Intellectual Property Value Creation and Monetization in Bankruptcy

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In a bankruptcy environment, intellectual property is often the last asset group to gain attention. Once the hard assets (i.e., A/R, inventory, equipment, real estate, etc.) are addressed, the focus then shifts to what's left-intellectual property and intangible assets. The intangibles represent the biggest opportunity to generate substantial incremental value for the estate through the "value creation and monetization" (VCM) process.

In a bankruptcy environment, intellectual property is often the last asset group to gain attention. Once the hard assets (i.e., A/R, inventory, equipment, real estate, etc.) are addressed, the focus then shifts to what's left-intellectual property and intangible assets. The intangibles represent the biggest opportunity to generate substantial incremental value for the estate through the "value creation and monetization" (VCM) process.

Inventory and Triage: The initial step in the VCM process identifies the full extent of the intellectual property and intangible assets owned and/or operated by the debtor. This group of assets includes the obvious assets, such as trademarks, patents, copyrights and domain names. However, there are additional assets that are typically overlooked, ranging from software and databases, to licenses and creative materials. Intangible assets generally fall into three distinct areas: marketing- based assets, IT-based assets and technology-based assets:

Marketing Bundle:
Primary trademark
Corporate name and logo
Marketing umbrella
Sub-brand names
Core brand
Worldwide trademark registration
Copyrights
Secondary trademarks
Packaging design and copyrights
Trade dress
Characters

IT Bundle:
Enterprise solutions
Custom applications
Data warehouses
Master licenses
Source code
Databases
Data mining
Domain names/URLs
e-Commerce sites
Third party software tools
Credit/payment systems

Technical Bundle:
Key patents
Trade secrets
Formulae
Packaging technology and sources
Shapes and sizes
Design technology
Proprietary test results
Plant and production design
Product specifications
Operating platforms

Once the assets are identified, it is important to triage the portfolio into the most logical bundles or groups. The bundling process develops a roadmap for categorizing the portfolio in a logical fashion for valuation purposes. From here, ownership of the assets is verified to confirm the debtor's rights. Encumbrances on the assets can severely impact asset value and hamper the ability to exploit the assets in the marketplace. In sum, the inventory and triage process serves as the foundation of the VCM process.

Valuation and Value Creation: Once the assets are identified, properly categorized and ownership rights are determined, the value creation process commences. With intellectual property, multiple contexts of value can exist. Initially, the "as is/where is" value sets the floor value for the assets. However, and more importantly, the value creation proposition is what differentiates intellectual property from the debtors' tangible asset counterparts. In other words, intellectual property presents the ability to leverage the assets into new opportunities. Whether via strategic licensing, joint venture, sale or other monetization scenario, intellectual property contains hidden value that, when properly exploited, can generate substantial returns for the debtor.

Monetization Process: Now that the assets are properly assessed, the "go to market" strategy must be developed. From a top-level perspective, intellectual property is by definition unique and few comparables exist in the marketplace. These assets require a strategic plan to effectively communicate the inherent value opportunities. Also, targeted buyers typically need more information about the assets and the opportunities than is offered through the static auction platform. Moreover, static auctions market the auction, and not the specific assets. To maximize value through the direct marketing campaign, the assets must be creatively packaged and communicated to an expanded universe of potential buyers. Direct marketers must possess a vast network of resources to reach a broader audience. While direct competitors may be the obvious targets, the expanded universe of potential buyers should include financial and strategic buyers. Additionally, buyers can be targeted through specific intellectual property and other industry resources such as:

International Trademark Association (INTA)
Licensing Executives Society (LES and LESI)
Licensing Industry Merchandisers' Association (LIMA)
American Bankruptcy Institute (ABI)
Turnaround Management Association (TMA)
Association of Insolvency and Restructuring Advisors (AIRA)
Commercial Finance Association (CFA)

The marketing of intellectual property is about telling a story, and this can only be accomplished through one-on-one interaction. Significant discussion is required during the due diligence phase. Buyers will need detailed information and will have a multitude of questions. This is the most important element of the selling process- identifying a need and creating a value proposition for the buyer.

Value Extraction Strategies: Extracting value from intellectual property and intangible assets can take a number of different forms-and requires marketing to a number of different types of potential buyers-these end-users typically include strategic buyers, financial investors, intellectual property owners and agglomerators, as well as competitors and professional IP management companies. This network includes people culled from our proprietary data base of 13,000+ transactions, as well as other proprietary and public sources. Successful strategies that we have pursued in specific cases include the following:

  • Sale of technology at a low price in order to recoup R&D tax credits at the federal level
  • Outright sale
  • Creation of an IP holding company
  • Partial sale of some assets with the balance being held by a successor IP management company
  • Dutch auction of assets to a variety of purchasers
  • Development of a licensing and brand extension strategy packaged with the assets for sale to an IP specialist
  • Sale of the assets to an offshore holding company, for internal use or license into overseas markets
  • Sale and leaseback of the IP assets
  • Securitization of the assets to generate working capital for a successful reorganization.

Each case is different and each value extraction strategy is unique-because all intellectual property by its very definition is unique, and the markets for specific intangible assets and IP changes on a relatively rapid basis. One final thought before looking at specific case studies: extracting maximum value from intellectual property is a five step process.

1. Identify all of the intangible assets and IP;
2. Understand all of the alternatives for value extraction;
3. Accurately value each asset or bundle of assets to establish priorities;
4. Design an overall strategy for the monetization process; and,
5. Manage the process early and intensively, using IP professionals.

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