The problem with Patent Due Diligence in Mergers & Acquisitions, and how fixed

Such as employment or investment in mergers and acquisitions (M & A "), perform due diligence on patents, according to standard procedures of the M & A attorneys and investment bankers? If patents are an important aspect of the transaction value, probably" Get Re incorrect advice, as exercise due diligence. The due diligence is taken into account, the competitive landscape of the patent. If the patents are not competitivein the evaluation, the target company can be overestimated significantly.

For many years of experience in intellectual property and patents have been involved in a number of M & A, in which the patent was an important part of the underlying transaction. As a specialist patent for these steps, I was paid to M & A attorneys and investment bankers who were from the C-level management are recognized "trueExperts "because they have completed dozens of transactions per year. To this end, we have specialists in the field of patents have been directed to the following patent check boxes 4" due diligence checklist:

Patents are granted by the Patent Office?
If the seller has its own patents?
Make at least some of the claims relate to products of the seller?
Counsel for the seller to make silly mistakes that the patent difficult to sue for patent law before the court to make, would?

If these fields were marked"Complete" on the checklist of due diligence, M & A attorneys and investment bankers were in fact "CYA'd" patent issues and are free from liability for patent in the transaction.

I have no doubt that I have my homework due diligence done competently patent, and that I had "CYA'd" me into this business. However, it is clear that correspond to the granting of patents for M & A Due Diligence, in essence, an idea of how to do something stupida transaction patent. In truth, I do not trust myself with the bridge "feel for a patent due diligence, but I have no decision making powers at odds with the standard operating procedures for M & A experts. And I discovered that it is incomplete, the standard patent due diligence process was when I left, to the shards of a transaction under the M & A conventional method.

This is my client, one of the largest producers and tried toexpand the supply of non-commodity for the acquisition of "Clean Care, a small manufacturer of a patented product for the consumer. CleanCare My client turned out to be a good target for acquisition because the product meets CleanCare strong consumer demand, and ordered this time, he for a higher price in the market. With the acceptance by consumers for its unique product has been CleanCare continue to experience exceptional growth in sales and growth. However CleanCare had only one production for smalland was difficult to meet growing market needs. Clean Care in venture capital investors are also eager to cash after several years of continued funding for the operation in a small margin "of society. The wedding of my client and then CleanCare seemed a good match, and the M & A due diligence process has begun.

Clean Care due diligence had revealed that few possessions: a plant for the production of small, limited, but growing, sale and distribution of several patentson CleanCare unique product. Despite these activities, seemingly small, CleanCare asking price up from 150 million U.S. dollars. This price could only mean one thing: the value of Clean Care is only in the potential growth of sales of its patented product available. In this scenario, the exclusive product Clean Care is seen as fundamental for the purchase. That is, if someone could knock off CleanCare prevail differentiated products, and competition would be LLParis is the holding company for growth and revenue forecasts to drive the basis of financial models made the purchase.

Take my statements of M & A lawyer and head of investment banking in the operation I took aspects of the patent on the process of due diligence in accordance with normal procedures. All check-out. Clean Care possession of patents and had always paid the taxes. Clean Care patent had good work on patents: do size CleanCarewas protected by patents, and it is not obvious legal errors made in obtaining patents. So I gave the transaction a thumbs up in the form of patents. Although everything seemed to be positive, my client has the proud owner of Clean Care and products.

Fast forward several months. . . . I started receiving calls from visitors, the marketing team of my client based Clean Care product with competing products that have been observed on Earth. GivenMore than 150 million U.S. dollars were not spent for the acquisition CleanCare surprising that these marketing experts believe that competitive products will be infringing on patents Clean Care. However, I discovered that each of these products has been patented in a design competition, the legitimate product placement Clean Care. Since these knock-offs are not illegal, my client had no means to hit them from the market for competitors to take legal action.

Following thisincreasing competition for the product CleanCare began to occur in prices. To erode the financial projections, which began as a basis for the purchase of my clients Clean Care. The product sells CleanCare still strong, but should not interfere with this unexpected competition, the margins charged my client and investment CleanCare much longer and more costly marketing. In short, so far seems to be the acquisition of 150 million U.S. dollars CleanCare into a fiasco.

InIn hindsight, the competition was expected to be the product CleanCare during the M & A Due Diligence. As we later would appear a literature search on patents, that there are many different approaches to consumers confronted by the product of Clean Care. Clean Care of success on the market now seems to be due to the advantage of offering the first, in contrast to the real economic and technological advantages that the product will be.

If I knew what I know now, Ido not recommend that sell the product expectations Clean Care at a higher price because of market exclusivity. Instead, I want available to the team of M & A of the competition in product markets CleanCare was and show in fact, very likely, as we found a variety of solutions for the same problem mentioned in the patent literature. This can still happen, but I think the fact that the financial models driving the acquisition would be based. AsTherefore, my client has a marketing plan, based on the insight that competition is not only possible but expected to be developed. The marketing plan was then the offense than on defense. And I know that my client did not expect that on the defensive after more than 150 million U.S. dollars, for the acquisition Clean Care.

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.