What is your IP worth?

You only have to look at the changes at the top of the stock indexes to see there’s been a seismic shift in the reasons why one company is worth more than others.

The 10 largest companies by market capitalisation in 2000 included Citigroup, Cisco Systems, Walmart, Microsoft, AIG and Intel. The 10 largest in 2018? Apple, Microsoft, Amazon.com and Facebook – technology firms now dominate, with intangible assets such as intellectual property (IP) replacing tangible assets as the major source of corporate value.

More than 84 percent ($19 trillion) of the S&P 500’s market cap is represented by intangible assets; yet businesses still struggle to understand, and therefore quantify, the value of their IP. The implications of not fully understanding the value of IP are significant. Among other things, it is difficult for companies to protect value they know is on their balance sheets, but cannot identify.

Data theft is constant and the volume staggering, as noted in the 2017 Global Cyber Risk Transfer Report, which highlighted a serious gap between companies’ efforts to insure cyber assets vs. physical ones. Respondents devoted four times as much budget to insuring physical assets as they did to cyber ones.

As noted in the 2017 survey, the insurance gap is particularly striking, given that the potential loss for information assets exceeds that for property, plant and equipment. At the same time, companies indicated that they felt it was more likely they would experience a loss to information assets than to their physical ones.
On top of that, where companies failing to properly value their IP face serious and punitive difficulties when confronted with a patent or trademark lawsuit or embark on a takeover deal.

Losing value in the inability to value

The trend toward IP becoming the primary source of business value began in the mid-1970s, but accelerated in 2007/2008 with the rise of mobility, cloud computing, social media and other technologies.

According to Lewis Lee, CEO of Aon’s Intellectual Property Solutions Group, markets first began to recognise IP as an asset class in 2006, when BlackBerry maker Research in Motion reached a $612.5 million settlement with patent holding company NTP over the technology used to push emails to BlackBerry phones.
IP is difficult to quantify; but increasingly valuable.

The need to protect those intangible assets’ ever-growing value is significant. Consider the issue of “patent trolls” – companies whose sole purpose is to obtain the rights to patents and profit by means of licensing or litigation. More than 10,000 companies have been sued at least once by a patent troll, and over the past 10 years patent troll lawsuits have grown 500 percent.

Understanding the value of IP is also critical when it comes to mergers and acquisitions. The classic IP horror story is that of one major car manufacturer which acquired a well-known luxury car manufacturer. After seemingly closing the deal, the acquiring car maker learned that, while it had bought everything needed to produce the luxury vehicles, it had failed to acquire the luxury brand’s trademark, which was sold to a rival firm.

The implications of not accurately valuing IP could play out across various scenarios:

  • Failure to align IP strategy and business strategy: Many firms do a good job focusing on legal aspects of their IP but fall short in recognising the inherent value of the IP portfolio. If a business uses the number of its patents as a metric for its innovation, it will fail to maximise the value of its IP, and struggle to align its IP strategy with its overall business strategy.

  • Failure to understand IP value: A new company has suddenly appeared in an established firm’s market. The start-up, it turns out, was founded by a disgruntled former employee who took IP with them when they left. Just how much is that IP worth? What value should the company attach to it in litigation?

  • Inability to value IP in mergers and acquisitions: A technology company wants to acquire in the network security space, but how does it make the best choice? Valuing the IP of each of the choices would contribute to a deal’s success. The company would likely select the best choice; but possessing a deeper understanding of the acquired company’s IP would allow it to better integrate assets with the business strategy.

  • Not properly protecting IP: Correctly quantifying the value of a company’s IP is vital to finding a satisfactory insurance solution. “Limited data and analytics available to the underwriting community has meant higher retentions, deductibles and co-insurance requirements for potential policyholders, limiting the value insurance can bring to the world of IPs” - Eric Boyum, Managing Director, National Practice Leader, at Aon.

Measuring IP to drive and protect value

As the value of intangible assets continues to grow versus that of companies’ physical assets, it becomes ever more important that companies take advantage of them.Companies with an accurate value of their IP portfolios are better positioned to protect those assets and to connect them to the overall business strategy. “Not only is an understanding of assets essential to the business – but necessary if firms are looking toward mergers and acquisitions,” states Lee. An accurate measure of your IP could also provide a source of competitive advantage and allow your company to realise the maximum return from your innovation. “If we look at today’s top companies, it’s clear – you can place a premium on innovation, and the challenge is how to best value it.”

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