The Importance of Due Diligence for IP Assets During Mergers and Acquisitions

Lauren Caryer, Ph.D.
Due Diligence Analyst and Investigator, Kreller Group

The first half of 2020 has seen a marked slowdown in mergers and acquisitions (M&A) as global markets navigate uncertainty in supply chains, cash flow and fluctuating government mandates related to the novel coronavirus pandemic; however, just as many got comfortable trading the conference room for Zoom meetings and the watercooler for Slack, Big Tech got “increasingly comfortable with making strategic acquisitions” of startups relevant to the work from home lifestyle (Financial Times, 2020). As M&A continues apace in the tech sector, a survey of C-suite executives, conducted by the Harvard Business Review, found that while many companies have paused acquisition plans during the pandemic, a full 49% of respondents indicated “their intent to opportunistically buy distressed companies” in the back half of the year.

Of course, even in the best of times mergers and acquisitions can be particularly fraught processes wherein considerations ranging from growth projections, to vendor relations, to anti-trust and regulatory concerns, to talent retention all contribute to the overall valuation of the target entity and viability of the agreement as proposed in the initial letter of intent. With so many factors at play during due diligence, a deep dive analysis of the target entity’s IP portfolio can sometimes fall by the wayside. However, analysis of intellectual property can be a crucial factor in establishing the target entity’s value in uncertain pandemic and post-pandemic markets.

A comprehensive assessment of a company’s IP portfolio should thus extend beyond basic fact-checking, and should evaluate the target entity’s brand and IP health in the context of the broader goals and risk-tolerance level of the acquiring firm. A seemingly attractive robotics startup, for example, may provide dazzling demos, impressive sales figures and amenable executives, but if an important piece of its intellectual property is poorly managed, such as a lack of necessary trademark filings, lax enforcement, or is otherwise vulnerable, this could render the deal unpalatable. As noted in WIPO Magazine, startups often fail to develop a robust IP strategy in the rush to market, thereby exposing their assets to potential infringement and weakening their value (Kulik, 2018).

In addition to verifying the registration of the target company’s trademarks, trade dress and patents in the target’s home market, a thorough due diligence analysis on behalf on the acquiring firm or its counsel will seek to address the following questions:

  • What is the relationship between the target entity’s IP portfolio and product line(s)? Who is the beneficial owner of the relevant high-value trademarks? Are all high-value trademarks included in the proposed acquisition deal for all application goods and services and in all forms utilized in branding? These fundamental questions were at the heart of a somewhat infamous blunder on the part of Volkswagen AG, who purchased Rolls-Royce Motor Cars from Vickers PLC for £430 million in 1998 without obtaining the brand’s double-R trademark. The iconic trademark in question was not owned by Vickers, but by Rolls-Royce PLC, the company’s aerospace division. Rolls-Royce PLC sold the mark to BMW, compelling Volkswagen to temporarily lease the branding for its newly acquired subsidiary from its Bavarian competitor (Buerkle, 1998). 
  • How does the target firm’s portfolio fit with the acquiring firm’s post-acquisition business development and marketing strategies? To return to the above case, VW’s then-Chairman Ferdinand Piëch contended that while he overpaid for the Rolls-Royce brand, sans double-R trademark, its sister brand, Bentley, was in fact the primary target in VW’s acquisition of assets from Vickers. Had Volkswagen articulated its goals for the Rolls-Royce and Bentley lines more clearly, and reviewed the assets listings and trademark register with an eye to those goals, it could have limited its acquisition to assets and marks specific to Bentley and avoided a protracted battle and complicated agreement with BMW regarding control of the various trademarks associated with the Rolls-Royce brand.
  • In what jurisdictions are various IP assets registered? Has the target entity updated its IP portfolio as its products and marketing strategies have evolved and possibly expanded into additional classes of goods? Do the registration jurisdictions coincide with the acquiring entity’s production, distribution and supply chain needs? Should the acquiring firm have plans to expand the brand into additional markets, it may be prudent to conduct a trademark clearance screening for any new jurisdictions. Initial screenings can help determine the need for in-country research by a local trademark agent with specialized linguistic and cultural knowledge of the desired market.
  • Has the target entity been active in protecting its brand through law enforcement cooperative activities, cease and desist letters and infringement suits? This is an especially pertinent question when acquiring small companies and startups which may not have the resources to pursue aggressive international enforcement of their brands. For example, as reported by the Guardian in 2016, the Washington-based inventor Shane Chen created 2015’s signature gizmo, the hoverboard, under the brand name Hovertrax. However, his company, Inventist, was overwhelmed by the product’s popularity, both with consumers and counterfeiters, with over a million knockoffs coming out of China, dwarfing the sales of his branded and patented product. Such information is vital for a potential buyer as the cost of protecting the company’s brands and the enforceability of its trademarks across various jurisdictions will have an impact on the overall valuation (McGreal, 2016).

Finally, answers to the above questions regarding the target entity’s brand health should be considered in conjunction with other aspects of the target’s intellectual property protections, including valuations of the target’s national and international patents; an assessment of the relative security of the target’s trade secrets (i.e. NDAs, non-compete agreements, etc.); as well as background checks on employees and upstream manufacturers to determine access to the means of production and distribution of counterfeit items.

Just as a property inspection can reveal that your would-be dream home is anything but, a clear-eyed analysis of a target’s IP portfolio may lead to unforeseen and even intractable obstacles in an already complicated merger process. But, like that home inspection, IP due diligence can help determine whether a brand is built on a solid foundation.