Introduction
Diversification and expansion are the areas which every company seeks to achieve. Accelerating growth and improving company’s performance is the primary goal of a company. In today’s world, a company in order to compete with the dynamic technological era, adopts various ways by which it can attain stability in the market and in order to withstand the innovation of ever-changing dynamic industry, a company is required to take risk.
Companies in today’s world do not want to hamper its growth. They consistently want to evolve new ideas that may contribute to their growth. One such growth measure that companies adopt is by way of Mergers and Acquisitions (M&A). Mergers and Acquisitions (M&A) are proved to be a boon for the companies as these measures add on to their productivity, good will and wealth maximisation. These measures help a company to achieve synergy where the newly formed company is more efficient than the former two separate entities.
What are Mergers and Acquisition (M&A)?
Mergers and Acquisitions are often used interchangeably, though, they are not same. Mergers and Acquisitions are consolidations of a company. Mergers implies merging of two or more entities into one whereas Acquisitions means when one entity takes control of another entity, through various means like acquiring majority stakes in the subsidiary company, taking control over the management of the company, etc.
Merger is usually when two companies of nearly same size want to club into one in order to capture a larger market, reduce competition, increasing sale, efficiency and capabilities. On the other hand, Acquisition is when a dominant company acquires a subsidiary company. Mergers is usually on friendly terms. However, Acquisition can be on friendly terms or on hostile.
Mergers and Acquisitions enable a company to increase market area, distribution capacity, improve labour talent, economies of scale, enhanced financial resources and reduce labour cost.
What is Intellectual Property?
In the layman language, Intellectual property may be understood as property that is a result of creativity. According to Oxford Advanced Learner’s Dictionary[1], Intellectual Property means “an idea, a design, etc. that someone has created and that the law prevents other people from copying”. Thus, Intellectual property is an intangible property that is the result of creativity, such as patents, copyrights, etc.
Intellectual property is something which is a created out of human intellect and thus the nature of intellectual property is that it is incorporeal and intangible i.e., it cannot be seen or touched. It is available against the whole world i.e., intellectual property is right in rem. Intellectual property can take any form like, copyright, patent, trademark, design, trade secrets, etc. The laws that govern intellectual property rights are:
The Patents Act, 1970[2];
The Trade Marks Act, 1999[3];
The Copyright Act, 1957[4];
The Designs Act, 2000[5];
The Geographical Indications of Goods (Registration & Protection) Act, 1999;[6]
The Semiconductor Integrated Circuits Layout Design Act, 2000[7].
Role of Intellectual Property in M&A
Intellectual Property (IP) has significant role in the development of a company as it carries product and brand value of a company. Intellectual Property (IP) plays a vital role in the innovation of a company. It protects the name and fame of a company. Intellectual Property is the most important tool of a company and acts like a fingerprint of a company because of its uniqueness. When companies merge themselves through agreement all the tangible, as well as intangible assets of one company, become a part of the revenue of the other acquiring company and Intellectual Property and its rights are the most important assets among these.[8]
Following are the vital role of IP in Mergers and Acquisition: –
IP VALUATION
IP valuation plays an important role in Mergers and Acquisition. IP valuation is the process of determining the value of intellectual property assets such as patent, copyright, trademark and trade secrets. Since Intellectual Property right forms the major part of a company’s business, thus IP valuation becomes the important aspect in case of mergers and acquisitions.
However, great care should be taken while evaluating the monetary value of Intellectual Property. It should be done by professionals and experts so as to give accurate value and information about the economic sustainability of mergers and acquisitions. This process of investigating the valuation of intellectual property by means of legal and financial expert is known as due diligence report.
On the acceptance of the Due Diligence Report by both the parties and upon the fixation of the final purchase price the M&A Agreement is executed which is an official transfer in the eyes of law. IP assets should prefer a transfer through the separate agreement as they are distinct in nature and the records of the new owner are required for valid use of it in respective jurisdictions. The intention to transfer 0the IP asset and goodwill can be clearly acknowledged during the sale of assets and lastly the exchange of documents is done. [9]
VALUE ADDITION
The next major role played by Intellectual Property in Mergers and Acquisition is adding value to the merged or acquired company. While merging one company into another or while acquiring a company by another, the intellectual property of the former becomes vested into the latter. Thus, adding value to the merged or acquiring company.
In the present dynamic and inconstant market environment, it is not possible to invent something new, thus the companies must search for new opportunities and the ways of acquiring existing innovations of the other companies[10].
For example, in 1988, Nestle acquired Rowntree business to acquire famous brands i.e. Kit Kat, Yorkie, and Rolo and Google Inc. acquired Motorola Mobility which gave the acquirer complete control of Motorola’s patents. Thus, adding value to the business of Nestle and Google Inc.
TECHNOLOGY TRANSFER
Another major role of Intellectual Property in Mergers and Acquisition is that there is technology transfer between the companies that performed mergers and acquisition process. This helps the companies in utilising their resources and assets in the better way, intellectual property asset utilised to the best.
UNIQUE RESOURCE ATTAINMENT
Mergers and Acquisition is the tool through which the companies want to create a dominant position in the market as against to their competitors. For this, a company require innovation and resources which cannot solely by done by a single company. This Innovation can be acquired by obtaining intellectual property rights of another company i.e., by the process of mergers and acquisitions.
GROWTH
The main objective to implement the corporate strategy is to promote growth and development and to maximize the profit, resulting in achieving the desired goals. The company must ensure that the product portfolio of the company is updated and is efficient to meet the current demand in the market[11]
DIVERSIFICATION
Mergers and acquisition help a company to explore new business sectors or line of production. It opens channel for diversification of business and reduce cost of operation. Thus helps a company to operate at larger level in the market at convenient cost.
For example, Luxury Italian fashion house Versace was acquired by Michael Kors to access new product lines and markets through an established brand and IP portfolio.
Conclusion
Intellectual Property is the major and most important aspect while dealing with the process of mergers and acquisition. The process of Mergers and Acquisition helps in enhancing the business and capacities of a company but the same is incomplete without acquiring the intellectual property rights of the acquiring company. Despite being an intangible property, the intellectual property rights of the acquiring company help in the growth, diversification and expansion of a company.
For a company survival, the acquisition of IP asset of a company is of utmost importance and therefore, the same needs to be acquired by due diligence. Otherwise, the benefits of IP portfolio of a company may turn into a liability for acquiring company.
[1] Oxford Advanced Learner’s Dictionary, Oxford University Press, 10th edition (1st January 2020).
[2] Act 39 of 1970.
[3] Act 47 of 1999 as amended by The Finance Act, 2017 with The Trademark Rules, 2017 (26-05-2017).
[4] Act 14 of 1957 as amended by The Finance Act, 2017 (26-05-2017).
[5] Act 16 of 2000.
[6] Act 48 of 1999.
[7] Act 37 of 2000.
[8] Ruchira Halli, Role of Intellectual Property in Mergers and Acquisitions, (last visited: 21 July, 2021, 18:45pm), https://blog.ipleaders.in/role-intellectual-property-mergers-acquisitions/.
[9] Ibid.
[10] Nidhi Poddar, Role of Intellectual Property in Mergers and Acquisitions, (last visited: 21July, 2021 at 20:25 pm), https://enhelion.com/blogs/2020/12/09/role-of-intellectual-property-in-mergers-and-acquisition/.
[11] Ibid.