Valuation of Intellectual Property Assets
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Transcript of Valuation of Intellectual Property Assets
ORIENTATION PROGRAM ON INTELLECTUAL PROPERTY FOR
MANAGEMENT STUDENTS FROM IIPM (INDIA)
May 3, 2007, Geneva
Valuation of Intellectual Property Assets
Christopher M. Kalanje, Consultant, Creative Industries Division, WIPO
IP VALUATION
• Valuation is a process of determining value or worth of an asset
• Valuation often combines objective and subjective considerations
• IP valuation is a relatively new area• IP valuation is triggered by various
factors
IP Valuation contd.
• A Final valuation would depend on the following basic premises of value– Value in exchange: worth of the
underlying IP asset in terms of its capacity to be exchanged in terms of money
– Value in continued use: worth of the underlying IP asset to its owner on the basis that it continues to generate income to the owner
IP Valuation contd.
– Acquisition value: strategic potential of the underlying IP asset e.g uses in M & A
– Value in place: worth of the underlying IP asset as it is. i.e. the said IP asset is not in current use in the production of income
Value Basis of IP Assets
• Traditionally IP assets were treated as Goodwill– Goodwill=the amount paid for a
business in excess of the fair value of its identifiable net assets at the date of acquisition (see Peguin dictionary of accounting)
• Advent of knowledge economy and high market value of companies as opposed to book value enhanced interest on value of IP
Value Basis of IP Assets contd.• IP assets have distinctive
characteristics which makes it possible to value them separately from other intangible assets
• These characteristics include– Independently identifiable– Legally protected and enforced– Transferable– Economic life
Value Basis of IP Assets contd.• Factors influencing value of IP
assets– High price
• Large potential market• Strong IPR (well written claim)• Exclusive license• Stage of technology (e.g. invention near
commercialization stage)• Option on leveraging
Value Basis of IP Assets contd.
– Low price• Non-exclusive license• Huge investments needed• Still far from commercialization (needs
further development)• No option for sub-licenses
IP Valuation Triggers
• As IA in particular IP take the central stage in determining the value of enterprises decision makers have to answer the following– Are returns on R&D satisfactory?
– Are patents worth renewing?
– Are brands worth defending? etc.
IP Valuation Triggers contd.• Enterprises need to formulate a
strategy which would make IP assets more profitable
• IP valuation is imperative in facilitating decision making process on strategy to pursue
• Several factors (triggers) lead to IP valuation
IP Valuation Triggers contd.• These include
– Sale or Purchase of IP Assets– Licensing– Merger & Acquisition– Cost saving– IP asset donation– Joint venture arrangements/strategic
alliances– Financing
Methods of IP Assets Valuation
• Valuation models may be broadly divided into two– Static models
• Estimate value of accumulated intellectual assets at a point in time
• Does not differentiate temporal differences in the accumulated IP
• Does not differentiate the differences among different categories of IA at the time of valuation
Methods of IP Assets Valuation contd.
Static valuationmodels
Mkt value - Book valuemodel
More info: Valuation of Intellectual capital and Real Option Models by Sudarsanam, S. et alhttp://www.realoptions.org/papers2004/SudarsanamIntellCap.pdf
Methods of IP Assets Valuation contd.
– Dynamic models
• Take into consideration the temporal difference in the accumulated intellectual assets (e.g. time value of money and riskiness of the forecast cash flow)
• Value investments in intangibles each at a time
Methods of IP Assets Valuation contd.
DynamicModels
Discounted Cash Flow
Real Option Models
Methods of IP Assets Valuation contd.• Basic Methods
– Cost Approach: Estimates the value of underlying IP asset basing on historical cost incurred in developing the asset• Replacement cost• Reproduction cost
Methods of IP assets Valuation contd.
– Market Approach (sales comparison approach):• Based on the value of similar or
comparable assets that have been exchanged, at arm’s length, in active market
• second variant uses standard industrial royalty rates
Methods of IP assets Valuation contd.
– Income Approach: Based on the income-producing capability of underlying IP asset• Seeks to establish the net present value
(hence use of discounted cashflow)• Decision tree analysis (DTA)-based on an
underlying DCF analysis and moves further to take into consideration flexibility available.
Methods of IP assets Valuation contd.• Net present value
– Calculating the future value of intellectual asset (investment) at present time
– NPV= A(1 + r)-n i.e. NPV = A[1/(1 + r)n]
where: NPV= net present value (i.e. DCF); A= amount expected at year n; r = risk factor
Methods of IP assets Valuation contd.• Other IP valuation methods include
– Monte Carlo simulation analysis– Option pricing theory
Accounting Challenges
• Rationale behind Accounting– Historically evolved
to report tangible assets/liabilities
– Quantitative stock of performance
– Documentation of past financial position
• Impact on Type of Language developed for IP– Silence about a lot
of a firm’s IP due to inherent definitions and assumptions in accounting
Accounting Challenges contd.
• Rational– Factual, precise,
objective, – comparable
information– Determines
perception of a firm’s management
and other market participants
• Impact on Type of Language developed for IP– Internally and
externally generated IP is treated differently
– Goodwill
Finally
Methods of IP assets Valuation contd.
MODERN VALUATION ANALYSIS IS EFFECTIVELY MODERN VALUATION ANALYSIS IS EFFECTIVELY DCF APPLIED TO THE BUSINESS ENTERPRISE DCF APPLIED TO THE BUSINESS ENTERPRISE UNDER UNDER CONSIDERATIONCONSIDERATION•The Net Present Value (NPV) of a strategy or business is the The Net Present Value (NPV) of a strategy or business is the
sum of itssum of its expected free cash flows to a horizon (H) discounted by its expected free cash flows to a horizon (H) discounted by its cost of cost of capital (r) capital (r)
NPV = NPV = Year 1 Cash FlowYear 1 Cash Flow + + Year 2 Cash FlowYear 2 Cash Flow ... to ... to say Year 5 say Year 5 Cash FlowCash Flow (1 + r) (1 + r) ² (1 (1 + r) (1 + r) ² (1 + r)H+ r)H
PLUSPLUS
The terminal value which is the value of the business at a The terminal value which is the value of the business at a horizon (HV)horizon (HV)HV = HV = Cash FlowCash Flow (r - growth)(r - growth)Also discounted back to present valueAlso discounted back to present value
Methods of IP assets Valuation contd.• Trademark remaining useful life
continue in perpetuity after after period 5
• economic income (royalty income) grows at 3%
• 15% is risk-adjusted discount rate
Methods of IP assets Valuation contd.
Discouted Cash Flow Analysis, Trademark Valuation Example
Present value discount rate 15%Expected long-term growth rate 3%In economic income
Period 1 Period 2 Perio 3 Perio4 Perio 5 Terminalvalue
Projectedeconomic income 100.00 103.00 106.00 109.00 113.00 966.00PV factor using15% discount rate 0.8696 0.7561 0.6575 0.5718 0.4972 0.4972
PV over discreteprojection period
87.00 78.00 70.00 62.00 56.00
PV of terminalvalue
480.00
Cumulative PV 833.00
Source: Meinhart, T. Intellectual Property Discount Rate and Capitalization Rates (ed) Reilly, R. & Schweihs R. The Handbook ofBusiness Valuation and Intellectual Property Analysis