Intellectual property managementin M&A transactions

Mehdi Farhadi and George TovstigaHenley Business School, Henley-on-Thames, UK and

School of Management, University of Reading, Reading, UK

Abstract

Purpose – The purpose of this paper is to focus on the intellectual property (IP) aspects of mergersand acquisitions (M&A) transactions.

Design/methodology/approach – A holistic approach is proposed that embraces IP as an integralpart of the M&A process in the form of a roadmap for the strategic and purposeful management of IPassets in M&A deals.

Findings – Addressing IP issues in transactions in isolation can lead to undesirable consequences(e.g. considerable costs for unplanned purchases of rights). IP due diligence and IP integration projectprocesses can be automated using collaborative software solutions. Thereby, risk can be reducedthrough the creation of a high level of transparency and predefined responsibilities.

Practical implications – Although the proposed IP management framework is based onintellectual property matters relevant to German jurisdiction, conclusions derived and the proposedroadmap are transferable to other jurisdictions and hence have a broader relevance. Evidence for thisis provided by the successful application of the roadmap in the context of the multinational transactionstated above.

Originality/value – This paper is based on the authors’ collective experience, insight and reflectedobservation of M&A practice gained in advisory M&A roles in management consultancies over aperiod of more than a decade. The paper summarizes the authors’ reflections and observations andbrings these into the context of the current management literature. Moreover, this paper builds onearlier published research.

Keywords Acquisitions and mergers, Intellectual property, Transaction costs, Germany

Paper type General review

IntroductionAfter facing near-bankruptcy in 1971 and subsequent intervention by the Britishgovernment, Rolls-Royce was split into Rolls-Royce Motor Cars (automobiles) andRolls-Royce PLC (airplane engines) in 1973. In 1980, the British armamentsmanufacturer Vickers acquired the automobile manufacturer Rolls-Royce Motor Cars,divesting itself of the luxury brand in 1998. Vickers had originally planned to sellRolls-Royce Motor Cars to BMW, but Volkswagen came up with a more attractiveoffer and acquired Rolls-Royce Motor Cars for approximately USD 800 million.However, while the Wolfsburg-based automobile manufacturer assumed that it wasacquiring Rolls-Royce Motors with all that it entailed, it soon realized that the rightsto the Rolls-Royce trademark continued in the possession of Rolls-Royce PLC. Hencewhile Volkswagen now assumed ownership of Rolls-Royce Motor Cars, including themanufacturing plant, it did not own the brand name Rolls-Royce. This error in duediligence was to haunt Volkswagen, particularly when the rights to the Rolls-Roycetrademark were transferred from Rolls-Royce PLC to BMW AG. After the

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Journal of Strategy and ManagementVol. 3 No. 1, 2010pp. 32-49q Emerald Group Publishing Limited1755-425XDOI 10.1108/17554251011019404

Rolls-Royce and Bentley trademarks were separated in 2003, Volkswagen acquiredBentley and BMW received the rights to use the Rolls-Royce trademark. As a result,VW currently builds Bentleys in Crewe, while BMW manufactures hand-madeRolls-Royces in Goodwood.

The case of Volkswagen-Rolls-Royce transaction highlights the significance ofintangible assets and third-party intellectual property. Was this an unusualoccurrence? We would argue that it was not. In practice, we have found that keydeal stakeholders, collectively, seldom employ a holistic approach when managingtheir IP. Externals such as legal advisors tend to focus on IP due diligence reviews,while strategy advisors tend to focus only on growth options, and perhaps mattersrelated to performance. Internal company post-merger integration teams are rarelyfamiliar with the full range of the IP – related strategic management agenda. Inpractice, the danger for IP –related matters to ‘fall between the chairs’ is very great.Hence, not surprisingly, M&A deals often lack an integrated approach toIP-management[1].

Review of the literatureDuring the 1990s, companies began looking inward to their internal base ofcompetitive resources for building a basis of competitiveness. M&A deals thatfollowed were primarily to bolster the firms’ portfolio of strategic resources. From thegrowth through acquisition efforts companies hoped to achieve and extend their baseof competitive advantage. This resulted in a number of mammoth transactions[2].

M&A deals, however, represent high-risk strategies and are prone to fail. Indeed, asmany firms quickly learned, M&A deals are not necessarily the easy route tosustainable growth. In the recent decades, most M&A activities have failed to meettheir targeted strategic objective. Various figures on the failure rate have beensuggested: Marks and Mirvis (2001) suggest that three out of four mergers andacquisitions fail to achieve their financial and strategic objectives; Bourgeois andAbiad (2009) suggest that 65 percent to 85 percent of M&As fail.

M&As can create economic value by enabling a company to gain access to uniqueportfolio of resources and capabilities (Chatterjee and Lubatkin, 1990). Resource-basedtheories suggest that a company’s competitive performance hinges on its managementof its unique and inimitable resources and distinctive capabilities.

Penrose (1959) argues that companies seek their full potential through the effectiveand efficient application of all available resources. Differentiation relative to rivals canbe achieved on the basis of the sustainability of the company’s strategic stock ofresources and capabilities (e.g. Grant, 1991; Barney, 1991; Peteraf, 1993, Mahoney andPandian, 1992; Prahalad and Hamel, 1990; Stalk et al., 1992; Collis and Montgomery,1995; Amit and Shoemaker, 1993; Porter, 1991).

Resources are categorized into tangibles and intangibles (e.g. Collis andMontgomery, 1995). The latter category finds expression primarily in the form ofthe firms’ intellectual assets and competencies (e.g. Hall, 1992). According to Lev(2001), the organization’s intangibles:

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[. . .] are claims of future benefits that do not have a physical or financial embodiment. Whenthe claim is legally protected, such as patents or trade makes, the asset is referred to asintangible property (Lev, 2001, p. 5).

Clemente and Greenspan (1998) argue furthermore that:

Beyond the obvious attention paid to cost reduction, the primary focus for strategic dealstoday must be on melding complementary, non- financial assets with an eye toward growthand then extending their benefits over the long term through integration. This implies thateven in acquisitions aiming for market extension, managers have to increasingly address theacquisitions’ impact on the technology base and the companies’ future innovativeness.

Given the increasing importance of intangible assets, M&As require propermanagement and valuation of such assets – whether this involves determining thevalue of a license to the licensor and licensee, pre-deal clearance of patent maintenancefees, ensuring the post-deal right of use of the target’s intellectual properties by thepurchaser, and collateralization and securitization of intellectual property following thepost-deal integration phase (Smith and Parr, 2000, pp. 15-55).

Intangibles play an increasingly important role in determining the “enterprisevalue” in M&As. They account for 87.9 percent in the case of Johnson & Johnson; 88.5percent in the case of Proctor & Gamble; 93.5 percent in the case of Merck; 97.8 percentin the case of Microsoft; and 98.9 percent in the case of Yahoo (Smith and Parr, 2000).They are significantly material to purchase price agreements.

In support of this, Reizig (2004) points out that intellectual properties contribute tothe competitive standing of companies by potentially:

. providing a temporary technological lead (incumbency);

. protecting brand names; and

. supporting the formation of industry standards.

Intellectual propertyThe lion’s share of money spent on modern mobile communications devices is spent onthe intangible value of the product, i.e. for patented microprocessors, software,production methods, trade secrets, design, brands and trademarks. The rest, anegligible share, is attributable to the actual materials. The intangible value built into aproduct is part of a class of intangibles known as structural assets. Structural assets –the focus of this paper – represent an explicit form of intellectual assets.

Since firms’ IP has become a major factor in determining the enterprise value ofmany companies involved in M&A, IP assets are considered amongst the importantresources in a transaction (Lamb, 2002, p. 2.3). Companies acquire “rare” intellectualassets, such as patents, trade-secrets, knowledge or new business models. Theyrepresent the essence of the value underpinning a technology; indeed. Bannert (2004,p. 182) argues that lack of intellectual properties related to technologies can be seen asa low level of mastering the technology as an asset. These arguments are supported byReizig (2004):

In recent years, the primary locus of value for many corporations has been found in theirintellectual property rights. By one informed estimate from the late 1990s, some

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three-quarters of the Fortune 100’s total market capitalization was represented by intangibleassets, such as patents, copyrights and trademarks.

Intellectual property rights (IPR) govern the legal protection afforded to intellectualproperty (Table I). Caulder (2007; p. 6) stresses the importance of IP assets indeals:

If a business does not aggressively monitor, protect and maintain intellectual propertyrights, it may be required by a third party IP owner to pay license fees, to stop using theprotected IP rights, and/or be forced into expensive and time consuming litigation overdisputed IP rights.

Copyright. Hildebrand and Klosek (2001) suggest that copyright governs thereproduction of works (e.g. audio-visual files, documents, written texts andcertificates). As such, it represents the protection of intellectual property. Acopyright protects neither the underlying idea nor the concept following from it. Inmany jurisdictions, copyrights are non-transferable such as under German law. Insome industries, such as the film and music industries, copyright is a critical element ofthe business model. Copyright arises automatically after creation of the work and doesnot require registration. Widely accepted, the owner of the copyright is the author ororiginator of the work. If several persons have collaborated to create a work, they canexploit and use the work together as joint authors pursuant to Sec. 8 UrhG. Consistentwith other Anglo-Saxon jurisdictions, copyright has a limited life spanning 70 yearsafter the death of the copyright owner under German Copyright Act. Copyright coversboth the rights of exploitation and the personality rights of the author. Employers areusually entitled to use any works created by their employees within the scope of thecontractual relationship between employer and employee. Generally, employers areonly entitled to simple rights of use.

Patent. As the protective right to an invention, a patent gives its owner the right toprohibit others from using the patented invention. This means that the productionand/or use of a patented product and commercial use of a patented process areprohibited without the express permission of the owner of the right. The value of apatent in an M&A deal depends primarily on its remaining term and scope ofapplication. Risks are probable if this is not “extensive” or “comprehensive”. As part ofthe IP due diligence review, the extent to which the target company is dependent onthird-party patents must be identified and confirmed. Such a dependency can slowdown the integration of the target company into the buyer’s organization. Consistentwith the non-renewable term of patents in most countries, German Patent Actstipulates a maximum life of 20 years from the patent’s registration date or the date offiling of the patent application.

Trade mark. Trade marks (also “marks”) help companies distinguish themselvesfrom their competitors. A trade mark is usually a word or symbol. It is frequentlycombined with a patented product (e.g. “Coca Cola” and “cola bottles”). A trade markmay be established in conjunction with a distinct product or service. Generally, trademark rights can be acquired through the use of a mark in association with a good orservice in the marketplace. Trade marks have unlimited terms and may becometherefore a valuable intangible asset. Trade mark registration is generally subject to

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Table I.Intellectual propertiesassets

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periodic renewal, Canadian jurisdiction requires for example that trade markregistrations last for 15 years from registration date, renewable every 15 years(Caulder, 2007).

Trade secrets. Trade secrets are confidential information such as that might includecustomer data, computer software, databases and customer references, research anddevelopment plans, supplier agreements and special terms offered by a lender. Tradesecrets are valuable as long as they remain secret from competitors. Therefore, withinthe scope of an IP due diligence, the buyer must ensure that the target company’strade secrets are systematically shielded from third-party access. In a transaction,trade secrets are transferred either as tacit knowledge through employees or asexplicit knowledge in the form of data and information stored in a database. Thetreatment of customer data is regulated by the BDSG [“Bundesdatenschutzgesetz”:German Federal Data Protection Act]. In a transaction, customers must be informed ofand consent to the transfer of their data to the vendor in advance. Consent must beobtained before closing. This is particularly important in cross-border M&A dealswhen data leave the country of the merging companies and are commercially used orstored in databases or online media outside of Germany. Data protection is based onthe local laws of the country of origin. German Data Protection Act is designed toestablish “privacy.”

Software licenses are another type of IP asset, which is often neglected. Licenseagreements grant a third party the right of use (computer software or a registeredtrademark) under stipulated conditions. The licensing of standard programs isgoverned by Sec. 69 UrhG. The license grants the right to use computer software at adefined number of workstations and make a reasonable number of backup copies. Inthe event of an acquisition, carve-out or merger, it must be ensured that externalsoftware has been licensed with utmost care. Furthermore, the rights to transferexternal licenses to the buyer need to be examined and confirmed within the scope of adue diligence review.

Intellectual property in M&A transactionsMergers and acquisitions hold the promise of providing the buyer direct access to thetarget’s intellectual properties. Transferring IP assets and their right of use from thetarget organization to the buyer embodies an “IP transfer chain.” Transferring IPassets needs to make financial and strategic sense for all parties. If the M&A deal leadsto further restructuring, e.g. outsourcing of central IT functions following an M&Adeal, operative and legal transfers of IP assets to third party service providers becomemore complex.

Figure 1 illustrates the practical and legal complexity associated with the IPtransfer chain in an M&A deal:

. The seller – in our case a major OEM giant – divests itself of a business unit(asset carve-out);

. The divested business unit as a stand alone company requires “the right of use”of several IP assets (e.g. design patents for the production of cars or access to thesource code of the transferred SAP applications to the new organization for

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adjusting financial reporting measures). This may be seen as the second transferof IP assets from the seller to the target;

. Post-separation, the carved-out business is subject to the buyer’s post-dealintegration plans. In this context, the 3rd transfer of IP assets to the buyer’sorganization needs to take place; and

. Most notably, due to the buyer’s main strategic objective - maximizing costsynergies through outsourcing of central functions, e.g. IT – the IP assets areagain transferred to a third-party service provider, e.g. licences, source code ofproprietary business intelligence applications, and customer related data.

Warranties, representations and guarantees (also known as M&A representations)by the vendor are an important part of the negotiations and the agreement text inacquisitions. They help the buyer ensure that all information regarding IP assetsand their transferability is correct on the transfer date (“day one”) and that all IPissues have been clarified. M&A representations are often negotiated for a fixedperiod. In the event of a legal dispute after the representation period, the buyerusually has no enforceable claim to damages if the vendor has acted correctly in thedue diligence. Such representations and warranties are also frequently limited to aset maximum amount. A legal dispute can be costly and time-consuming for allparties, therefore any unanswered questions regarding IP assets need to beaddressed before closing.

Figure 1.Example of an IP transferchain in an asset deal

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Intellectual property management approachIP management process in an M&A transaction needs to span the entire M&A process.The M&A process generally comprises a preliminary phase (pre-announcement), atransaction phase (pre-closing) and an integration phase (post-closing).

(1) Preliminary phase. Merger or acquisition-fueled growth begins with thedevelopment of an appropriate strategy and the search for a suitable candidate(Farhadi and Tovstiga, 2008a). The transaction strategy should facilitate accessto the target’s new IP assets.

(2) Transaction phase. Schmitz (2004) claims that the transaction phase includes IPdue diligence reviews, IP integration planning, business valuation and theactual transfer of liability and control over the company or the shareholding(closing). A thorough examination of the target’s IP assets can pinpoint the IPrisks and integration potential. The IP due diligence avoids potentialinfringements of third-party IP rights and ensures that IP rights are treatedwith due care during an acquisition or merger. The value of the target is thedecisive factor for continuing an M&A transaction. A target is valued on thebasis of its working capital, fixed capital, intangible assets and intellectualproperty (Smith, 2002).

(3) Integration phase. The closing marks the transition from planning mode toexecution mode (Gottgens and Scheinwaerder, 2006). In this phase, the target’sIP assets, identified during the transaction phase, are integrated into the newpost-merger organization.

Based upon research reported by Caulder (2007), Combs and Yates (2007)and our own experiences and insights derived from M&A practice we proposethe roadmap framework presented in Figures 2 and 3 for an integrated IPmanagement approach. The framework consists of four phases: IP strategy; IP

Figure 2.M&A process at a glance

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Figure 3.Intellectual propertymanagement approachin M&As

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due diligence; IP risk management and IP integration planning; and IPintegration.

The individual stages of the framework are described in detail in the followingdiscussion.

IP strategyIP assets are a potentially powerful strategic component for building a position ofsustainable competitiveness in all knowledge-based industries. However, theirrelevance and potential for value contribution must be alignment with the strategicrationale underpinning the MA& deal. “Organic” development of intellectual propertyis usually a drawn-out and costly matter. Well designed and executed M&A deals canunlock or speed up access to new or strategic IP assets in transaction mode, therebyenabling inorganic growth driven by intellectual capital. Therefore, the top priority inthe first phase of the IP management approach in a merger or acquisition should be toidentify strategic growth options provided on the basis of intellectual property.

Danzon et al. (2007) examined the determinants and effects of M&As in thepharmaceutical and biotechnology industry using SDC data on 383 firms from 1988 to2001. They provide evidence that mergers of larger pharmaceutical and biotechnologyentities are a response to expected excess capacity due to patent expirations and gapsin a firm’s product pipeline. IP rights play a significant role in this context. Genentech,the US-based biotechnology company that uses human genetic information to discover,develop, manufacture and commercialize biotherapeutics, for instance, purchasedTanox as its first acquisition for USD 919 million in 2006. According to MergerMarket,Genentech’s rationale for its first merger in its 30-year history was to extend itsIP-protected product pipeline.

IP due diligenceAccording to Caulder (2007), one key aim of the second phase and, as such, of anIP-oriented growth strategy as pursued in an M&A transaction is to gain access to thetarget’s IP assets. In this context, a clear understanding of the scope and nature of theIP in question is essential. Due diligence of intellectual property, describedschematically in Figure 4, is instrumental for this.

IP due diligence serves the purpose to collate information on the target’s IP assetsand facilitate their post-deal integration. Moreover, IP due diligence helps to identifyrisks and secure evidence underpinning the IP due diligence results; it enables asystematic analysis of detailed facts about the target’s IP assets, their transferabilityand future rights of use for the buyer within the scope of a business transaction. IP duediligence is also performed during management buy-outs (MBO) or leveraged buyouts(LBO), when raising risk, debt and equity capital, in initial public offerings (IPO),reorganization/restructuring, outsourcing and the privatization of public enterprises.

Both parties in an M&A transaction typically carry out IP due diligence. In abuy-side IP due diligence, the buyer ensures that there will be no surprises after thepurchase agreement has been signed. In a sell-side IP due diligence, the vendorendeavours to have selected IP rights transferred to a potential buyer in order tounderpin the desired value or price of the target company with sustainable IP assets.

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Figure 4.IP due diligence

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Meilmann and Brady (2003) suggest that an IP due diligence report comprises threetypes of information:

(1) existing facts or information on IP assets and related agreements;

(2) relevant IP risks; and

(3) strategic options for IP risk management as well as potential integrationproblems and challenges.

Figure 4 lists the key questions posed in an IP due diligence.

IP risk management and integration planningThe third phase of IP management targets the risks and weaknesses already identifiedin the IP due diligence. Challenges arising from integration and measures regarding thetransfer of IP assets are also addressed in consultation with the relevant departmentsand legal counsel. This phase is essential for the active management of IP risks prior toclosing. While this is happening, the major integration activities need to be identifiedand planned.

A company’s external stakeholders also need to be considered. IP-related questionsand requirements are not always treated with the desired level of urgency to be a toppriority in this phase. External owners of IP rights can take an opportunistic stancetoward the buyer, which may have undesirable effects that are beyond the control ofthe actual parties to the transaction, including, for example, an increase in royalties dueto the operational change resulting from the deal (LaCount, 1994).

IP transfers. Many intellectual property assets, such as software licenses, generallyrequire (unless otherwise contractually stipulated, which is seldom the case) theconsent of the owners of the IP rights to transfer the IP assets and their rights of use tothird parties (buyers). This is where internal departments and the buyer’s or vendor’slawyers are called in to review the legal framework. This requires an exact evaluationof the target’s IP assets and rights. Bird et al. (2004) argue that there are two methods ofIP transfer in M&A deals in Germany:

(1) IP assets based on “transactions imposing a legal obligation”; and

(2) IP rights based on “transfer transactions”.

Transactions involving software products being used in companies are a factor thatshould not be underestimated. The various restrictions on transfer, sub-license abilityand connection with other software products, which are usually included in standardlicense agreements, must be considered and the “chain of title”[3] has to be reviewed. Inthe first place, the transferring company must be able to transfer its IP rights to thebuyer, if necessary obtaining the original owner’s consent to the intended IP righttransfer. In the case of larger software providers, the number of licenses can beadjusted up or down by submitting annual requirement reports.

It is paramount that all questions surrounding IP assets be submitted to the ownerof the IP early and in writing in a notice of transfer. Coming to an agreement with theowners of the rights involved maybe take a long time. In order to aid efficiency, it canbe worth considering using the services of software reseller companies. These

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companies handle the licensing of standard software products from the varioussoftware manufacturers. Another problem is negotiating with licensors. It is notuncommon for companies to forfeit bargaining power in dealing with suppliers due tostructural changes, such as company size, after a carve-out. The legal counsel andpurchasing department have to work together to develop suitable strategies for the“transmission of bargaining power” of the original organization prior to the carve-out,for example, by joint negotiations with the parent company and suppliers beforeclosing. Cooperation with resellers can push up general licensing costs and causenegative synergies, but it also has its advantages: licensing is seamless and quick, anddoes not tie up any internal resources. After acquiring the licenses, the licensee has todistribute the license keys to the devices. Because this technical task is relativelytime-consuming, an individual agreement can be made with the licensor to allow thekeys to be distributed at a later date. If a transfer is not feasible, the post-mergerorganization may have to find alternative products. The owner of a right is theindividual or entity who or which has created, tested and arranged the data or hasdesigned and developed the database concept.

IP agreements. It is not uncommon for a company to sign collaboration agreementswith other companies or business partners on research and development. In order toavoid potential conflicts in the aftermath, IP-related agreements have to be identifiedearly and reviewed for transfer. Furthermore, the company must ensure that noconflicts of interest arise between the parties after the closing, for example, that nothird parties expect to receive royalties. Such conflicts can have a decisive impact onthe value of the target company for the transaction parties.

In an M&A transaction, IP contracts and agreements may not always be availableduring the IP due diligence because many companies only keep external IP agreementsfor a certain period of time – usually ten years. Depending on the significance of the IPassets, copies of such documents have to be obtained. If external experts were involvedin defining, designing or implementing a piece of work, the contract must haveaddressed all copyright issues. Otherwise there is danger that a transfer following anM&A transaction might infringe third-party IP rights.

IP integrationIn line with the transaction objectives, IP-oriented acquisitions are geared to increasingvalue and imply a high investment and implementation risk. Based on experience frompast transactions, important concepts have emerged which help to better mitigate thesetypes of risk. They include coordinated and central communication with specialistdepartments (research and development or IT), detailed time schedules and budgets aswell as the definition and introduction of responsibilities for team members forpost-merger integration projects and IP integration management.

The goal of the fourth phase, the IP integration phase, is to transfer or integrate theacquired target’s IP assets and their rights of use into the buyer’s post-dealorganization. Other tasks during the integration phase are establishing the IPorganization, defining the publication guidelines, planning and holding trainingsessions, creating safeguards and internal policies for the protection of intangible

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assets using IT-based and physical measures and monitoring the integration projects.IP integration largely hinges on the general post-deal integration strategy

Intellectual property management softwareIn an M&A deal, the relevant documents, contracts, licenses and agreements have to becompiled, analyzed and archived as comprehensively as possible. Cooperation betweenthe various specialist departments, high staffing and time requirements, regularcommunication, liability toward freelancers, the need for transparency, the legalcomplexity of projects, interaction with external parties and the need for a practicablestrategic approach in practice number among the biggest challenges to IP managementin a transaction.

IP management in a transaction has to cope with huge volumes of data, exactingtransparency requirements and increasingly high time pressure. As part of the IPmanagement process, lawyers and integration teams often prepare ad hoc reports on IPassets and the progress of IP due diligence projects. Detailed lists of IP assets andrelated risks are frequently exchanged in e-mails to and from among the specialistdepartments. As a result, individual IP assets can be traced to a sub-process with aspecial status (e.g. identified, being processed, not transferred or transferred).

Collaborative IP management software can be used during a transaction to supportcooperation and communication between the various specialist departments, suppliers,IT and other work groups over long periods of time and from a distance duringtransactions. Due diligence processes can be automated. General costs and time spentby the teams involved can be thereby reduced. The job can be done far more effectivelyand efficiently with high levels of data transparency and availability as well asautomated processes.

Future researchIn this paper we have discussed intangibles in the form of intellectual property –explicated intellectual assets in the form of patents, copyright, trademarks and tradesecrets. We have argued that the appropriate management of intellectual propertyconstitutes a critical element in the success of M&A transactions. However, werecognize that intellectual property forms only the proverbial “tip of the iceberg” interms of intangibles at large. The strategic potential of on-explicated intellectual assetssuch as human capital, relational capital is still largely neglected in most M&Atransactions today. Their role in the success or failure of M&A transactions hasreceived little attention in the academic literature to date. How the collective of firms’intellectual assets contributes to the creation of value in the newly created organizationis yet to be explored.

SummaryIn practice, successful mergers and acquisitions demand astute strategic planning andcareful risk management of the intellectual property in question. According to Reizig(2004):

Intellectual property now makes up a large proportion of many companies’ market value, andIP management can no longer be left to technology or legal departments alone.

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Intellectual property rights can help a company gain competitive advantage in variousways and can become one of the most important issues in a merger, acquisition orcarve-out as illustrated in the Volkswagen and Rolls-Royce deal. During due diligencereviews, it must be ensured that the target company’s IP assets have been adequatelyand comprehensively documented and that all underlying agreements are available.The types of rights and limitations on the use of the IP assets also need to be clearlyidentified. It is also important to consider a possible combination of IP assets and thetarget’s dependence on third-party licenses, copyrights or patents.

Successful IP management demands an integrated strategic approach. This paperintroduces a framework for the purposeful management of IP assets in M&Atransactions. This roadmap has been applied and tested in one of the largestcross-border transactions initiated in Germany; its implications have been furthervalidated in more than 30 countries across EMEA, Americas and Asia Pacific.Addressing IP issues in transactions in isolation can lead to undesirable consequences(e.g. considerable costs for unplanned purchases of rights). IP due diligence and IPintegration project processes can be automated using collaborative software solutions.Thereby, risk can be reduced through the creation of a high level of transparency andpredefined responsibilities.

Notes

1. The Volkswagen/Rolls-Royce case has been discussed at length in the press and in severalstudies. The authors of this article have compiled information from several studies andsources and present them here. For more information please refer to Handelsblatt.com (2003)and Valoir (2006). More details on this case are also available in the company profiles of theabovementioned companies on the internet (e.g. www.wikipedia.com).

2. The terms “transactions” and “deals” in this paper refer to “acquisitions”, “takeovers” and“corporate divestitures.” The authors acknowledge that any deal has its own uniquechallenges and success factors. This contribution, however, focuses mainly on the overridingchallenges and success factors of both mergers and acquisitions.

3. This refers to the transferability of rights of use after closing.

References

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Further reading

Baums, T. and Birkenkamper, A. (1998), Corporate Governance in Germany, available at: SSRN:http://ssrn.com/abstract¼158038

Brautigam, P. (2004), IT-Outsourcing, 1st ed., Erich Schmidt Verlag, Berlin, pp. 885-6.

Bruner, R.F. (2004), Applied Mergers & Acquisitions, 1st ed., John Wiley & Sons, Hoboken, NJ,pp. 218-25.

Cartwright, S. and Cooper, L.C. (1993), “The role of cultural compatibility in successfulorganization”, Academy of Management Executive, Vol. 34, pp. 67-80.

Dosi, G., Rumelt, R., Teece, D.J. and Winter, S.G. (1992), “Towards a theory of corporatecoherence: preliminary remarks”, in Dosi, G., Giannetti, R. and Toninelli, P.A. (Eds),Technology and Enterprise in a Historical Perspective, Clarendon Press, Oxford.

Farhadi, M. and Tovstiga, G. (2008b), “Structural anti-takeover strategies in Germany”,Management Online Review, available at: www.moreexpertise.com/download.php?id¼108(accessed 9 May 2009).

Huppertz, P. (2004), IT-Outsourcing: Urheberrechtliche Grundlagen und sonstige gewerblicheSchutzrechte, 1st ed., Erich Schmidt Verlag, Berlin, p. 315.

Jetten, J., O’Brien, A. and Trindall, N. (2002), “Changing identity: predicting adjustment toorganizational restructure as a function of subgroup and super ordinate identification”,British Journal of Social Psychology, Vol. 41, pp. 281-97.

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Mohring, P., Ahlberg, H. and Nicolini, K. (2000), UrhG, Urheberrechtsgesetz, Kommentar(Gebundene Ausgabe), 2nd ed., Verlag Vahlen, Munich, p. 100.

Rothenbuecher, J. and Schrottke, J. (2008), “To get value from a merger, grow sales”, HarvardBusiness Review, Vol. 86 No. 5.

Tovstiga, G. (2008), Mergers & Acquisitions, MBA course material, Henley Business School,Reading.

About the authorsMehdi Farhadi is Senior M&A Manager at one of the Big Four transaction advisory servicesfirms and DBA Research Associate at Henley Business School in the UK. He advises globalcorporations on corporate finance and growth strategies.

George Tovstiga is Professor of Strategy and Innovation Management at the Henley BusinessSchool. George has extensive experience in crafting and implementing corporate strategies inM&A deals.

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