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Intellectual property drives business value


By FRANK SZIVOS

http://www.fairfieldcbj.com/current_issue/101705frop06.html

You often can't see it or touch it, but intellectual property (IP) might be a company's most valuable asset. Within the last 25 years, IPs (patents, trademarks and copyrights) have emerged as the primary driver of corporate assets.

The Association for Corporate Growth-Connecticut (ACG-CT) and Licensing Executive Society (LES), co-hosted a recent forum at the Millbrook Club in Greenwich, focusing the power of intellectual property in private equity deals. ACG-CT is a global association of professionals involved in corporate growth, development and mergers and acquisitions, while LES is a professional society for professionals engaged in development, manufacture, use and marketing of IP.

Guest panelist James Malackowski, president and chief executive officer of Ocean Tomo, an intellectual capital bank specializing in IP investment issues, said the time is ripe for early stage companies to profit from the importance of IP assets.

"For the U.S. economy, the shift from manufacturing to service is all but complete," Malackowski said. "We have now entered a new phase of economic development where value is captured through IP. Emerging business must have a thorough understanding and recognition of IP as a leading-asset class responsible for significant business growth."

Malackowski pointed out that investors are attracted to companies with IP assets. Research done by Ocean Tomo based in Chicago, has shown that investments in companies with strong intellectual property have a significantly greater chance of raising additional capital and offer half the risk of default. He predicted that investors will eventually hold portfolios of IP assets, similar to having a portfolio of stocks and bonds.

Panel member Emmett Murtha, president, Fairfield Resources International, services clients interested in developing and leveraging intellectual assets. The former director of licensing at IBM, noted that many companies sell off licensing rights to generate significant income. For example, IBM researchers perfected a laser eye surgery technique that it sold for $15 million.

"IBM was able to realize a nice piece of change," Murtha said. "And the company that purchased the IP rights did it so no one could compete and control the market."

Despite IBM's success, many companies have little or no clue about IP assets, often undervaluing or mismanaging them, Murtha said. Consider that:

+ Fewer than 3 percent of patents generate royalty income.

+ The Harvard Business Review reported that more than $1 trillion annually is wasted in patent assets. Failing to harness the power of IP is equally as negligent as failing to assign value to a company's IP portfolio.

+ Ernst & Young reports that patent licensing alone should soar from the $110 billion it generated in revenue in 2000 to $500 billion by 2015.

+ Qualcomm has generated as much as $430 million in licensing revenue in recent quarters while IBM has consistently brought in between $1.5 billion and $2.0 billion annually in licensing royalties.

Of course, mismanaging IPs presents other potential pitfalls. Companies that are negligent about IP rights can face a loss of patents, allegations of patent infringement and reserving enormous sums of money. There are plenty of examples of such problems. For instance:

+ Pfizer lost its patent for Viagra in China.

+ Brody Berman Associates estimates that the average cost of patent litigation is $2.5 million.

+ Research in Motion has reserved $100 million in view of its ongoing litigation

Robert D'Loren, president and CEO of UCC Capital Corp. and another panel member, noted that in the 21st century companies must realize that the power of the Internet that empowers consumers and the emergence of a world economy has dramatically changed the complexion of company assets and increased the value of IP.

"Remember that two years ago, 90 percent of home furnishings were produced here. Now, 90 percent of home furnishings are produced in China," D'Loren said. "The picture has changed incredibly. This is why intellectual property is so important." s