Firmex Harvesting Intangible Assets

©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 1

Firmex Webinar Series

May 22nd, 2012

1:00p.m. to 2:00p.m.

Andrew J. Sherman, Esq.

Jones Day

51 Louisiana Avenue, N.W.

Washington, D.C. 20001-2113

202-879-3686

[email protected]

Harvesting Intangible AssetsUncover Hidden Revenue in Your Company’s Intellectual Property

@Firmex, #FirmexMC

mailto:[email protected]


About FirmexFirmex is focused on providing the best virtual data room

solution for managing corporate transactions and financial

compliance

Who uses Firmex?

• Firmex community includes

over 200,00 users worldwide

• Conducted over 10,000 deals

in the last 18 months

Why offer an M&A Master Class?

• As part of our value-added service, we believe it is important

to offer educational resources to our expanding community

Joel LessemCEOFirmex


Andrew J. ShermanMr. Sherman is a partner in the Washington, D.C. office of Jones Day with over 2,700 lawyers worldwide.

He is the author of 23 books on business growth, capital formation and the leveraging of intellectual

property. His twenty-second (22rd) book, Harvesting Intangible Assets, Uncover Hidden Revenue in Your

Company’s Intellectual Property, (AMACOM) was published in October of 2011.

Other recent titles include the best-selling Mergers and Acquisitions from A to Z, third edition was

published by AMACOM in 2010. He is also the author of the 2nd edition of the Due Diligence Strategies

and Tactics, which was published in the Spring of 2010. His Twenty-third book Essays on Governance,

will be published June of 2012.

He has appeared as a guest and a commentator on all of the major television networks as well as

CNBC’s “Power Lunch,” CNN’s “Day Watch,” CNNfn’s “For Entrepreneurs Only,” USA Network’s “First

Business,” and Bloomberg’s “Small Business Weekly.” He has appeared on numerous regional and local

television broadcasts as well as national and local radio interviews for National Public Radio (NPR),

Business News Network (BNN), Bloomberg Radio, AP Radio Network, Voice of America, Talk America

Radio Network and the USA Radio Network, as a resource on capital formation, entrepreneurship and

technology development.

He has served as a top-rated Adjunct Professor in the Masters of Business Administration (MBA)

programs at the University of Maryland for 23 years and at Georgetown University for 15 years where he

teaches courses on business growth strategy.

He has served as General Counsel to the Young Entrepreneurs’ Organization (YEO) since 1987. In 2003,

Fortune magazine named him one of the Top Ten Minds in Entrepreneurship and in February of 2006, Inc.

magazine named him one of the all-time champions and supporters of entrepreneurship.


Introduction:

Challenges, Opportunities, Myths

and Call to Action


The Risks and Challenges of the

Intangible Asset Class

• The markets have trouble understanding that which they can’t touch or feel – yet the

paradigm shift continues at a rapid pace driven by technology and social media

• Investors have not figured out yet how to properly value intangibles, banks have not yet

figured out how to lend against intangibles as collateral and the accounting profession

has not yet figured out how to treat these assets properly on financial statements (Lev)

(The Extinction of Goodwill)

• Companies of all sizes and types, universities, governments, NGO’s, trade associations

don’t know how to properly manage these assets nor do they have systems and

strategies in place to drive stakeholder value, new business models, markets and profit

centers (a crisis of strategy, systems, governance and leadership) (AOL)

• So … our economy is increasingly being driven by a vehicle that nobody knows how to

properly drive and which has no clear path forward….

©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 6#FirmexMC

The Opportunities

• The increasing strategic importance of intangible assets in our society as

drivers of shareholders value

• Trillions of dollars worth of intangible assets already exist and are waiting to

be harvested to foster innovation, economic growth, productivity and job

creation on a global basis (but some will rot on the vine or spoil if not harvested

on a timely basis) (the Dangerous Assumptions of Complacency and RITA)

• Even a modest effort can create tangible and measurable results (“P&G’s $3

billion sideline” WSJ March 20, 2012)


The Opportunities (Cont’d)

• Intangible assets are becoming the premier driver of business strategy

and M&A (Google® buys $12.7b of Motorola® patents)

• The capital efficiency of most intangible asset harvesting strategies and

the access to the credit/equity markets for companies of all sizes and types

as the financial markets better understand the value and strategic

importance of this asset class will be a key driver of growth and profitable

margins

• Uptick in patent litigation and trolls (over 2,800 patent infringement

lawsuits in 2010 – doubled in 10+ years)


The Myths

• It’s not just about money (it’s about attitude/culture/passion/ time

management) (The Tao of Steve Jobs)

• It’s not just about patents (brand equity, systems, know-

how, processes, channels, relationships, databases, best

practices, culture, governance, etc. are all critical strategic intangible assets

that drive shareholder value)

• It’s not just about break through innovation (most intangible assets offer

pathways to incremental opportunity)

• It’s not just about the private sector (look at the AUTM ratios and upside

potential, governments, trade associations, etc.)

• It’s not just about economic reward (the advancement of society, culture, even

our ability to co-exist relies on a human race that wants to innovate for psychic

reward, peer recognition, career accomplishment, legacy, etc.)

WebEx CLE Verification Code: 051512


Some Insights From One of the World’s

Greatest Innovators

“Innovation has nothing to do with how many R&D dollars you

have. When Apple came up with the Mac, IBM was spending at

least 100 times more on R&D. It’s not about money. It’s about the

people you have, how you’re led, and how much you get it.”

-- Steve Jobs

RIP – 10/5/11

1. Do What You Love (Passion is everything)

2. Put A Dent In The Universe

(How will you define your legacy?)

3.Kick Start Your Brain

(What is the definition of insanity?)

4. Sell Dreams. Not Products

(Understand what your customers truly want)

5.Say No To 1000 Things

(Discipline. Rigor. Focus. Screens and Filters. Prioritize. VC

Model.)

6.Create Insanely Great Customer Experiences and Master the

Message

(Define and build your brand)

7.Inspire Evangelists

(No man is an island)


Key Economic Trends and

Intangible Assets


The Shift From a Tangible Asset-Driven Economy

to an Intangible-Driven Market is Well Under Way

Source: Ocean Tomo

Intangibles information

gap

Intangible book value

Tangible book value


The Shift Is Taking Place In Multiple Industries

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Energy

Materials

Industrials

Consumer Disc

retionary

Consumer Staples

Health Care

Financials

Telecommunications S

ervices

Informatio

n TechnologyUtili

ties

Intangible Value as a % of Total Market Capitalization

by Sector

1975

2005


Source: Ocean Tomo


Intangibles +/- 70% in M&A

Ernst & Young: Acquisition Accounting – What’s Next for You? (global data from 2007).

Tangible, 30%

Intangible, 23%

Goodwill, 47%

…another version of the intangibles

information gap


Here’s What’s Really Happening

15

Source: Corrado and Hulten (2010). Last point plotted is 2007.http://www.conference-board.org/data/intangibles

.02

.04

.06

.08

.10

.12

.14

.16

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003

Percent of NFB output

Intangible

Tangible

Intangible capital

• Computerized information

– Software

– Databases

• Innovative property

– R&D, broadly defined

– Copyrights and licenses

– Designs

• Economic competencies

– Marketing and branding

– Strategic firm practices

Intangible vs. tangible investment rate

rises over time in the United States

http://www.conference-board.org/data/intangibles




This Investment Created a New

(albeit invisible*) Kind of Capital

16

Total Corporate

Value

Financial Capital

Tangible Capital

IntangibleCapital

*not on the balance sheet


It’s about

knowledge

assets


Understanding Intangibles


Intangible Assets

• The drivers of shareholder value that we can’t touch or feel

• Assets that transcend the four buckets of intellectual property law

• Assets that transcend the definition of goodwill and traditional

balance sheet accounting

• Assets that all companies of all sizes and all industries have access

to, but rarely fully engage

WebEx CLE Verification Code: 051512


Types of Intangible Assets &

Intellectual Property

Cultural Assets

• Leadership and Governance

• Organizational Norms and Habits

• Trust and Integrity

• Mission, Vision and Values

• Communication and Goal-setting

• Accountability

• Transparency

• Reward and Compensation Systems

• Decision-making Systems

Human Assets

• Investment in the advancement and

interchangeability of workforce

(career advancement)

• Skill expertise of workforce

(competence and experience)

• Special

certifications, awards, security

clearances, etc.

• Functionality and performance of

teams

• Commitment, motivation, attitude

and loyalty

• Problem solving skills

• Creativity


Types of Intangible Assets &

Intellectual Property (Cont’d)

Relationship Assets

• Corporate reputation and external/internal

brand image perception

• Status, strength and influence over channel

partner relationships

(VAR’s, dealers, distributors, wholesalers, f

ranchisees)

• Vendor relationships

• Customer relationships

• Investor/banking relationships

• JV and Alliance Partners

• Sales, Marketing and Branding Strategies

• Customer Relationship Management

Systems

Practices and Routines Assets

• Know-how and show-how (codified in

manuals and informal procedures and

tacit rules on workplans)

• Systems and processes

• Information transmission, flow and

management

• Knowledge, management and capture of

best practices

• Training systems


Branches of Intellectual

Property Law

Trademarks &

BrandsCopyrights

Trade

Secrets

Trade

Dress

IP

Patents


Evolving Strategic Views Towards

Intellectual Assets (IA)

Traditional

View

Enhance the company’s competitive advantage and strengthen its ability to defend

its competitive position in the marketplace (IA as a barrier to entry and as a shield

to protect market share) (reactive and passive approach)

Current

View

Should not be used merely for defensive purposes but should also be viewed as an

important asset and profit center which is capable of being monetized and

generating value through licensing fees and other channels and strategies,

provided that time and resources are devoted to uncovering these opportunities

(especially dormant IA assets which do not currently serve at the heart of the

company's current core competencies or focus) (proactive/systemic approach)

Future

View

Premiere drivers of business strategy within the company and encompass human

capital, structural/organizational capital and customer/relationship capital. IAM

systems need to be built and continuously improved to ensure that IA assets are

used to protect and defend the company's strategic position in domestic and global

markets and to create new markets, distribution channels and revenue streams in a

capital efficient manner to maximize shareholder value (core focus/strategic

approach)


Why are so many companies typically so

bad at leveraging their intellectual capital?

• Lack the time (too busy)

• Lack the desire (too lazy)

• Lack the skills/expertise/systems (too ignorant or disorganized)

• Lack the vision (too focused on their niche)

• Lack the resources (too capital-constrained)

• Lack the leadership (too thin at the top)

• Lack the market (too focused on technical excellence)

• Lack the demand (clients do not require innovation or value if in the delivery services)


Intellectual Asset Management (IAM)

(The IP Discovery, Management and

Mining Process)

• IAM systems facilitate collaboration and help break down silos in communications regarding new product development, the harvesting of intellectual assets and provides training to employees at all levels on the importance of the protection and leveraging of intellectual property.


Reviewing Current IAM Practices

• What is the real commitment to R&D and innovation at all levels within the company? Are strategies and budgets focused only on “home runs” or “singles and doubles?”

• What IAM systems, procedures and teams are in place now?

• How and when were these systems developed? Are they obsolete or no longer consistent with the company’s current strengths, focus or growth objectives?

• Who is responsible/accountable for managing these systems within the company? Who is empowered to make decisions as to which projects will move forward and which will not?


Reviewing Current IAM Practices

(Cont’d)

• What are the ideas/technology harvesting, filters and procedures for innovation decisional analysis (as to whether to move forward/budget allocation/timetable, etc.) currently in place? How does information about creative new ideas flow within your company? Where does it start? Where does it end?

• Is the strategy and the process for harvesting and leveraging intellectual assets more reactive or proactive?

• What are the real or perceived internal (politics, red tape, turfmanship, budgeting processes, organizational structure) and/or external (market conditions, state of the art moving quickly, competitor's strategies, etc.) silos, barriers and hurdles that stand in the way of better IAM practices and procedures?

• What can be done to remove or reduce those barriers?


IAM System Goals

• Catalogue and manage the inventory and status of the company’s proprietary and intangible assets

• Use of technology (software, intranet, telecommunications, IM, etc.) to encourage and support communication and data-sharing about new intra-company and industry-wide innovation and intellectual property

• Internal processes, filters (including resource allocation) and decision-making systems for intellectual asset development and harvesting

• Foster innovation which strengthens customer relationships and builds shareholder value

• Open-ended brainstorming on new applications and value-added improvements to existing products, services and technologies


IAM System Goals (Cont’d)

• Roles and accountability for creating, implementing and enforcing IAM system standards (internally and externally)

• Management of strategic interdependent relationships

• Determining how IP assets will be owned (holding companies, tax issues, etc.)

• Analysis and implementation of strategies to leverage and monetize these assets


IAM System Goals (Cont’d)

• Defending what you own via IP litigation and enforcement (including licensing)

• Defending claims of infringement by others

• Identifying opportunities for “licensing in”

• Periodic “pruning” of dormant IP assets

• Viability/Staleness/Obsolescence

• Too far away from current core focus

• (Sale/Licensing/JV’s/Donation)

• Reducing costs of R&D/Patent maintenance and filing costs


Intellectual Assets Drive Growth

Strategies and Generate Revenues

• Spin-off new companies

• Joint ventures, strategic

partnerships & alliances

• Technology & software licensing

• Outright sale of new technology

• Co-branding

• Franchising

• Enter new markets

• Develop new products

• Brand-extension licensing

• Technology transfer

• Cooperatives, consortiums,

federations

• Training & consulting services

• International expansion

• Government contracts

Possible Market Opportunities

and Revenue Sources

• Patents

• Trademarks

• Copyrights

• Trade dress & trade secrets

• Distribution channels

• Show-how & know-how

• Databases & customer info.

• Software & proprietary algorithms

• Customer & partnerships

• Proprietary processes & systems

• Knowledge & technical workers

• Exclusive licenses/access to

technology

Protectable

Intellectual Property


Questions & Answers


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Firmex Harvesting Intangible Assets

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Transcript of Firmex Harvesting Intangible Assets