Protecting Intellectual Property during Divestitures and Aquisitions
Gudmestad, Terji, Gudmestad, Ove Tobia, Research-Technology Management
Intellectual property is the cornerstone of a company's business strategy, often a major revenue source, and a strong selling point during a divestiture. Here's how to protect it.
OVERVIEW: As companies the world over strive to gain product market share through acquisitions and mergers, a strong intellectual property base must back the technology behind the acquired products. Accordingly, when management is considering an acquisition or merger prospect, the intellectual property assets must be scrutinized more thoroughly than ever In today's litigious environment, this proactive measure is a must. Similarly, a company divesting of product lines must also review its intellectual property assets to assure it does not disconnect from its ongoing business base. Key intellectual property supporting the remaining products must not be lost through the divestiture process.
The hypothetical company we shall call "American Widget Electronic Enterprises" has a problem. As part of a major conglomerate-wide restructuring, AWEE's biggest subsidiary, Military Microwave Systems, recently sold several product lines that were outside its core business, including its line of microwave filters.
Among the assets handed over to the buyer were all patents, trade secrets, and technologies related to its microwave filters. Might any other branch of AWEE need any of those intellectual property assets? Because no one bothered to find out, no rights to them were retained by either Military Microwave or its parent company.
Another subsidiary, Commercial Microwave Systems, learned too late that the patents on which it based its major product line-microwave transceivers-were part of the Military Microwave sale. Pre-sale carelessness stripped Commercial Microwave of the right to manufacture most of its products. Now it must either pay millions to buy back the core intellectual property-or shut down.
Whether a business is expanding through acquisitions, mergers or joint ventures, or divesting through an asset sale, intellectual property has become a critical component of the deal. The plethora of infringement accusations and lawsuits has sensitized industry to the need for a strong intellectual property position. A strong intellectual property portfolio, including a slate of patents, trademarks, copyrights, and protected trade secrets, can serve as a shield against claims of infringement by would-be aggressors. Such a portfolio can also provide an income stream in the form of royalties.
This article presents some considerations for a proactive approach when considering an asset sale or a purchase involving technology and intellectual property, from both the seller's and the buyer's aspect. By following such an approach, a company can ensure that as it meets tough competition and sells off incidental product lines, technologies and organizations, it not only gets top dollar for its assets, but also retains the intellectual property critical to continued development of its strategic technologies.
When Divesting a Business
1. Inventory and protect the company's intellectual property.-Savvy buyers look for businesses well-stocked with secure intellectual property. Before selling any subsidiary-or even an individual product line or technology-find out what the company owns. First, inventory all supporting intellectual property. Then make sure the following property is safe from infringement:
Patents, patent applications, and invention disclosures. A full slate of patents can be a strong selling point, particularly if they cover products or technologies being sold, either individually or as part of the divestiture of an organization. To determine how many products and technologies are actually protected, start by assembling all patents held by either the organization being divested or the organization that is selling an individual product or technology. Then compare the patents held with the products and technologies being sold. …