Navigating Patent Due Diligence: Key Strategies for Mergers and Acquisitions

Mergers and acquisitions in technology-driven industries are important milestones in the corporate world and are increasingly becoming the path of choice for technology startups around the world. The value and quality of the intangible assets held by the seller often plays an important role in the buyer’s decision-making process.

For tech startups, patents can account for up to 50–70% of their total value. Patent due diligence is therefore an important part of mergers and acquisitions, where potential buyers evaluate a target company’s patent portfolio to clarify the scope, quality, and legal protection of the company’s intellectual property (IP). Research shows that due diligence during M&A can uncover up to 90% of intangible assets where traditional processes fail. Patent due diligence is a complex process with many factors to consider and challenges to overcome.

More About Patent Due Diligence.

The Need for Patent Due Diligence In 1998, Volkswagen made a serious mistake in patent due diligence when it acquired the assets of Rolls-Royce and Bentley for $900 million. However, it soon became clear that the deal did not include the prized Rolls-Royce brand.

This is yet another reminder of the importance of thorough patent due diligence for buyers involved in mergers and acquisitions (M&A).

(Source) Patent due diligence is an important part of M&A transactions.

a) Quantify intangible value.

This is important information for negotiating valuations and terms.

b) Assess risks and avoid future liabilities.

c) Protect the long-term viability of the buyer’s investment.

d) Provide input for post-acquisition product, technology and patent integration.

The process of patent due diligence in a merger or acquisition requires attention to the minimum process to achieve an accurate and comprehensive evaluation.

Comprehensive Analysis: Key Investigations to Prioritize in Patent Due Diligence

Important Research to Conduct During Patent Due Diligence: The first step in the due diligence process is to make a full list of all sellers’ patents and applications.

Typically, the seller will provide this list, and the buyer will have to search a worldwide patent database to cross-reference the list.

Patent databases such as PatSeer provide simple and comprehensive business search capabilities that can include all patents currently owned or previously owned by the seller and its subsidiaries.

Once the list is created, the following evaluations are important to the due diligence process: Patent

Validity and Future Costs: The buyer must know whether the patents under investigation are valid, for how long, and when they expire. You need to check the potential maintenance costs until it expires. and whether that protection can be extended (for pharmaceuticals) and at what cost.

Probability of Grant for Pending Applications: For pending applications, purchasers can estimate the probability of grant by reviewing the Patent Registry and available grant history data.

Ownership and Redistribution Analysis: Buyers should investigate the ownership of patents held by the seller to ensure that the seller is the sole owner of the patents and that there are no claims or disputes over the patents.

Infringement Risk: The Seller’s patents, which are public documents related to its inventions, can also open the door to potential future infringement lawsuits if the invention is based on someone else’s patented technology. It is important for companies to conduct patent due diligence (particularly his FTO investigation) before a transaction to identify infringement risks and design appropriate counterstrategies.

Scope of Protection: For the most important patents in a portfolio, buyers should analyze the claims to assess the depth and breadth of protection. This process helps identify any limitations or challenges to the scope of protection claimed by the patent.

Alignment of Product and Business Goals: As companies continue to adapt to changing market conditions, it is not uncommon for patent portfolios to become misaligned with the seller’s existing or future growth plans. Therefore, patent claims must be mapped to product and business objectives to assess the strategic direction of key patents and identify gaps that may require additional protection.

Evaluating Existing License Agreements: A license agreement is a legal document that authorizes another party to use the technology covered by a patent. The main purpose of these contracts is to generate revenue in the form of royalties.

Specific license agreements may limit the buyer’s wishes, so their details should be analyzed considering the value assigned to the asset. The process helps companies determine if they comply with their legal and financial obligations related to patents and serves as a precaution to identify potential risks associated with the technology they acquire.

Tackling Patent Due Diligence: Addressing the Challenges Faced by Teams

Time Limit: Assessing patent originality, legal risk, and validity takes time (although AI-driven patent database platforms like PatSeer.The various criteria that need to be evaluated can be time-consuming even when working with a team of experts. Total time varies depending on the company, buyer, and market environment.

Cost Limitations: The IP due diligence process ultimately saves companies from unexpected legal costs and future complications, but it requires an upfront investment. Costs vary depending on the services required, the size of your company, and the expertise required for the process.

Restricted access to information: Inadequate records and restricted access impede the patent due diligence process. Decisions are then made based on the information at hand, which can make it difficult to fully analyze the big picture.

Evaluation Limitations: Due diligence is based on facts and figures but is often subjective. In some cases, decisions may need to be made based on incomplete and inaccurate information, leaving room for subjective decisions.

Lack of Expertise: Due diligence relies entirely on the expertise of professionals involved in reviewing corporate mergers and acquisitions. However, the benefits of this procedure outweigh these limitations and buyers should insist on this procedure.

Investing the time and investment in a high-quality patent due diligence process provides protection against future risks and potential costs. In situations where there are significant time or resource constraints, a more superficial assessment of the patent situation may be necessary.

This type of evaluation focuses only on important aspects such as the patent’s ownership, legal status, challenges (if any), and remaining term. For example, you need to check whether the patent is still owned by the inventor (employee) or assigned to the company. Although this approach may not provide a comprehensive analysis, it can still provide valuable insights and help identify potential problem areas and opportunities in the patent landscape.

Eliminates some short-term risks associated with trading.

Conclusion

The importance of patent due diligence in mergers and acquisitions of innovation-driven companies cannot be overstated. This process highlights unintended consequences that could be detrimental down the road before signing a major contract.

Therefore, it is essential to perform patent due diligence regardless of the type (merger or acquisition), the size of the companies involved (small, medium, large), and time and cost constraints. Companies should view this as a non-negotiable commitment to protect investments made prior to acquiring the target company.