In hard times, finance chiefs extract value from every asset in sight. But what about the assets they can't see, like copyrights, patents, and trade secrets?
Intellectual property (IP) may be intangible, but it can fetch substantial sums. As knowledge-based firms have flourished, the value of IP in the United States has swelled — to as much as $5.5 trillion, according to a 2005 study sponsored by nonprofit USA for Innovation. A growing industry has sprouted to serve companies seeking to shake loose extra cash from IP. "There's a new landscape out there for companies that need to figure out what their IP is worth and how to sell it," says Edward Black, partner at law firm Ropes & Gray.
In the past, corporate patents showed up on a CFO's radar once a year, "when they got a budget for patent filings," says Ron Epstein, founder of consultancy IPotential. "Even then, they just left it to the lawyers. Now they are asking for patents to be aligned with the business objectives." Companies like Motorola and British Telecom have hired IPotential to sell the licenses for their noncore patents.
"More and more, selling IP is a path to liquidity," says John Scully, co-founder and CFO of Ecliptic Enterprises, which makes hardware for rockets, missiles, and satellites. There are a number of such paths in the emerging IP marketplace. Here are the most common routes, along with some of their pros and cons:
Contact a patent aggregator. All these businesses do is buy and sell IP. The best-known is Intellectual Ventures, whose co-founders include Nathan Myhrvold, former Microsoft chief strategist. Intellectual Ventures holds 20,000 patents and other IP assets, which it bundles and leases out. Pros: Patent aggregators buy rights directly from owners, whereas most big companies don't. Cons: They are likely to drive a hard bargain.
Find the highest bidder. In 2006, Ocean Tomo, an IP asset-management firm, began sponsoring public auctions of carefully screened IP twice a year. Potential bidders receive a catalog describing up-for-grabs assets two months in advance, but are responsible for conducting their own due diligence. Pros: It's quick and uncomplicated and can be done by phone. Cons: The crowd may include competitors. Also, bidders who may not know what the IP is worth could drag prices down.
Hire an expert. A number of IP consulting firms serve as high-level matchmakers, much like traditional investment bankers. Companies such as IPotential and IPinvestments Group perform a market analysis, use their contacts to identify potential buyers, and help conduct the transaction. IP expert Gabe Fried says his business, Streambank, has switched from mostly serving lenders looking to secure collateral to selling the IP of companies in liquidation. "When we show up, it's not a good situation," he says. "We're like the morticians." Pros: Patent advisers streamline the process, using their networks to find prospects willing to pay a premium price. Cons: A hefty chunk of that payment (roughly 25%) becomes the broker's commission, and there's also an up-front fee of at least $5,000.