The article, "A Triangulation Approach to Valuation" looks at value in three ways: 1) modeling the value that the technology and IP provides for your company's intended use, 2) reviewing, risk-adjusting and use-adjusting the target's valuation, and 3) understanding comparable market transactions, or “comparables”. This article discusses finding and understanding market comparables to understand the market value of an asset.
Why look at comparables?
Comparables are vital to determining what the market would likely pay for a company, technology, or Intellectual Property (IP) asset. While the market value is not necessarily what the asset is worth to your company, it gives you an idea of what competitors may be willing to pay and can provide insight that will inform your bidding strategy. If the market value is greater than the value to your company, you may want to structure a more creative winning bid, such as a bid on a subset of the assets or a field of use of the IP.
How to look at comparables?
Company Approach: One approach to evaluating valuation of a company or asset is to look at comparables of a particular company, ideally a company who may be in competition with yours to acquire the assets, or one that purchases assets in the same space. For example, if Google purchases assets in a similar space as you do, a great way to develop a set of comparables is to evaluate Google's past IP, technology and company acquisitions. To simplify comparison, we recommend you develop a table of comparables similar to Table A.
Table A: Google - Material 2010 Acquisitions and 2011 patent offer
Company name |
Date acquired |
About the company |
Number of patents/applications |
Acquisition price |
FASB value of patents and developed technology |
FASB value of patents and developed technology / # patents |
Nortel |
|
Initial offer to acquire patents |
6000 |
n/a |
$900M initial bid |
$150k (implied bid) |
Widevine Tech |
12/10 |
Content protection/video optimization |
109 |
$158M |
$53M |
$486k |
Slide, Inc. |
8/10 |
Social technology |
1 |
$179M |
$10M |
$10M |
AdMob |
5/10 |
Mobile display ads |
8 |
$681M |
$20M |
$2.5M |
On2 |
2/10 |
Video compression |
27 |
$123M |
$27M |
$1M |
From Table A, you may notice the following:
From these observations, if we were going to determine the price that Google would be willing to pay for a particular set of patents, we would compare the strategic impact of the portfolio to that of Nortel's or Widevine's, and then determine a per patent value in the $150-$486k range.
Technology Approach: Another way to gather comparables for an acquisition is to identify relevant technologies and evaluate comparables based on those technologies. In Table B below, we gathered a number of comparables for a company who might be acquiring a free consumer tool asset in the Financial Services sector. As you can see from the table, the acquisition price of the companies ranges from $5M to $170M. These numbers alone wouldn't help us determine the value of the acquisition target, but by comparing the technology of the companies listed in Table B to the technology of the target company, you can adjust the comparables to estimate a reasonable market value for the target's technology.
For example, if you were acquiring a patent portfolio in the free consumer tools space that was twice the size of Bankers Financial Products' IP portfolio, and you reviewed the Bankers Financial Products transaction and felt that the majority of the intangibles acquired in the transaction were patent-related, the value of an acquisition might be a little less than twice the value of Bankers Financial Products' intangibles ($11.8M x 2).
Table B: Financial Services Education/ Free Consumer Tools Websites Comparables
Transaction | Technology description | Total acquisition price | Value attributed to intangible assets | Value attributed to technology |
Sale of Bankers Financial Products to TheStreet.com |
Rate Watch and BankingMyWay websites provide free consumer banking resources and information | $25.4M | $11.8M | $0.6M |
Sale of AllBusiness.com to Dun & Bradstreet |
Online media and e-commerce company | $58.1M | $10M | $1.3M |
Sale of Stockpickr to TheStreet.com |
Combines financial info + social networking | $5M | $0.5M | |
Sale of Mint.com |
Web2.0 website infrastructure, money management | $170M | $43M |
Conclusion
When you develop a clear understanding of the market value, you are less likely to pay too much for an asset, and you may gain important insight to guide your bidding strategy so you don't lose out to a competitive bid. By combining the comparables approach with a discounted cash flow analysis of the value of the company or technology asset to your company, you increase your chance of purchasing a company or technology at a fair price and having that asset achieve your target return on investment.
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For an in-depth look at how to value IP for an acquisition, read Rachael Schwartz' article on the subject published in the February, 2011 issue of IPM Magazine.