POSTED BY Adam Bulakowski and Betsy Nesbitt AT 8:45 A.M. Jan 13, 2012
Over the past two years, ipCG completed several IP valuations in the IT industry. In most cases, our clients contracted the models for external purposes – to estimate IP value for M&A negotiations. However, work products generated significant internal benefits as well. We share this case study with you to demonstrate the many strategic and managerial insights that can be gleaned from thoughtful IP valuations.
Background
IT Company ABC: Key IP and Market Characteristics
| IP portfolio sizes: | Small to medium (20-40 issued/pending patents) |
| Product technologies: | Patent protected features |
| Market growth: | Medium (~6-8% CAGR) |
| Industry M&A activity level: | Moderate to high, due to changing business models |
Analysis
Our research revealed that in the context of today’s uncertain economy, business models are changing in the IT industry.
- Cause: end users are cost-conscious and value innovative technologies that optimize and accelerate existing IT systems. They are interested in innovation that generates financial savings, not just new features.
- Effect: IT vendors are offering products that can be customized to meet end users specific needs, and they are marketing bundled solutions that integrate hardware, software, and services.
- Impact on IT Company ABC: patented technologies in products with multiple routes to market are more attractive M&A targets.
IP Value Implications
Our clients, like IT Company ABC, need valuation models that encompass a variety of market opportunities for their patented technologies. To address these possibilities, we built functionalities that enabled our clients to modify key assumptions and to assess different market segments. Below is an example of the market segmentation used in the income approach.
From this market segmentation we reached an estimated, risk adjusted NPV:
| Income Approach: NPV 5 Years ($M) | |
| Primary Market | $20.0 |
| Alternative Markets | $15.0 |
| Total | $35.0 |
To gauge the IP pricing derived from the income approach, we used a complimentary valuation approach: comparable transactions. We combed dozens of SEC filings and disclosures to find industry comparable technology based transactions, and we deduced an estimated IP value based on price per patent family. Together, these pricing strategies converged around a range that addressed the various market opportunities for a potential acquirer of IT Company ABC.
Takeaways
A value model that incorporates technology modifications, market segments, and financial forecasts provides clients like IT Company ABC:
- Internal benefits: more sophisticated and strategic decision making due to integrated financial and technology planning
- External benefits: stronger negotiating positions based on thoughtful market research and data analysis
