Introduction:
IP (intellectual property) plays a vital role in Mergers and Acquisitions. IP mainly refers to intellectual and intangible assets of the Company, it includes patents, copyrights, trademarks, etc., and even though it’s intangible it can be more valuable than the physical assets of the company.
Mergers and Acquisitions refer to when two or more companies join together to form one company, or when one company acquires the other company by purchasing more than 50% of shares of the other company it is called Acquisition and the former is called Merger. In broad terms, we can say that merger and acquisition mean, just two or more companies joining together to form a single entity. There are many methods for combining business other than Mergers and Acquisitions like Consolidation, Tender offers, Divestitures, Holding companies, etc.
Both IP and Merger and acquisition are related to each other as they both are related to the corporate world. And directly or indirectly Intellectual property plays an important role in every Merger and acquisition deal as IP is the main source of a company asset portfolio. While transferring IP, the due diligence of IP is necessary to avoid any exploitation.
Merger and Acquisitions:
Mergers and Acquisitions are the processes of combining two businesses together. Both mergers and acquisitions are different but they always are used together. The term “Merger” means an agreement where two companies join together to form a new company, for example, the Merger of Vodafone and Idea, Two big telecom giants of our country. The value of this merger is around $26 billion and they formed a new company named “Vi”[1]. There are 4 different types of Mergers and are Vertical merger, Horizontal Merger, Conglomerate merger, Reverse Merger. The term “Acquisition” means when a company acquires the other company (target company) or we can say that when one company i.e. Acquirer purchases more than 50% of shares of another company i.e., target company. Now, this acquisition can either be hostile or friendly. Friendly Acquisitions are more successful than Hostile takeovers because in friendly acquisition employees are more satisfied with their work as they are happy about this acquisition, whereas in hostile takeover employees are not happy with this acquisition so, they don’t work efficiently and effectively and i.e. why hostile takeovers are not successful for a long time. Example of Acquisition, the Acquisition of Walmart and Flipkart where Walmart Acquire Flipkart 77% of shares for $16 Billion[2].
According to Sir Milton Friedman (Nobel Prize in Economics) “basic purpose of every business operation is to maximize profit for its shareholders”. Mergers and Acquisitions help business to explore new market opportunities as two business combine together which increase their consumer base and it also reduces the competition among the two businesses. This helps in the rapid growth of the business as it increases the assets of the company and because of M&A there is the transfer of technology which helps the business to improve its products and services thus, it increases the sales of the business. Mergers and Acquisitions are a very important elements in any business. It is the most significant strategy for any business to grow instantly. However, it is a very tricky process but if it is done correct it really helps the business to grow rapidly.
In 2019, There was around 50,000 deal in Merger and Acquisition worth about USD 3.9 Trillion dollars throughout the world and out of which 1684 deals have taken place in India worth about 75.52 billion US Dollars[3]. Most deals around the world were mostly done in the pharmaceutical and biotech sectors. Two of the Top 3 M&A deals are done in the pharmaceutical sector i.e., the Merger of AbbVie and Allergan worth about 86.3 billion US dollars and the most expensive merger of 2019 is of Bristol-Myers Squibb and Celgene valued at around 89.5 billion US dollars[4]. The technology sector is another core area of M&A deals.
Intellectual Property:
Intellectual Property is the intangible property that is created by the human intellect. It is called intangible because it cannot be seen or touched and it is called property because we can purchase it or sell it. IP is the main source of the company’s asset portfolio. The person who creates an intellectual property owns it like any other tangible property and no one can use it without the permission of the owner of the IP. Intellectual Property Rights possesses “Right in rem” which means Right against the whole world. WIPO (World Intellectual Property Organization) is one of the specialized agencies in the UN (United Nations) and the main function of this organization is to promote the protection of Intellectual Property throughout the world.
Intellectual Property law is broadly divided into 2 parts and are Industrial Property and Copyrights. Industrial property includes Patents, Trademarks, Industrial Designs, Plant variety rights, etc. And Copyrights include any original work, Artistic work, Musical work, Dramatic work, etc.
There are 4 types of Intellectual property:
1. Patents: A patent is a special right given for an invention means a patent gives protection to the invention so that no one can imitate it, manufacture it, sold it without the permission of the patent owner. Patent law protects the inventions of the inventor. The validity of a patent is for 15-20 years from the date of filing the patent application and patents are territorial rights means it is limited to a particular area or a region according to the law of the country.
2. Trademarks: Trademarks are also called service marks. These are any word, design, or symbol which helps the seller to show his/her unique identity in the market to the buyers. The trademark act 1999, protects trademarks in India. Unlike patents, trademarks cannot be sold but their ownership can be transferred along with the product.
3. Trade Secrets: Trade Secrets are the secrets of a business and cannot be disclosed to anyone. It consists of any formula, design, algorithm, pattern, etc. Unlike patents, trade secrets are for an unlimited duration. The best example of a trade secret is the secret formula of Coca-Cola.
4. Copyrights: Copyrights are the rights that the creators have for their original artistic and literary work. The creative work can be musical work, educational work, dramatic work, etc. The copyright act 1976, protects the copyrights in India. Usually, copyrights are for the limited time period and this time period is until the death of the copyright owner and 60 years more after the death of the copyright owner[5].
Due Diligence in IP:
Due diligence is the means of investigating the party ownership, identification, valuation of assets, or checking whether this business is beneficial to us. So, before any M&A deal due diligence is necessary as it helps the business to know the pros and cons of any business activity. As we know that, IP is the main source of a company’s asset portfolio so the due diligence of IP is very important. Due diligence in IP helps the business in building new strategies for the business. There are some issues in IP due diligence like the process itself is moving so fast it is difficult for the person (who is doing this due diligence) to cope with this process even though that person is an expert in due diligence.
The due diligence of IP helps the Acquirer to evaluate the value of the Target IPs, it helps in the identification and verification of the IP asset ownership. The Acquirer can also know about any previous litigation matter of IP and can scrutinize third-party claims. The Due diligence of IP also tells us about the scope of protection of IP, the applicable territory of the IP, and the time period of IP. The due diligence of IP does not only help Buyers but also helps Sellers by ensuring them that they are not paying money to maintain some unused IP and it also helps sellers by letting them know about any potential risk or issue regarding IP that can hinder the sales.
The most famous example of negligence in IP due diligence in the M&A deal of Volkswagen and Rolls-Royce Motor. In this deal, Volkswagen faced a huge humiliation because of their negligence in IP due diligence. Volkswagen acquire Rolls-Royce Motor Cars for 780 million US dollars, later they come to know that the trademark of Rolls- Royce was controlled by Rolls-Royce PLC, not Vickers LTD, and Rolls-Royce PLC -transferred its trademark to BMW for 66 million US dollars. Volkswagen owned the Rolls-Royce car business and manufacture its car but cannot use its name. Later after, Volkswagen had a deal with BMW and they agree to give them to use Bentley.[6]
Role Of Intellectual Property in Mergers and Acquisitions:
1. Increase Company Asset Portfolio: Intellectual property is the main source of a Company Asset Portfolio. Intellectual Property makes the business more valuable and it can increase the profits of the business. In this present market conditions, it is very difficult for someone to invent something new, So, the company tries to merge together or acquire someone as it increases their IP portfolio. It is very important for an acquirer to evaluate the IP portfolio of the target company to check whether it matches the requirement of company objectives.
2. Competitive Edge: IP gives the company a competitive edge in the market. By Mergers and Acquisitions, the company may acquire unique capabilities or innovations or any secret formula and this gives them a competitive edge in the market. After having an edge over their competitors, the company is in dominating position in the market and it increases their products/services quality which increases their sales and profits.
3. Technological Transfer: By mergers and acquisitions, the transfer of technology from one company to another is possible. The company shares each other, their technological secrets, their business Algorithm, etc. and this helps both the companies to expand their business. With the transfer of technology, the companies can exploit the market opportunities and use the Intellectual Property to their full extent.
4. Diversification: With the help of mergers and acquisitions, companies can expand their business in different sectors. Mergers and Acquisitions help in the diversification of the business, Diversification is the strategy of risk management as diversification of the investment lowers the risk of the business and IP is the best source to increase company asset portfolio.
5. Growth: The main objective of any business operation is the growth of the business. So, any Merger and Acquisition deal’s main objective is to increase sales and maximize profit and IP play important role in every M&A deal. When one company acquires the other company then they also acquire their Intellectual property like Patents, Trademarks, Copyrights, etc. and they also get Brand recognition and Goodwill along with the IP. This all helps businesses in rapid growth.
Conclusion:
Intellectual Property plays a very important role in Mergers and Acquisitions. Intellectual property helps in the expansion of business as it is the intangible asset of the company and the main source of the company asset portfolio So, it is very important for any company to protect its Intellectual property rights. The due diligence of Intellectual property is also very important, any type of negligence in the process of IP due diligence can cost companies around in millions. Mergers and Acquisitions help businesses in increasing their asset portfolio, acquiring new techniques and abilities, expanding their customer base, diversification, growth of the business, etc. and IP helps mergers and acquisitions in achieving all of these objectives. So, we can say that the role of IP in mergers and acquisitions is very important.
[1] https://www.vodafoneidea.com/content/dam/vodafone-microsite/VIL%20Begins%20Operations%20(1).pdf
[2] https://corporate.walmart.com/newsroom/2018/05/09/walmart-to-invest-in-flipkart-group-indias-innovative-ecommerce-company
[3] https://www.lexology.com/library/detail.aspx?g=832c7b2d-102a-4708-9593-93c68174436d
[4] https://sagaciousresearch.com/blog/role-ip-in-mergers-and-acquisitions/
[5] https://www.mondaq.com/india/licensing-syndication/406982/copyright-law-in-india#:~:text=Duration%2FTerm%20of%20Copyright,the%20death%20of%20the%20author.
[6] https://www.nytimes.com/1998/07/29/business/international-business-bmw-to-get-rolls-royce-after-all-by-acquiring-the-name.html
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This Article is written by Prashant Kaushik, a final year law student of Bharati Vidyapeeth New Law College, Pune.
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