Intellectual property is everywhere. Everywhere, but from a market perspective, only sometimes properly valued and leveraged. Certainly the entertainment industry can’t be accused of being slack when it comes to managing licensing programmes and selling rights. And of course the right film almost guarantees high-kicking sales in what can otherwise be a fickle market.
Earlier this month, fund managers and traders got the impression that entertainment company Character Group held two of the all-important Harry Potter licences, a rumour that caused the company’s share price to rocket by nearly 140%.
The recent sale of Woodland Animations, creator of Postman Pat, to HIT Entertainment for #5.1m added another much-loved character to HIT’s menagerie – one which also includes stars such as Pingu and Bob the Builder. But such successes are not uniform. Part of the problem with sector that is not all intellectual property assets are as visible as Harry Potter or Gerry Anderson’s Thunderbirds.
IP – brands, patents, trade marks, copyright, licensing agreements – apply throughout all sectors of business from children’s toys to pharmaceuticals.
IT company Dell has patented its order-processing system, for instance.
Gillette took out in excess of 30 patents for its Mach III – including one for the angle of the blades and another for the razor’s head.
A PwC study of intellectual property in Australia, however, reported an only partial awareness and understanding of the issues.
The survey of 159 Australian CEOs found that many didn’t take their intellectual property – from trade secrets, patents and design rights – seriously.
The implications for cashflow are huge.
More than one in three respondents had experienced ‘loss incidents’; less than half had formal IP protection plans in place; and only 19% of those who reported IP losses could quantify the potential financial impact.
Figures cited ranged from a $20,000 to $50m (#18m), with a median of $2m.
Forged goods and copied technology or designs can cost companies dear in terms of lost sales, lost market share, loss of image, legal costs and wasted R&D expenditure.
What’s more, patents in themselves cost money to maintain. Many companies pay the fees to maintain patents that they no longer use and are in some cases out of date. In the US patents can be donated to research facilities on a 100% tax break.
PricewaterhouseCoopers’ Nick Anderson works in IP valuation. As well as fulfilling a financial reporting function, valuations can play an important strategic role for companies, he says. For instance, it is important to establish a brand value for borrowing or marketing purposes.
Where drug companies are looking to exploit patents, for instance, they will need to understand what royalties should be charged and how payments should be managed.
And companies should put more focus on this area if they are to generate returns on their intangible assets.
Here again, valuation is an area that seems to be chronically undermanaged.
‘Given 70% of the value of companies is in intangibles there is a problem of a lack of attention on IP. People aren’t managing that value properly, especially in a downturn.’
Anderson says the first step for IP advisers is to make an assessment of how a company has handled its brands and other IP assets.
‘We would try and understand the value of the IP today; what it had been worth to the company in the past; the cost of any spend in relation to that value as well as trying to understand what that is contributing to cashflow and shareholder value. Is that spend – in marketing or R&D – generating good returns? We look at these questions so businesses can focus their spend on the right places.’
And he endorses the idea that it’s an inconsistently managed area of business. ‘Our overall comment would be that there are many companies not giving enough management time to IP. Even the “best in class” could do better,’ he says.
All the Big Five accountancy firms have interests in the IP market. New to the UK market, however, is InteCap – an American specialist IP company.
Formed by IP experts, CPAs and economists working across the States in consultancies and accountancy firms, InteCap is now recruiting UK IP experts as fast as it can. Head of InteCap’s UK office Howard Cottrell believes that a lot of UK businesses are failing to exploit their IP. And sensible exploitation of IP will be increasingly important at a time of recession.
The company focuses on mapping the IP portfolio of a business, competitive analysis, formulating licensing strategies, royalty investigations and payment monitoring.
It can also play a role in the acquisition process – making recommendations as to the value of target acquisitions and taking a hand in structuring deals.
Such input can provide valuable support to M&A negotiations, says Cottrell.
Apart from carrying out the usual due diligence work, InteCap will encourage clients to think laterally about deals. Why spend three times the revenue when you only want the access to the target company’s technology? What is the value of the technology and is there more sense in licensing it rather than acquiring the whole company?
Cottrell says InteCap’s US experience and spread of contacts enables the firm to introduce potential technology partners to clients – effectively acting as a market maker. There’s scope for this kind of negotiation throughout the European telecoms sector for the firm.
In the US: InteCap works with companies from Fortune 100 level to #7m in revenue. Its portfolio takes in IT, banking and biomedical sectors.
It aims to capitalise on the growing market for licensing in Europe.
Licensing as a means of business is taking of in Europe exponentially, he says. But people may need advice on how to roll out a licensing programme if they are to successfully translate their technology into cashflow.
According to KPMG’s IP services practice, IP licensing revenues globally are now worth more than $150bn, (#93.8bn) while only 10% of IP assets are fully used. This means that there is a potential $1,350bn to be won.
Licensing programmes may be attractive in terms of revenue potential, but they need to be carefully managed, not least because they place the IP – the main asset – in the hands of others.