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The Challenge is to evaluate intangible assets in mergers

by Gustavo de Freitas Morais e Rodrigo Borges Carneiro

June 01, 2007

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The pace of corporate mergers and acquisitions in Brazil has accelerated in the last two years. This trend promises to continue in 2007 as numerous deals have been announced, the purchase of the Ipiranga Group, for example. On the other hand, there is universal agreement on the growing importance of intellectual property for companies in the age of the knowledge economy. In highly innovative sectors, intellectual property in its diverse ramifications is actually the companies’ most important asset.

In no area of the current economy is it unimportant to have a well-implemented strategy for protecting, managing and exploring intellectual property. Even sectors considered less "technological," like the fashion industry, or more traditional sectors, like steel, depend on intangible assets such as trademarks and patents to ensure their competitiveness.

In this scenario, intellectual property naturally increases in importance in proceedings of due diligence or systematic analysis of a company’s documents and information designed to assess risks. Due diligence is indispensable for mergers, acquisitions and even for obtaining financing, which is more and more often ensured by intangible assets. Careful examination of the intellectual property portfolio of a target company must be conducted, preferably by an experienced team. A solid intellectual property due diligence team should consist of lawyers who have experience in the matter together with industrial property agents who have technical knowledge (like engineers, biologists and chemists); it is ideally conducted in the phase when the parties are establishing the transaction’s general procedures, objectives, guarantees and initial values.

The investigation and analysis must be strategically aligned with the parties’ corporate objectives to ensure efficient control of time and resources. In some cases, it is even possible to anticipate pending matters that may determine the outcome of a transaction or influence its value.

Relegating to the back burner an appraisal of the target company’s intangible equity and focusing the due diligence solely on corporate, labor and fiscal factors, or postponing the intellectual property assessment until the final phase of the process may prove to be irreparable mistakes.

Ideally the companies take the care to have regular intellectual property audits to adjust their assets to changes in managerial planning. Auditing can identify technologies that the company is not exploring directly, reduce spending on maintaining rights and identify situations where third parties could potentially threaten properties. The practice also teaches that ownership of rights can be affected if a company does not take precautions at the time assets are created.

It is important to point out the key points to be raised in a due diligence. Each situation is unique, and the diverse intellectual assets and rights have particularities that require special precautions. In general, however, the first issue is identifying all the trademarks, patents, industrial designs, copyrights, computer programs, trade secrets, contracts and litigation in which these assets are involved.

Regarding trademarks, among other things it is fundamental to ensure that there are registrations and that they cover the entire range of goods and services sold: it is increasingly common for the use of trademarks for goods and services to be extended to others to which the mark did not originally apply.

Numerous other issues can and are raised during a due diligence. Of note is the case of any licenses the company may have obtained for the use of software, technology or know how required for its operations and the impact of these licenses. On the other hand, verification must be made of any licenses the company granted to third parties and their effect on the business.

Completion of this process provides companies with a portrait of the range for building more solid grounds for closing a transaction.

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Gustavo de Freitas Morais

Agente da Propriedade Industrial , Advogado, Engenheiro Eletrônico

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Rodrigo Borges Carneiro

Advogado, Agente da Propriedade Industrial

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