Posts by: Matt Miskimin | (1) posts

The global IPR transactions market

The global IPR transactions market

 

Recent comments in Swedish business press point at the lack of a functioning marketplace for IPR and the need for governmental and industrial intervention in the process of commercialization of innovations and intellectual property. However, I feel there is a clear need to increase the general understanding of how a ”capital market” functions and the fundamental demands that must be met for a market to exist and fulfill both buyers and sellers and therefore serve its purpose.

IPR are no uniform “goods” on a traditional “market”
A ”market” arises first when both a buyer and a seller exist for a ”good” which can be defined in a clear and exact manner. Beyond that, the ”good” must be transferable and the right of ownership must be able to established and recorded. The price for the ”good” must be decided by joint agreement between buyer and seller and both parties based on their own perceived value of the “good”.

A fundamental demand for a functioning market is that the ”good” is clearly defined and that units of the ”good” are as uniform as possible. A class B share of Volvo is the same as all other B shares in Volvo. A barrel of crude oil contains the same amount of oil in Chicago or London or Amsterdam. In addition, a well functioning market shall have a good measure of transparency and frequency of transaction/turnover in order to allow all parties to realize a gain or reverse a position if they desire to do so. Under such conditions both the seller and the buyer can be confident in what they are trading and the ”good” is easy to set a price for since there is transparency and one can observe similar transactions.

Intellectual assets (IPR = granted patents, trademarks, designs and even domain names) are by their very nature not uniform. They do not function well as a ”good” used for quick deals on a traditional market. To call after help and strong measures from Swedish politicians and industrial owners to establish a ”marketplace” for IPR is naive and can easily lead to confusion and mistaken counterproductive initiatives.

Nortel’s patents sold in a box
If we focus on granted patents as a subject for this discussion, it is clear that they have different strengths depending on, among other things, their age, how often they are cited by other patents, their area of technical innovation, how well they cover a method or a product and if they generated a revenue flow through a license. In other words, all IPR are not of the same quality. They fail the test for uniformity or fungibility. It is not correct that all of Nortel’s patents were equally good or that the price per patent sold was 2.4 MSEK. On the contrary, a few nuggets of gold were blended with many patents of lower caliber. But all were sold in a box to the party that bid highest at the auction. In that case it was the consortium led by Apple that bid higher than Google and several other companies. Now that the Nortel portfolio has been sold, the majority of the patents will most likely not come out on the public market again for strategic reasons. The consortium is now more or less married to their purchase. Here the process fails the test of frequency of transactions and pricing transparency.

The history of an IPR transactions market
A bit of background on the IPR transactions market can be instructional. Patents have traded hands since the beginning of patents themselves; often secretively and without a trace in the public view. This was very inefficient as a market and served both buyers and sellers badly. Patent auctions for high quality assets were created to improve market functions and have existed for several years with Ocean Tomo’s Live Auctions as the guiding star in the market until the finance crash of 2009, when a lack of liquidity undermined the market and the auction team was disbanded and sold to a ”money and commodities broker” in London.

For several years there have been initiatives to start an IPR market with the intent of listing all granted patents on a ”marketplace” (preferably web-based) and let interested buyers find and bid on chosen patents. Several web-marketplaces exist with enormous lists of IPR that is for sale. Conceptually this may be attractive but in practice it has not worked out. The reason is simple. Professional buyers of IPR (industrial users and financial investors) have certain demands for information concerning the legal aspects of IPR. For instance, who is the actual owner of the patent and if there is a clear ”chain of title” without any unfulfilled covenants or missing payments. Since many companies may not want to reveal, for strategic reasons, who they have licensed a technology to or from, it is often difficult to verify license revenue flows from a patent. That makes it difficult to use the DCF method (Discounted Cash Flow) to estimate an IPR ’s value. Buyers don’t have the time to waste searching for this type of information. Such markets fail to meet the needs of both buyers and sellers and have not been successful.

Fulfilling the price transparency requirement for a functioning market as it is traditionally meant, places to high a demand on IPR as a tradable ”good” that is neither uniform nor fungible. Not to mention that correct information about possible patent infringement from products is enormously important for price development and value perceptions. It is not easy to establish these ”facts”, and they are often not clear until after a legal process and judgment, which can itself take several years and cost a fortune. It costs time and money to analyze an IPR portfolio. The ”due diligence” processes that Nortel’s and Motorola’s portfolios went through took months to complete. It takes a long time to analyze if a patent matches a potential buyer’s business, product and legal strategies. Thereafter, the management must also request and allocate funding from the corporate budget. So, in a traditional sense the market for IPR cannot be compared to other markets like those for commodities or commercial property. Trying to create a market for IPR or “innovation” by political force will only lead to a dysfunctional market that is ignored and will be perceived as a destructive invasion of the state into the private sector.

IPR are part of the international stock markets …
In fact a liquid market for IPR assets exists already today. That is shown clearly by the few deals that have been seen in the media recently. The ”IPR market” is actually part of the well-established international stock markets where one can buy and sell shares in companies like Motorola, Nortel and Interdigital. It is today an accepted fact that during the last three decades a shift in the relative weights of assets on balance sheets has occurred in the majority of technology driven companies. From a weighting of 20 % IPR–80 % hard assets before the 1980’s it is now common with an 80 % IPR – 20 % hard assets weighting. (Source: Ned Davis Research among others).

If you want to buy an attractive IPR portfolio held by a competitor today, you can put a bid on the entire company where these IPR assets are found undervalued and then ”strip the assets”. That is precisely what the Motorola deal was about, and it is not unusual today that corporate raiders and M&A deals are based on IPR. To yearn for political initiatives to create markets and tax breaks to promote IPR based deals to promote innovation can easily lead to a ”Pandora’s Box” experience and twist markets with very unexpected results.

… and the IP Broker market
Today there is also a well functioning ”IP Broker” market that takes care of many IPR portfolios continuously. These portfolios can be made up of one or several hundred IPR, but they must go through the same process steps that the Motorola deal did, even if they do not have the same dignity or size.

Low prices for patent applications
The market that does not function well today is the market for patent applications. It is unfortunately true that a patent application is just that – an application. It has no legal standing and can not be enforced until it reaches granted status. For any number of reasons they can be shot down by the relevant patent office or remain bound up in long challenge actions initiated by competitors. Selling a patent application is merely transferring the financial risk of the application process from the seller to the buyer. Few buyers are willing to pay much for high-risk assets that also require payments to maintain them until they are granted. Therefore, prices are usually very low for applications. Other paths for monetization are necessary to help or clients with applications.

Licensing portfolios and new industries
Even if I agree that there is a need in Sweden for politicians, industry, universities and even the law to promote research, innovation and patenting in order to secure the nation’s future welfare and growth, there is no direct link between the number of patent applications and their quality or likelihood of reaching granted patent status. It is only truly good innovation and discoveries that lead to strong patents which lead to strong revenues and high values. And we don’t necessarily need to sell our ”precious metals” for short-term financial gains. A concerted strategy for building licensing portfolios and new industries is what is important – the market can and will take care of itself.

Matt Miskimin, Intellectual Asset Manager