This article first appeared in World Trademark Review on 15 April 2021. For further information, please go to www.worldtrademarkreview.com.
Getting IP portfolios M&A ready for sale requires in-depth, proactive work that many fail to carry out, potentially causing serious issues further down the line. Henk-Jan Rutgers discusses how to prepare an IP portfolio for success, while Marc Cloosterman of VIM Group outlines best practices in structuring brand assets following an acquisition.
While brand equity is created by a variety of factors, it is ultimately the legal system that supports the way in which a brand is built, captured and protected that holds the key to unlocking a brand's value – especially when it comes to merger and acquisition activity (M&A). Unfortunately, it is fairly common that a brand’s trademark and design rights are not in place or up to date. As a result, it has arguably neither a brand to sell, nor value that a company can truly take over or own as part of its acquisition investment. It is paramount, therefore, that companies and brands properly maintain their IP portfolios.
Proactive management can add significant value to a company or brand portfolio, making it a highly attractive proposition to potential buyers, as well as easing the transition from buyer to owner. The reality, of course, is that this is often easier said than done.
Keeping IP strategies up to date with a business’s wider activity, management approach and global product strategies is a perennial challenge for IP professionals. A typical international company, for example, may have switched back and forth between centralised and localised approaches to IP registration and management – or it might have merged or acquired new portfolios, lapsed unused brand portfolios or sacrificed rights to cut costs or avoid disputes. The importance of updating records and registering new or existing assets in new iterations or geographies can frequently be overlooked in the rush of change.
- Don't forget to download our complimentary white paper: 'IP in M&A: Getting your rights in order'.
The role of IP due diligence
The first step in any sale or divestment exercise should be to look in detail at what it is that a company actually owns, the strength of the registration and what it offers the business in terms of market share and future expansion. At the very basic level, for sellers, this means ensuring that the IP portfolio is comprehensive, which means ensuring that all relevant trademarks for correct goods and services are registered and in all applicable jurisdictions before preparing to sell. The ownership information must be up to date and valid, with a secure chain of title, as this will make the transition clearer and much smoother for both parties.
Another factor that affects the price of the portfolio is how the IP rights have been used – if the business has a trademark but it is not being used, its value may diminish due to the risk of cancellation. Similarly, the seller should be conscious of and try to rectify any ongoing IP disputes and, if this is not possible, it should keep track of any formal deadlines and communicate the change of ownership to the relevant parties and offices.
Companies should expect the unexpected when undertaking any IP due diligence or audit exercise. When an entity digs back through its portfolio, while it is not unusual to come across a few hidden gems, unfortunately it will also unearth some problems. These might include, for instance:
- rights that are no longer active (eg, that were acquired for products that have been discontinued, renamed or redesigned, often during merger or acquisition);
- oversights, which leave the company vulnerable (eg, where IP acquisition has not kept up with business activity, core rights are isolated or left unmonitored, or rights that are simply out of date or incorrect); and
- potential hurdles relating to IP licensing, contracts or manufacturing/distribution agreements, among other things.
Assessing portfolios in advance means that these vulnerabilities can be identified and addressed, thereby shoring up the brand’s market value.
The buyer’s perspective: caveat emptor
IP due diligence is equally as important for the buyer and should be done as early as possible, in order to verify that the records have been properly maintained and the chain of title is up to date. Ideally, this would be carried out prior to completion. However, in certain cases (eg, bankruptcy or hostile takeover) this may not be possible. It's also often the case that IP and legal teams are often only involved in M&A plans at the eleventh hour.
Undertaking the necessary checks early on will not only ensure that the buyer is buying what it thinks it is buying, but will also give it the opportunity to make appropriate updates to the portfolio as a condition of the transaction. This should help to avoid any nasty surprises for either party further down the line, whether that be potential litigation, loss of rights, damage to brand reputation or more.
It is important to consider what is present and what might be missing from the portfolio. A buyer needs to know how much of the brand’s intangible assets are protected by IP rights, and be aware of ‘soft’ assets, such as goodwill, trade secrets and know-how that are equally valuable but where protection is not as straightforward.
Inevitably there will be obstacles and challenges along the way, which can delay and increase the cost of the activity. The most common issues to be avoided include the following:
- Discrepancies in the schedule of rights: This is why the initial pre-transaction audit is key, as it investigates whether: the records are held in the correct entity name; the plc/ltd status is accurate; and, the rights have been registered for the intended purpose and free to use in the desired markets.
- Representatives are not empowered or available to sign: This is particularly relevant in situations such as bankruptcy. It is advisable to have both parties sign a general power/authorisation empowering an attorney to complete all documents needed for the transfer project, so that any documentary requirements after the sale can be met without having to track down both parties.
- Difficulty tracking deadlines: Monitoring and communicating key renewal deadlines and status updates between all parties involved will help to ease the strain and keep everyone informed.
In any M&A scenario, no matter the timescale, a solid plan is vital. It saves time and money for both parties in the long term if there is a strategy in place to manage the process from the beginning. In this plan, buyers must consider any IP issues and obstacles that arise from the newly created business – while these will not be sufficient to halt the transaction, planning ahead and proposing solutions will make the road much less rocky.
Managing distressed situations
Buyers can set themselves up for success in portfolio acquisitions by including IP lawyers and trademark attorneys in discussions from the outset. The earlier that they are involved in planning, risk assessment and risk mitigation, the better the results will be, even when time is short.
Transactions prompted by brands falling into administration or bankruptcy are now becoming all too familiar, particularly on the high street, as seen recently with the collapse of fashion and travel brands, such as Topshop/Arcadia and Thomas Cook.
Brick and mortar stores were already struggling to compete against new online giants and, for many, the COVID-19 pandemic and the resulting lockdowns have been the final straw. In the last year, we have also seen some high-profile and well-established brands go into administration, leaving their IP portfolios up for grabs. Online giant ASOS paid around £265 million to acquire Topshop’s brands, IP and inventory, while Boohoo.com recently acquired all of Debenhams’s IP assets for £55 million.
As we also saw with Thomas Cook in 2019 (when the trademark, website and social media assets of the defunct travel brand were bought for £11 million), the IP assets owned by these companies can be sold off during the liquidation process for a considerable sum – often, representing one of the highest assets during insolvency. These high-profile sales highlight the extraordinary value of brand assets, even after a business has ceased trading.
Brand value is so much more than a name, goodwill or reputation. However, its worth can often be undermined by a poor trademark protection or maintenance strategy. Undertaking due diligence before purchasing IP assets from an insolvent business is therefore as essential as with a ‘normal’ purchase. This means applying the same thorough approach when assessing the strength and vulnerabilities of the IP portfolio, including the following:
- Checking that IP rights are up to date –with timings tight, it is important to bring in a specialist to conduct a due diligence exercise over the IP assets as early as possible.
- Ensuring that all formalities are completed within the limited timeframe before the company ceases to exist – to make this possible, authorising and empowering an attorney to complete all documents needed for the transfer project is strongly advised.
- Assessing the damage to goodwill that might have occurred during the liquidation – will this affect any plans once the brand is bought? Is there a scandal associated with the bankruptcy?
Post-completion – now the work really begins
Under pressure of pre-sale deadlines, IP due diligence can be a taxing process, but it is not until completion that the bulk of the work begins – and tight turnarounds apply here too.
It is vital that the transfer of all IP assets is handled quickly and efficiently, with records at the relevant registries updated promptly and accurately. If this does not happen, the new owner could find that its assets are not fully protected when it needs them most, especially if the seller ceases to exist once the transaction is complete. The longer the buyer waits, the harder it is to get those all-important signatures from the seller. Updating IP ownership records is no simple task, especially for international businesses, with every jurisdiction working on different timeframes, fees and processes. This is even more so during the covid-19 pandemic, given that many of the strict formalities that are enforced by the different patent and trademark offices have been subject to change, often at short notice. Brexit has also brought its own challenges.
Despite these difficulties, it is still advisable that the new owners update all titles in one go when possible. While it might seem like a mammoth task and a hit to the budget, this approach is generally more cost and time-effective in the long run. If this is not possible, the process can be phased out post-M&A, for example, by scheduling updates in line with the renewals schedule and/or the business’s plans for structuring its brand architecture (see boxout).
No matter which approach a company selects, managing the recordal project smoothly and efficiently is key to success. We recommend the following steps:
- Smooth the transfer – the purchasing company should receive a schedule of IP rights and pending applications, the selling company should communicate the transfer to its IP team, plus all external agents and advisers.
- Verify the data before it is imported – the purchasing company should confirm that the information with which they have been provided on IP assets is correct and accurate for every jurisdiction.
- Confirm the formalities – the requirements for each jurisdiction and each type of intellectual property need to be followed to the letter, taking advice or using local experts where required. Depending on the type of right, the process can be managed simply by letter or email to the registry, but in many instances will require strict formalities to be adhered to, including legalisation and notarisation.
- Keep track of alterations, especially if personnel or suppliers change – the speed at which the local authorities process applications varies greatly, so the new owner’s IP team must track the status of the applications and maintain accurate internal records.
- Double-check confirmations – the purchasing company must record which confirmations it has received, reviewing any errors or omissions as they arrive.
Maintaining IP rights is an iterative process. Where brands are transferred to new owners, it is not uncommon for them to make changes to a portfolio’s structure or strategy, which may necessitate further updates.
In the post-COVID-19 landscape, any business undertaking M&A activity must be conscious of the impact of digital marketplaces on its intellectual property. Further, it is critical that online brand protection forms a crucial part of the IP due diligence process for buyers. Given the rising levels of infringements and enforcement taking place year on year, it is becoming even more important to understand the digital landscape, and the online risks facing the acquired brand. The ability to respond quickly to any unauthorised activity will depend on the portfolio being transferred efficiently to the new owner, as well as the systems and legal rights being in place to identify and act promptly against infringement.
VIM Group’s Marc Cloosterman writes...
In any acquisition process, brand value plays a vital role. BrandFinance estimates, for example, that approximately 20% of the market capitalisation of the largest companies in the world consists of brand value. However, decisions in this area are far from clear cut.
The question of value
While there is much debate about how to calculate brand value as the outcomes vary with each applied methodology, broadly speaking it is similar to how investors value stock. For example, any listed company with 10 analysts will probably have two advising to sell, two to hold and six to buy. The reason for this is that all decisions are based on expectations for the future.
In essence, a brand valuation is a combination of:
- the relative strength of a brand (company or product) compared to its competitors. Brand valuation experts use as much external and internally available research as possible to gauge this; and
- the financial outlook in terms of revenue and profitability – however, as this means creating future projections and then calculating the net present value, the face values resulting from such a calculation can vary widely.
How to structure the new brand
The question of how to structure a brand post-sale also plays a key role in these valuation exercises. After all, from a buyer’s perspective, the acquired portfolio’s worth, combined (or not) with that of the buyer, is where the real future potential lies.
All assumptions made pre-completion must be checked and assessed once the legal constraints against accessing information have been relaxed. The main rule here is to investigate whether it is possible to unify the branding of the combined entities going forward. The benefits of doing so are obvious in terms of effectiveness and efficiency – the more aligned the brands, the fewer resources required.
On the other hand, there are very good reasons not to unify all brands. This is especially true if the market segmentation is quite different, or when the profitability of the acquired portfolio is significantly higher. There may also be pertinent cultural reasons to avoid unification.
Therefore, a stepped approach is recommended, both for prioritising which brands will achieve the highest impact at the lowest effort and for mitigating risk once the unification process has started. The latter can be achieved by keeping names at a lower (product) level in the new architecture or by aligning the visual brand appearance across the portfolio, without immediately changing all names. Although it can vary greatly by company or situation, such an approach can help to avoid the risk of losing equity by moving too swiftly to the new brand.
Marc Cloosterman is CEO of VIM Group.
This article first appeared in World Trademark Review on 15 April 2021. For further information, please go to www.worldtrademarkreview.com.