examples where patent analysis has been used to identify acquisition candidates, measure compatibility, identify strengths and weaknesses, and identify key innovators. Despite the insights provided by patent analysis in these cases, we suspect that its use in M&A targeting and due-diligence is still the exception rather than the rule.

Basics of Patent Citation Analysis

The idea of a patent is simple. An inventor or his/her company is granted a 20-year monopoly on an invention, in return for detailed disclosure of how the invention works. The idea behind the patent system is to spur innovation and technological progress. The incentive for the inventor is the exclusive control of his/her invention. Meanwhile the public gets to see how the current invention works, and can then improve upon it, rather than having to start from basic principles.

Due to the potential windfall from monopoly rights, companies have been obtaining patents at a record pace in the last several years. In 2001, the U.S. Patent & Trademark Office issued 184,174 patents, surpassing the previous record of 176,00 in 2000. However, simply counting the number of patents owned by a company may give an inaccurate impression of the value of its technology. This is because the value of patents is skewed, with a great deal of value residing in a small number of breakthrough inventions. As a result, it is necessary to examine not only the quantity of a company's patents, but also their quality.

One technique for measuring the quality of patents is patent citation analysis. This technique is based on the examination of the citation links among different patents, and between patents and scientific literature. When an inventor applies for a patent s/he must demonstrate that the invention is novel, useful and non-obvious to someone with average expertise in the same industry. To do so, the inventor cites to earlier patents and papers, and explains how the new patent improves on the earlier inventions. The patent examiner may also add citations to earlier patents that limit the scope of the new invention.

The idea behind patent citation analysis is that patents cited by many later patents tend to contain important ideas upon which many later inventors are building. A company with a large number of cited patents is thus likely to possess technology that is central to developments in its industry.

Not all important patents are highly cited, nor is every highly cited patent important. However, numerous validation studies have revealed the existence of a strong positive relationship between citations and technological importance. For example, Carpenter et al. found that patents related to IR 100 invention awards are cited twice as often as typical patents (1). Also, Albert et al. showed that patents identified by industry experts as important were highly cited (2). Other studies have revealed a positive relationship between patent indicators and stock market valuations (3) and between highly-cited patents and increased sales and profits in the pharmaceutical industry (4). …

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