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As a organization or investment expert concerned in mergers and acquisitions ("M & A"), are you conducting patent due diligence in accordance to the common practices of your M & A attorneys and investment bankers? When patents type a important aspect of the price of the transaction, you are possibly acquiring incorrect assistance about how to conduct due diligence. The due diligence method ought to take into consideration the aggressive patent landscape. If aggressive patents are not incorporated in your vetting process, you might be significantly overvaluing the target organization. In my many a long time of intellectual residence and patent expertise, I have been concerned in a quantity of M & A transactions where patents formed a considerable part of the underlying value of the offer. As the patent specialist on these transactions, I took course from very compensated M & A attorneys and investment bankers who had been acknowledged by C-degree management to be the "real experts" because they finished dozens of offers a year. To this end, we patent professionals had been directed to verify the following four boxes on the patent due diligence checklist: - Are the patents paid up in the Patent Workplace?
- Does the seller truly personal the patents?
- Do at minimum some of the patent claims cover the seller's products?
- Did the seller's patent lawyer make any stupid mistakes that would make the patents hard to enforce in court?
When these boxes had been marked "comprehensive" on the due diligence checklist, the M & A attorneys and investment bankers had effectively "CYA'd" the patent troubles and ended up no cost from liability relating to patents in the transaction.I have no doubt that I carried out my patent due diligence responsibilities hugely competently and that I, as well, had "CYA'd" myself in these transactions. Nevertheless, it is now evident that the patent facet of M & A due diligence basically conformed to someone's idea of how not to make stupid errors on a transaction involving patents. In truth, I in no way felt fairly comfortable with the "flyover" experience of patent due diligence, but I did not have determination rights to contradict the standard operating methods of the M & A professionals. And, I discovered out just how incomplete the standard patent due diligence process is when I was left to select up the items of a transaction conducted in accordance to standard M & A process. In that transaction, my client, a big producer, sought to expand its non-commodity products offerings by acquiring "CleanCo", a modest manufacturer of a patented client product or service. My client found CleanCo to be a excellent target for acquisition because CleanCo's products met a sturdy buyer need and, at that time, commanded a premium cost in the industry. Due to sturdy consumer acceptance for its sole product or service, CleanCo was experiencing great development in income and that progress was expected to keep on. Even so, CleanCo owned only a small production plant and it was acquiring issues in meeting the increasing wants of the market. CleanCo's venture funds investors had been also anxious to cash out following many many years of continued funding of the company's relatively marginal operations. The marriage of my client and CleanCo therefore appeared a very good match, and the M & A due diligence approach received underway. Due diligence revealed that CleanCo had few assets: the small production plant, limited but developing sales and distribution and several patents covering the sole CleanCo products. Notwithstanding these apparently minimal property, CleanCo's asking price tag was upwards of $150 million. This price could only mean one particular point: CleanCo's price could only be in the likely for revenue growth of its patented item. In this circumstance, the unique nature of the CleanCo product was appropriately understood to be essential to the obtain. That is, if a person could knock-off CleanCo's differentiated product or service, opposition would invariably outcome and ll bets would then be off for the growth and product sales projections that shaped the basis of the financial versions driving the acquisition. Taking my recommendations from the M & A lawyer and investment banker leaders in the transaction, I carried out the patent factors of the due diligence method according to their standard techniques. Almost everything checked out. CleanCo owned the patents and had kept the costs compensated. CleanCo's patent attorney had carried out a excellent career on the patents: the CleanCo item was covered effectively by the patents and there ended up no evident legal mistakes produced in acquiring the patents. So, I gave the transaction the thumbs up from the patent standpoint. When everything else looked positive, my consumer became the proud operator of CleanCo and its product or service. Quickly forward a number of months . . . . I began to obtain frequent calls from folks on my client's marketing team concentrated on the CleanCo item about aggressive merchandise that had been getting noticed in the discipline. Provided the truth that much more than $a hundred and fifty million was spent on the CleanCo acquisition, these marketing and advertising specialists not remarkably considered that the competitive products need to be infringing the CleanCo patents. Nonetheless, I discovered that each and every of these competitive merchandise was a reputable style-close to of the patented CleanCo item. Simply because these knock-offs had been not illegal, my customer had no way of finding these competitive products removed from the market utilizing legal action. As a outcome of this rising opposition for the CleanCo item, cost erosion started to take place. The monetary projections that formed the basis of my client's acquisition of CleanCo commenced to break down. The CleanCo item nonetheless sells strongly, but with this unanticipated competitors, my client's expected margins are not being produced and its investment in CleanCo will get much more time and costly advertising and marketing to pay off. In small, to date, the $150 Million acquisition of CleanCo seems to be a bust. In hindsight, the competition for the CleanCo products could have been anticipated for the duration of the M & A due diligence procedure. As we found out later on, a search of the patent literature would have uncovered that a lot of other approaches existed to handle the client will need addressed by the CleanCo product or service. CleanCo's success in the marketplace now appears to be because of to first mover benefit, as opposed to any actual technological or expense benefit furnished by the product or service. If I realized then what I know now, I would have counseled strongly versus the expectation that the CleanCo product or service would command a top quality price tag due to marketplace exclusivity. Fairly, I would demonstrate to the M & A team that opposition in the CleanCo product or service was probable and, without a doubt, extremely most likely as exposed by the myriad of solutions to the very same dilemma shown in the patent literature. The deal may possibly nonetheless have go through, but I believe that the the fiscal types driving the acquisition would be much more truth-based mostly. As a end result, my customer could have formulated a advertising and marketing strategy that was grounded in an knowing that levels of competition was not only feasible, but also probably. The advertising and marketing approach would then have been on the offense, fairly than on the defense. And, I know that my customer did not expect to be on the defense after shelling out a lot more than $150 million on the CleanCo acquisition.
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