IP Valuation Case Study: Non-Durable Consumer Products & IP Acquisitions  

POSTED BY Betsy Nesbitt AT 8:11 A.M. Mar 13, 2012

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Introduction
Companies buy and sell intellectual property (IP), including patented technology, in all industries, ranging from high-tech products like semiconductors to relatively lower-tech products like non-durable consumer goods. Businesses can take advantage of these often fast-moving opportunities if they have the appropriate IP valuation tools. These tools are particularly important when market and technology uncertainties are highand managers need to model different market scenarios.

Background
Recently, a multinational, non-durable consumer products company engaged ipCG to help evaluate an opportunity to purchase patented technology. The IP for sale was comprised of issued patents and patent applications, and the selling company was a smaller firm in a different industry.

Our client, who we'll refer to as CP Client ABC, has historically participated in a mature market. However, new technologies were beginning to influence their traditional products. CP Client ABC recognized that this was a trend which needed attention and active management. Product innovation represented on opportunity for brand differentiation. However, with a limited history of IP analysis, they were cautious about purchasing non-core IP. To make an informed, strategic decision, they needed financial guidance grounded in market research.

The tables below present key market and technology characteristics of this case study.

Market Characteristics

Growth:

  • Variable by product and geographic segment, ~+/- 2% CAGR

Market share concentration:

  • High, but decreasing

Product differentiation:

  • Historically low, but increasingly required to deliver customer benefits

Threat of substitutes:

  • Increasing, and primarily inter-segment

Technology Characteristics

Trends:

  • Robust pipelines
  • Broad applications for product deployment
  • High potential for disruption

Percent of products with patents:

  • Ranges between segments, from 0-100%

ipCG Valuation Process

  1. IP portfolio risk assessment: analyze the IP for sale to quantify key risk factors
  2. Market definition & size: the patented technology was applicable to a nascent market. Through our research, we identified the primary variables and assigned each a "base case" assumption value. These variables included factors such as:
    • Adoption rate
    • Cannibalization rate
    • Government regulation
    • Market entry date
    • Market share projections
  3. IP value modeling: we used multiple approaches to triangulate a price range. Each approach presented unique insights for CP Client ABC.

Valuation Method

Insight

Income Approach

  • Different scenarios could be modeled by modifying the assumptions from "base case"

Market Comparable Transactions

  • There was no industry established patent price floor or ceiling, because industry comparable M&A deals rarely priced technology

Real Options
(upcoming ipCG blog article)

  • When there are significant uncertainties regarding future product characteristics and market strategies, flexible decision making has value

Outcome
Together, these three valuation approaches gave CP Client ABC the tools to explore market dynamics, to model the outcomes of different product strategies, and to make an informed acquisition decision.

Takeaways

Stay tuned to our blog for our upcoming article on real options pricing theory and a discussion of how it can be coupled with the income approach to account for uncertainty and decision making flexibility.


TAGS: Betsy Nesbitt | Case Study | Valuation