Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Risti Wulansari discussed The Art of Deal Making: Using External Expertise Effectively as part of the IP chapter.
What is your best practice approach to IP due diligence as part of the deal making process? E.g. Schedule of IP and establishment of transferable ownership rights?
a. Prioritising the Objectives. This is important to understand the significance of the role IP plays behind the deal, and helps ensure that the due diligence is focused on the particulars of the deal and happens in a timely fashion.
b. Schedule of IP: Preparing an IP schedule that contains a complete and accurate list of all domestic and foreign IP applications and registration. An IP schedule is a crucial part as a base to define, examine and analyse the value of the intellectual property by examining the strength, scope and enforceability of the IP, the ownership rights surrounding the IP and the future potential to be derived from the IP.
c. Ownership and Status of IP: Ownership is often one of the first issues explored in an IP due diligence investigation since it can be a deal-breaker. Therefore, it is important to verify the following information:
• the status and validity (accuracy of the disclosed information) of all IP assets.
• the security interests and assignment clauses of the license agreements (i.e. who are the inventors? Did those inventors properly assign the IP rights?).
Which methods of valuing patents, trademarks or trade secrets are most common in an M&A deal in your jurisdiction (e.g. cost, value or market approaches)? Any examples?
To date, there are no applicable regulations and institutions able to assess the value of intellectual property in Indonesia. However, based on developing practices, as intellectual property is categorised as an intangible asset, an IP owner may appoint a Public Appraisal Service Officer (KJPP) to carry out the assessment.
In general, IP assets can be valued based on the following approaches:
a. Income Approach
• The income approach determines the value of an asset in which the valuer, in this case KJPP, will assess the revenues earned by using the IP within a certain period. This valuation technique also converts the amount of potential future income and expenses by using such IP in business activities.
b. Market Approach
• The market approach determines the value of an asset based on the selling price of a similar asset. In practice, KJPP will study the most recent sales of similar assets and make a comparation between such assets. Since each asset being valued may not be identical, various adjustments possibly required.
c. Well-Knowness of IP (especially Trademark)
• For instance, if the mark was considered as well-known, the fair price assessed by KJPP is within the range of + – 5-7.5% of the valuation. Meanwhile, if the brand is not well-known, the fair price is in the range of + – 2 to 5% of the valuation.
We have conducted internet searches where we found several cases that are publicly accessible. There are several cases, one of which is the purchase of PT HM Sampoerna by PT Philip Morris Indonesia for Rp. 18.5 trillion or US$5 billion in 2005; and valuation data on a trademark license agreement between PT Sepatu Bata Tbk and its affiliate Bata Brands S.A. which data can be accessed through the website of the Indonesia Stock Exchange: https://www.idx.co.id/StaticData/NewsAndAnnouncement/
What warranties and indemnities do you recommend putting in place to ensure IP value is fully preserved?
a. To make sure that the IP is being used properly (to avoid nonuse claim – for trademarks). Improper use of the IP may result in the loss of such IP rights.
b. Have all IP data well documented – determine all the IP assets of the business, where the assets are located, the license and renewal terms. These must be properly documented.
c. Establishing a good practice of signing a non-disclosure agreement – this allows a company to share its intellectual property with others without unduly jeopardising that information and, at the very worst, these provide insurance that legal action can be taken if the information is leaked.
d. Keep the information confidential – it is important to keep the idea/invention confidential until it is protected. For instance, if we intended to obtain a patent or design protection, we need to safeguard and maintain secrecy of such information until we have filed the application (i.e. public disclosure may result in the immediate loss of invention patentability unless a patent application has already been filed).
e. Adequate security system – sensitive IP assets should be managed only by those with a need to know. Limit the number of copies of sensitive IP and strongly encrypt and control who has access to specific information.
f. Closely monitoring competitors and IP infringement – it is important to always keep an eye out for anyone who may infringe IP, as this can negatively affect market share and quickly jeopardise the IP value and reputation.
Top Tips – To Accurately Establish IP Ownership Process
• Conducting IP searches prior to filing
• Have a clear consensus of all parties involved in anything IP-related
• Monitoring the progress of IP applications (until registered)
• Register the IP, and make sure to put clear identification if having it published
• Regular market checks – for potential conflicting trademarks and IPs
• Proper underlying agreements, when contracts are involved.