Maximizing the Value of IP Assets in a Distressed Situation

Since companies are increasingly finding themselves in distressed situations, here is a simple opportunity to act upon that often yields significant dividends: Invest in understanding intellectual property (IP). The IP of an entity needs to be understood as an important value driver for its business and a potent vehicle to increasing potential recovery. Understanding the underlying value of patents and trademarks in a distressed situation also helps guard against being criticized in the role as a fiduciary and/or advisor. Accordingly, sellers need to invest in understanding the IP assets that they are trying to optimize—even if the answers to a quick review point toward minimal residual value. The cost and benefit of being informed outweighs lost opportunities and potential liabilities arising from not understanding what exactly you have to work with. 

In examining the IP assets, issues such as ownership, encumbrances, enforceability, infringement, valuation and assignability need to be explored. There are important questions one must know the answers to before selling a patent or trademark that will have a significant impact on the salability, structure, value and ultimately financial recovery, including:

• Does the entity have free and clear title to the assets in question? If the rights are via a license, is the license in good standing and transferable?
• Are there currently any existing licenses (express or implied) that might impact the IP’s value? What is the scope, length and other material terms of such licenses?
• Is the trademark registered or is there an application? If registered, which categories, and when was first and last use?
• Is the IP currently infringing or being infringed upon? How big is the market—both current and potential use—of the IP in question? What are reasonable comparable royalties?
• What about any trade secrets? How might those be saved, captured and transferred?

Ultimately, successfully leveraging these assets depends in large part in understanding the strength of a company’s IP in the marketplace, as well as the factors that may increase the potential value among potential third-party interests. Here are a few brief case studies of transactions that illustrate the payoff from investing in the understanding of the IP in a distressed transaction:

• Commerce One Bankruptcy Sale: A portfolio of 39 issued patents were analyzed and marketed and determined to be important to Web services architecture. From an initial situation where little was known about the potential of the patents, a market impact study was conducted and numerous potential strategic acquirers were contacted and supported in their diligence. Initial valuation was driven up from a $1 million initial stalking-horse bid pre-auction to a successful close at public auction of $15.5 million.
• Airnet Communications Bankruptcy Sale: A portfolio of 59 U.S. patents, 31 ex-U.S. patents, seven pending U.S. applications and 18 pending ex-U.S. applications were analyzed and marketed. The investment made by the creditors drove the outcome up from an initial loosely-expressed interest in the $1.5 million to $1.75 million range to a completed transaction at $5.5 million—a three-time increase in the final price achieved for the assets.
• Organized Living Inc. (OLI) Bankruptcy Sale: The 363 Group was hired to sell the entire portfolio of OLI’s IP and intangible assets, which included registered trademarks and domain names. The bidding process concluded with the successful strategic acquirer bidding four times more than their initial bid for the assets.
• Sale of Defunct Company Assets: Pluritas, in its capacity as advisor to the surviving new company, was hired to sell off this single patent family for a to-be-unnamed defunct company that had interest expressed by a third-party potential buyer at $125,000 to $175,000. Three rounds of analysis and packaging were performed and published during the six-month transaction effort, each round resulting in the best offer on the table being significantly improved. The portfolio was finally sold for $1.75 million.

Hopefully by now the point has been made: What you get for IP assets is all about knowing with what you are working. Investing appropriately up-front will prevent accidentally transacting an IP on the cheap, and helps keep important constituents on-board and more supportive of any distressed transaction process and outcome.