The Problem With Patent Due Diligence in Mergers and Acquisitions and How to Fix It

As a business or investment professional in mergers and acquisitions (M & A "), you will be conducting patent due diligence in accordance with the standard procedures of your M & A attorneys and investment bankers? If the patents are an important aspect of the value of the transaction, you are probably always wrong advice about how to perform the due diligence. The due diligence is taken into account, the competitive position of patent landscape. When competition are patents that are not inTheir release process, you can significantly overestimate the target company.

In my many years of intellectual property and patent experience, I was involved in a number of M & A transactions involving patents constituted a significant portion of the underlying value of the transaction. Since the patent specialist for these transactions, I have very balanced direction of M & A attorneys and investment bankers, those of recognized C-level management as the "real experts" because theycompleted dozens of transactions per year. To this end, we were patent specialists advised to check the following 4 fields on the patent due diligence checklist:

If the patents granted in the Patent Office?
If the seller actually owns the patents?
At least some of the claims include the vendor's products?
If the seller a patent attorney to make no stupid mistakes that are difficult to enforce the patents in court would be?

If these fields have been associated with "complete" to the bottomDiligence checklist, the M & A attorneys and investment bankers had indeed "CYA'd" the patent issues, and were free from liability in relation to patents in the transaction.

I have no doubt that I carried out my patent due diligence very competent and I also had "CYA'd" me into this business. However, it is now clear that the patent represented aspect of M & A Due Diligence is why the idea of someone of how stupid mistake to make a transaction inPatents. In truth, I never felt entirely comfortable with the "fly-over" feeling of patent due diligence, but I have no decision making powers in conflict with the Standard Operating Procedures of the M & A experts. And I found out how incomplete is the standard patent due diligence process, when I left, to place the pieces of a transaction according to the standard M & A process.

Tries in this business, my client, a large manufacturer to expand its non-commodity productOffering through the acquisition of "CleanCo", a small manufacturer of a patented consumer products. My client found CleanCo met a good target for acquisition because CleanCo have a strong consumer and product range, then under the command a premium price on the market. Because of the strong consumer acceptance for its single product CleanCo has been experiencing tremendous growth in revenues and growth is expected to continue. CleanCo but owned only a small factory and it was having difficulty inthe growing demands of the market. CleanCo venture capital investors went to cash out also for further funding after several years of somewhat marginal activities of the company. The marriage of my customers and CleanCo therefore seemed a good game, and got the M & A due diligence process in motion.

Due diligence revealed that CleanCo few assets: the small production was limited, but growing sales and several patents, the only CleanCo product.Despite this seemingly low assets, was CleanCo asking price upwards of $ 150 million. This price could only mean one thing: CleanCo value was only the potential for sales growth of its patented product. In this scenario, the exclusivity of CleanCo product has been correctly understood to be of fundamental importance for the purchase. That is to say, if someone could knock-off CleanCo differentiated product that would lead to competition and the bets would then ll always be the path to growthRevenues and projections, which form the basis of financial models driving the acquisition formed.

Under my guidance from the M & A lawyer and investment banker leaders in the transaction, I have the patent aspects of the due diligence process in accordance with their customary procedures. Everything checked out. CleanCo owned the patents and had paid the fees forever. CleanCo's patent attorney had done a good job on the patents: The CleanCo product was protected by patents, and ithad produced no manifest error of law in obtaining the patents. So, I have the transaction the thumbs up from the patent perspective. If everything looked positive, my client has been the proud owner of CleanCo and product.

Fast forward several months. . . . I began to get frequent calls from people on the marketing of my client's team on CleanCo product to competitive products, were seen in the field is concentrated. Given the fact that it was more than 150 million U.S. dollars spent on theCleanCo acquisition, not surprisingly, these marketing experts believe that the products must be competitive against the CleanCo patents. However, I found that each of these competitive products was a legitimate design to CleanCo of the patented product. Since these knock-offs were not illegal, my client had no chance of these competitive products from the market with legal action.

As a result of increasing competition for the CleanCo product, priceerosion began to occur. The financial projections that formed the basis of my client's acquisition of CleanCo began to break down. The CleanCo product still sells strongly, but with this unanticipated competition, my client's expected margins are not being made and its investment in CleanCo will take much more time and expensive marketing to pay off. In short, to date, the $150 Million acquisition of CleanCo looks to be a bust.

In hindsight, the competition for the CleanCo product could were expected during the M & A due diligence process. As we learned later, would a search for the patent literature has shown that there were many other ways to address the consumer need, addressed by the CleanCo product. CleanCo success in the market is now due to first-mover advantage, as to any actual technological or cost advantage opposition for the product.

If I knew then what I know now, I would have strongly counseled against the expectation thatCleanCo the product would command a premium price because of market exclusivity. Rather, I want to show the M & A team that competition is possible in the CleanCo product shown and with high probability, as shown by the variety of solutions for the same problem in the patent literature. The deal may still go through, but I believe that the financial models driving the acquisition would be more reality based. As a result, my client, a marketing plan could have been formulatedgrounded in an understanding that competition is not only possible but also likely. The marketing plan then it would have been on the offensive, rather than on the defense. And I know that my client does not expect the defense, after more than 150 million U.S. dollars will be on the acquisition CleanCo.