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31 May 2019Patents

M&A: Big fish, small pond?

The big players in the IP services industry are getting bigger, with myriad merger and acquisition (M&A) deals being announced over the past year.

“CPA Global, the IP management company, continues to neutralise competitors by buying them,” says Jayne Nation, commercial director in the Cheltenham office of Wynne-Jones.

In October last year, CPA acquired the management business of Clarivate Analytics, just months after swallowing up market insight tool Filing Analytics and patent alert tool Citation Eagle.

It didn’t stop there—in late January the news broke that CPA had agreed to merge with rival IP management company ipan/Delegate Group.

“This consolidation will give CPA Global access to massive amounts of client information and lots of new business, cementing an overwhelmingly dominant position in the IP sector globally,” Nation avers.

As WIPR went to press the merger itself had not yet been completed and had been removed from CPA Global’s website.

"Any business action that limits customer choice is damaging for customers in any business sector and IP is no exception." - Jayne Nation, Wynne-Jones

When contacted by WIPR, a spokesperson for the company said: “The transaction is subject to customary regulatory approvals. The relevant processes are ongoing and we are therefore unable to comment further at this time.”

This move was part of a trend. The combined ipan/Delegate Group was formed in 2018 after ipan joined forces with Delegate, and Delegate itself was created in 2016 following the merger of Valipat and Envoy—this is a febrile market.

CPA Global was acquired by private equity firm Leonard Green & Partners, in a reported £2.4 billion ($3.1 billion) deal which was announced in August 2017.

Leonard Green may have been attracted by the potential earning power of service providers and, according to reports, had to fight off rivals.

On the M&A path

CPA Global isn’t the only player in the market on the acquisition path. Also in January, service provider Clarivate Analytics announced plans to merge with Churchill Capital Corp, a public investment vehicle, in a deal that values the combined company at $4.2 billion.

Churchill Capital is a special purpose acquisition company formed for the purpose of effecting mergers, acquisitions or similar business combinations in the information services segment of the broader technology services and software industry.

At the time, Jerre Stead, Churchill’s CEO, alluded to the attractiveness of Clarivate Analytics, saying the company has a “superior set of data assets, valuable customer relationships and extraordinary people”.

The deal came a few months after CPA Global acquired the IP management business of Clarivate Analytics. The business manages the payment and renewal processes for patents and trademarks.

What’s driving this deluge of activity? It appears that there’s something of the chicken and egg about it.

Much as in other industries, to keep pace with consumer demand, companies are increasingly focusing on a broader and better service offering.

Whereas 20 years ago, there were many small IP firms with different offerings across the value chain, there are now service providers with an end-to-end offering, says James Pople, managing director of investment bank DC Advisory, based in London.

He adds that there’s been a real influx of capital into the sector, from an increasingly wide pool of investor classes attracted by the potential earning power.

Simon de Banke, CEO of IP Centrum, a provider of European patent validation services based in Birmingham, UK, agrees that the multiples in IP have attracted the attention of private equity.

He explains: “If all else is equal, and a certain industry attracts a 10x earnings multiple (as a company’s value); then other factors come in to play as to whether one particular company is worth more or less than the 10x industry average.

“One thing which is almost universally accepted as increasing a company’s multiple is its market share (assuming that share is significant).”

De Banke adds that IP has been attracting very high multiples, in the high teens to mid-20s, so there are some very big wins available.

“The slightly sad thing about this, is that none of that is about innovation or creating spectacular services for clients. It’s just a corporate mechanism for capital growth,” he claims.

The flurry of consolidation is expected to continue, albeit on a smaller scale, given that providers are “becoming fewer and farther between”, according to Pople.

Looking east

One country in particular is destined to play its part in the continuation of this activity: China. As China begins to play a bigger role in global IP and with a more outward-looking focus, Pople expects to see consolidation in the IP service market combined with increased interest from Chinese capital in US and European IP services providers.

China is fast closing the gap in research and development (R&D) spend between the country and current top contender, the US. This, says Pople, is an indicator of how IP will develop in the Chinese market.

Combine the spend with patent applications—the World Intellectual Property Organization expects China, which filed 53,345 patent applications last year, to outpace the US and take the top spot within the next two years—and it’s clear that China is “outstripping” any other market in the world, says Pople.

“The sheer volume of patent applications going through the IP offices, and the number of grants coming out of the Chinese market, mean that companies will end up with an enormous amount of patents that will need renewing down the line,” he says, adding that if you’re a provider, you have to consider China.

“Chinese investors are likely look into IP providers with scaleable solutions that can be rolled out across the country.”

In Europe, the UK’s departure from the EU and the introduction of the unitary patent continue to cause uncertainty. But, as is clear from above, there have been some pretty big transactions in the service provider space.

According to Pople: “This suggests two things. First, that service providers are unwilling to be hamstrung by legislation. Second, that the inherently global nature of IP market will always overcome local noise and disruption.”

Firepower

With potentially greater firepower in terms of resources and penetration into the IP market, consolidated companies can pose a greater threat to traditional IP firms.

By pooling resources, companies can reduce overheads and can also offer a wider variety of services, says Nation, thus developing economies of scale.

Smaller firms will be out gunned, warns de Banke, who expects a period of attrition where firms that are not equipped to compete and fail to adapt may find it difficult to thrive.

For medium to larger traditional firms, de Banke adds, these firms have a much better chance of “creating a halo of truly stunning service quality and powerful, wonderful advice”.

“The good side is that while everyone is focused on pure size/capital value, they’re not focusing on delivering exceptional service and quality,” says de Banke. “Traditional firms can do this. It’s really hard for them to do it, just as it is for everyone else, but it really is possible.”

He believes that most of the investment is in commoditised services, rather than fee-earning advisory and consultative services so traditional firms can add “real brilliance and charge well for it”.

In the past, many law firms focused on both traditional ‘bread and butter’ advisory work and IP services work. Now, there appears to be a divide, with some law firms effectively withdrawing from the more process-driven services work, to focus solely on intellectual efforts, such as advisory and counselling.

However, the flurry of M&A activity could produce the knock-on effect of acquisition activity in the traditional space.

Nation believes that traditional firms might even find themselves being made an offer they can’t refuse for purchase of the company and may find trading conditions poor enough to be tempted.

However, there’s still a place for smaller and more innovative players in the market. This space doesn’t represent a vacuum that can just be filled by “me-too” services, says de Banke, adding that only genuine innovation can fill the space.

“As an industry, we have to genuinely improve what is being offered, not just continue to offer the same as we always have done. If you are nervous about consolidation, take solace from the fact that once it’s all about consolidation, it means it isn’t about innovation,” he adds.

In de Banke’s view, there are gaping holes in the IP industry for innovation.

“It’s a lot more fun to be David rather than Goliath, and Goliath rarely sees David as a big threat until it’s all over,” says de Banke. “There are wonderful opportunities for great innovators, and people and companies who are willing to step outside their comfort zones.”

However, it is consumers could bear the consequences of such consolidation, which effectively limits consumer choice and risks a pricing hike.

“Any business action that limits customer choice is damaging for customers in any business sector and IP is no exception,” says Nation, who adds that increased consolidation ultimately decreases client choice.

Questions of ‘why lower your costs and work hard for your customers if they have no choice’, and ‘why improve your service’, bubble up to the surface in the wake of consolidation.

Nation adds: “This increase in IP costs, should it happen, combined with a heavily consolidated and saturated market position with few IP independents, would spell bad news for clients.”

She advises clients to become more savvy about where they spend their money if they are to have any control over their IP dollar in a consolidated market.

“They now need to dig deep to find out how their IP companies operate, asking the right questions, such as finding out who owns their IP service provider, to satisfy themselves that they have the right deal and the right IP supplier for their business,” she concludes.

Change is coming to the industry, and those who are not prepared will feel the bite of consolidation. Traditional providers need to assess their practices and consumers need to delve into what they’re being offered.

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