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TechInsights: managing patents in M&A deals

10-05-2016

TechInsights: managing patents in M&A deals

GAJUS / SHUTTERSTOCK.COM

Following a blockbuster year for M&A activity in the semiconductor industry, WIPR spoke to Mike McLean of TechInsights about his thoughts on the current boom and how companies should manage patents that are being bought and sold.

With $72.6 billion worth of deals in the first half alone, 2015 was a blockbuster year for mergers and acquisitions (M&A) in the semiconductor space.

That’s six times the annual average from the past five years, and this spate of activity is expected to continue.

As M&A continues to dominate the semiconductor industry, it’s becoming more important than ever to have a detailed understanding of your own patent portfolio and the portfolio you are acquiring.

One man responsible for leading a team of patent and engineering professionals that helps technology organisations protect, manage and use their patent rights is Mike McLean, senior vice president of intellectual property services at TechInsights.

“Pre M&A, we do a lot of the work,” he tells WIPR. “TechInsights sets up the framework, creates one or more taxonomies and populates it in an efficient fashion. There are many companies that offer to sort and evaluate patents but I think our method is unique in a number of ways.

“TechInsights’ approach requires a balance of applying software tools to human analysis, making sure that there are intelligent groupings. Our M&A clients need to know exactly how the groups read and apply,” he says. 

A positive outlook

McLean is confident that over the next few years the semiconductor space will be able to maintain the M&A activity levels that have been seen in 2015.

“Companies are looking to maintain or drive further growth, and being unable to do that with their existing products or markets, they bring in other businesses that can drive that growth,” he says.

“In particular in Japan, a number of semiconductor companies have been struggling. Bringing together two or more businesses can rationalise costs and develop a more competitive business at the end of the day.”

He adds that another piece of the M&A puzzle is the high cost in the semiconductor business with a lot of research and development and manufacturing expenses. This means that businesses need to have a certain scale to be profitable, driving new deals and providing “access to new technology, markets, patents and other intellectual property rights”. 

In May 2015, Avago Technologies announced its intention to acquire Broadcom Corporation for $37 billion, making it the largest M&A deal in the semiconductor industry during 2015. The plan was to form the world’s leading diversified communications semiconductor company. Hock Tan, president and chief executive officer of Avago, explained that the landmark transaction would unite the engineering capabilities of Broadcom with Avago’s heritage of technology.

Earlier that year, NXP Semiconductors and Freescale Semiconductor unveiled plans to merge in a nearly $12 billion deal. McLean believes the automotive space is and will be M&A-heavy in the coming years as companies look at developing self-driving or aided driving technology.

This could be just the beginning as takeover activity begins to heat up across the globe. “The Chinese government feels very strongly about developing a semiconductor industry within China. However, it’s very difficult to grow at a certain pace without the access to technology, experienced technical staff and patents,” explains McLean. 

“They’ve been looking at M&A activity which, so far, has met with limited success but there’s definitely a lot of churn there and the water is boiling.”

A nuanced approach

You could be mistaken for believing that identifying potential targets for acquisition is simple. “There’s always the obvious targets, but companies will consider a more nuanced approach,” he says.

“Companies can look at the technology available, the players in any given technology space, the quality of the IP and who the engineers are in a given field. There’s a level of landscape research that can help guide and find new opportunities for acquisition.”

Additionally, McLean says, it’s important to consider whether the company is being acquired outright or whether a business unit or product line is being bought.

“If the company is on the selling side, TechInsights looks at how you make decisions about what patents to keep and what patents to let go of for the business, what patents are needed to maintain the ongoing business and to support whatever patent strategy they have in place,” he explains.

“If you are not acquiring the entire company you may assume you’re acquiring certain assets. When the acquisition closes there may actually be different assets on the table.”

For the patent-heavy semiconductor industry, one of the first tasks that TechInsights completes is the key analysis of comparing each company’s portfolios. McLean warns that although that this can be done quickly using automated tools, in many cases the groupings that are created will not be relevant to the business.

“It’s vital to set up a meaningful framework or taxonomy that will allow you to make the right decisions and give you the data that you need to make those decisions.”

The time this set-up takes varies depending on the size of the portfolio, with the creation of the initial taxonomy being completed relatively quickly, within a few days to a week. It takes more time to populate the taxonomy, which provides the company with a quantitative analysis of the portfolio in terms of where there are overlaps, where there are differences and what can be done in these different scenarios.

“Usually, there are key products and essential parts to the deal which will need to be looked at more in-depth than a solely quantitative assessment,” he says.

McLean advises companies to thoroughly investigate what patents are being acquired. Although for confidentiality reasons the executive is unable to disclose specific examples, he reveals that in some deals companies have post-dated some decisions.

“For example, there’s an initial set of patents at close but in a year’s time when the acquirer has a better idea of the business, it could come back and get another 200 patents from this broader set.”

Crucial questions

McLean also reveals that a number of TechInsights’ clients want to know what patents to ask for when acquiring part of a business. If a large company has 50,000 patents and it tells the acquirer that 2,000 patents are relevant to the part of the business being acquired, how can the acquirer be sure that these are the correct patents? Are there any other patents in a broader set that need to be asked for?

Asking and answering these questions is essential to avoiding the potential pitfall that occurs when a company does not actually get the patents it believed it would acquire.

“If you are not acquiring the entire company you may assume you’re acquiring certain assets. When the acquisition closes there may actually be different assets on the table.”

The job is not finished after the acquisition is completed. It’s important to conduct a thorough analysis by “identifying the strong assets that can be used to drive different aspects of the business and support aspects of the company’s patent strategy”.

He adds that companies should also look at where they can afford to sell assets, what licensing activity is required, how to protect these spaces and what type of policing effort needs to be put in place in terms of maintaining a watch on competitors.

McLean discloses that TechInsights has been helping a client involved in a semiconductor deal. The company, which had acquired another business with several thousand patents, wanted to cut the number of patents by 25%.

“After increasing its patent maintenance costs by a factor of two times or more, it’s likely that there will be a portfolio audit and reduction of patent portfolio sizes through the sale of assets or not paying maintenance fees. TechInsights identifies what patents are essential to the business.”

Given the value of patents in the semiconductor industry and the spate of M&A activity, TechInsights makes it clear that it’s vital for a company to continuously assess its own patents and compare those with the patents it plans to acquire. 

M&A , NXP Semiconductors, mergers and acquisitions, patent,

WIPR

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