The art of anticipation: maximising value in patent sales
According to Sun Tsu, the outcome of every battle is determined before the first shot is fired. Preparation, position and forethought are more important than size, strength or the brute force of numbers on the battlefield. The same holds true in patent transactions. Presenting the right patent to the right buyer at the right time is the art of the sale and happens only when the seller has the perspective, skill and instinct necessary to see when the stars have aligned to maximise value.
Just as in battle, anticipation is usually the difference between a blockbuster sale and a big disappointment. Over the course of hundreds of patent transactions, the value of anticipation has paid off for patent sellers time and again. A successful sale turns on these four fundamentals.
Know the needs of the market
Understanding why parties are in the market for patents is crucial to valuing and marketing a portfolio. They may want to buy offensively to eliminate a business threat, taking the view that it is better for them to own a particular patent than a competitor. Or perhaps they are looking to eliminate a defensive risk and would prefer to buy up a patent than to find out later that they are infringing on it.
Consider the 2011 bankruptcy auction of Nortel’s 6,000-patent wireless telecommunications portfolio. Many in the patent world were shocked when it was sold to a consortium of big-name technology companies for $4.5 billion. Most observers had expected it to go for a much lower sum – including Google, whose $900 million bid for the portfolio fell far short of the mark.
The success was rooted in the fact that the brokers handling the Nortel auction for its creditors had a crystal-clear understanding of the market dynamics of the time. They were well aware that an Android operating system war was underway and that companies were ready to form alliances to bolster their defences – and they presented the portfolio accordingly.
How does a company go about obtaining such expertise? Everyone has heard stories about an effortless bit of serendipity – sitting next to the right person on the plane or overhearing chat while buying coffee – that delivers a valuable tip about the way a technology or company is going. But of course, a sound patent strategy cannot rely on luck. There is no secret method of carrying out a market assessment: old-fashioned proactive networking is still the best way to understand the perspectives of potential buyers.
Sellers must invest the time and effort necessary to gain actionable market intelligence. They need to listen to the market, whether that entails making a phone call or meeting for a drink. They might hear that one company is ready to branch out into a new technology sector or that another is poised to file oppositions against various patents that it may infringe. Sellers should talk to potential buyers constantly to understand their needs or engage brokers who can both fill that role for them and act as a neutral party with which potential buyers and sellers are more likely to engage and share than competitors.
The needs of any particular market or party are in constant flux, so effective networking with the players operating within a given industry is a neverending process – even the most experienced and well-connected experts cannot discern the needs of an entire market before the transaction. To get a broader understanding of the market, it is more realistic to:
- accept that market analysis is based on the needs of various parties within it;
- learn about the needs of as many parties as possible, with some of those views more detailed than others; and
- extrapolate how those pieces of information fit into the market as a whole.
Understand how the portfolio fits the market
Another high-profile bankruptcy auction that surprised IP observers was Kodak’s disappointing sell-off in 2012. The same bankers involved in the Nortel transaction were advising Kodak. The company had valued its portfolio of around 1,100 digital-imaging patents at $2.4 billion and some experts thought it could go for nearly double that. But when the bids came in they fell well short of those rosy projections. Ultimately the portfolio sold for just $527 million to a consortium of 12 companies and provided an unexpected blow to Kodak’s Chapter 11 proceedings. In this case, the original estimates – and the crushing disappointment of the actual sale price – were the result of misreading the market. The sellers failed to interpret the dynamics of the wireless patent wars accurately or to assess whether Kodak had already exhausted most of the licensing and litigation value of the portfolio.
As with networking, there is no silver bullet or trick to gauging the market, despite the proliferation of technology-driven patent valuation service providers claiming to be able to calculate a portfolio’s worth by running algorithms and keyword searches. The more value a company places on its patents, the more important it becomes for someone with the right perspective to read them and analyse their place in the outside world.
Having an expert closely read the patent is the best and most definitive way to understand its true value when the person reading it is an expert not only in the relevant technology and industry, but also in patents – someone who knows the nuances of how patents are drafted and how claims are constructed. An expert will be able to provide a holistic view of what the patent is, who may or may not infringe it as well as how the encumbrances may affect the total available market. But aside from the market analysis, ownership and assignment must be considered.
Patent brokers who perform this kind of well-informed close read often uncover surprising information about portfolios. There have been cases where the seller unknowingly did not hold title to a portion of the portfolio or where highly touted patents were not worth the paper they were printed on.
It can go the other way, too. Experts can identify patents worth far more to certain buyers than the seller previously realised and an educated buyer can get a bargain if the seller remains unaware. As the patent marketplace becomes more sophisticated, sellers are becoming savvier and these situations are less common. In major sales today, the seller will almost always have consulted with a broker who identified the value of the portfolio to any given profile of potential buyer.
The less obvious part of the seller’s expertise is determining what a patent reads on – whether a standard or a product – and how it fits into a potential seller’s products and business strategies. In the past this might have been left to potential buyers: “Here’s what we have, make an offer if you want it.” Today, increasingly sophisticated sellers and their brokers employ teams of experts to package patents effectively and then show buyers why they should want the portfolio. In the new patent era, brokers are partners with the expertise to determine where a patent fits, uncover all of its potential value in the marketplace and swiftly develop a market plan and reach out to the right parties to pitch the portfolio effectively. This is an analysis that should be based on knowledge and information, as guessing rarely hits the mark. Once a seller has a good understanding of a portfolio’s true value, it will be able to present it accordingly to potential buyers.
Sellers must approach buyers with a credible and compelling analysis of their portfolio and how it supports buyers’ needs. As much as possible, the presentation should conform to the buyer’s strategy and incorporate the technical due diligence that the seller performed ahead of time.
Nail the first impression
Buyers rely on their first impressions, so these matter enormously. Once a potential buyer rejects a portfolio it is exceedingly difficult to persuade it to take another look. Sellers must go into a presentation having done all the groundwork necessary to ensure that buyers understand quickly and clearly why they should make an offer.
Today’s potential buyers expect that this information will be provided to them and expressly prepared for their consumption and understanding. The shift towards this model can be a boon to sellers, which can now fully control the message and image they want to project about a portfolio; but it requires more work than it did in the past. Seller presentations should highlight the most valuable assets in a portfolio and make clear why they are high value and how exactly they fit into a product line or perceived business plan. They should avoid getting deeply involved in technical aspects that are not obviously applicable to the wants and needs of buyers; and if that is the only pitch that a seller has, it should reassess the way in which it is looking at the portfolio. A broker’s ability to perform at this stage is central to a successful sale.
The people handling the Nortel sale succeeded at highlighting the portfolio’s best assets. Virtually no one, not even the parties with the most interest in Nortel’s portfolio, knew exactly what all 6,000 of its patents were. Even without that level of detail, the Nortel brokers were able to summarise and highlight key assets to convince the auction-winning consortium that the portfolio would be valuable in their hands and would pose a significant threat to them if it ended up in the hands of a competitor such as Google.
When a seller is valuing a portfolio it should keep in mind that there will always be a push-pull dynamic with the buyer side, and that it or its brokers must stand their ground and protect the value of the portfolio. However, a good broker will also understand that overselling the portfolio can be just as detrimental as underselling it. Again, buyers today are incredibly well informed and sophisticated, with patent operations driven by large in-house and outside teams with technical and legal expertise. They will not let overzealous or inexperienced sellers’ brokers mislead them and they can see past the lipstick on the pig.
In one case, a seller’s broker stretched the limits of the value of a portfolio too far, touting it in a presentation as reading on cutting-edge, fundamental components of future technologies. However, when companies took a closer look at the patent, they immediately saw that the patent had little value and in fact was more rooted in past technologies than future. That broker not only failed to sell the portfolio, but also tarnished his own reputation in the relatively small patent community as a trustworthy partner.
Market needs are not static. They change over time – sometimes within months, sometimes over a decade or more – and they may change enough to overcome a failed first impression. But that fluidity comes with its own intrinsic challenges.
Timing is essential
The final basic component of cultivating a patent portfolio for maximum sale value is market timing. This is the trickiest aspect to master, as it cannot be controlled. Rather, sellers and buyers must all remain well aware of the ebb and flow of market forces, and work with them.
They must also accept that the forces that determine the most profitable time to buy or sell a particular portfolio are often impossible to predict and involve inherent risk. Of course, companies want to strike when the iron is hot, but sometimes it is impossible to predict when the iron is about to go blazing hot or ice cold.
Companies can have a perfectly accurate view of a portfolio’s value, only to see the landscape change drastically as the result of a disruptive technology, a court decision or a major licensing deal. They might pass on a portfolio because they are looking for something with shorter-term pay-off, only to see the market take a sudden turn and the portfolio begin to generate significant profits within a year rather than the decade they expected. They might sell a portfolio for a respectable sum only to see its value skyrocket and its sales price seem like a pittance.
The key for companies is acknowledging that, as in all aspects of a business, patents come with risk and companies must determine their risk threshold. It is smart to diversify, dealing in both patents that seem decades away from usefulness and patents with immediate reads on current technologies.
Companies should focus on the education aspect of educated guesses and leverage the best information out there to make the best predictions about the direction of the market.
What is fully within companies’ control is their understanding of the market, the portfolio they want to sell and the angle they will take in presenting it to potential buyers. That is where their efforts should focus. Whether buying or selling, when parties do this homework ahead of time and remain aware of the assets in the marketplace – a sense of which are good, which are bad and which show potential – they can act to their best advantage when opportunities present themselves. Armed with information, the question of correct timing becomes a function of experience – a feel for the market that grows with each deal.
The state of the art
Few areas of business or law are as scientific as patents, but for all their technical precision, in a transactional contest it is the art of the deal that decides the day. In a global business culture that places a premium on metrics, the notion that not just insight but instinct can play a role in determining the value of a patent transaction can be somewhat uncomfortable. But the art of patent transactions is not some secret mojo, it is knowledge.
If a seller knows itself, its patents, the landscape and the prospective buyers intimately, the chances of success are strong. The seller, in all likelihood, will win the deal long before sitting down at the negotiating table.
Transpacific Advisors Limited
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Transpacific IP Group Limited
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Guy L Proulx
Guy Proulx founded Transpacific IP, the only full-service IP strategy company based in Asia, in 2004. Mr Proulx is a guest speaker at industry conferences globally, an adviser to governments and academic institutions, and one of the world’s leading strategists as named in IAM Strategy 300 from 2012 to 2014. He has years of experience advising start-up companies on critical IP and business issues, including IP strategy, portfolio development, acquisitions and licensing, as well as company formation, business capitalisation, strategic planning and general management.
Mr Proulx serves on the board of directors at the IP Office of Singapore and is a supervisor on the master’s programme at the Peking University IP School and director of the China National Institute for Digital Copyright Research.
Donald Merino leads the team licensing and advisory business at Transpacific Advisors. He is instrumental in developing programmes that work with individual inventors, companies and universities to help them to understand the value of their inventions and the potential paths towards monetisation.
Dr Merino spent nine years at Intellectual Ventures as vice president and general manager for intellectual property. He then became senior vice president for licensing, building the Asia IP licensing revenue. Previously, Dr Merino was director of licensing at General Instrument and Intel Corp.
Dr Merino is a graduate of the US Naval Academy and a Certified Licensing Professional with an MEng in mechanical engineering and a PhD in interdisciplinary subjects, both from the Stevens Institute of Technology.