Intangible Assets: When the Sum of the Parts is Worth More than the Whole

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Two recent transactions have shown how tremendous value can be unlocked through intangible asset sales. This week, Microsoft’s purchase of an 18 percent stake in Barnes & Nobles’ Nook unit valued Nook at $1.7 billion. This figure far exceeds the Barnes & Noble’s entire market capitalization. And not only did Microsoft take a position; it also committed to paying $60 million a year over three years as an advance on revenue sharing. Barnes & Noble stock responded to the news with gains of 50 percent on the day of the announcement in a big win for shareholders. Similarly, when Microsoft paid AOL $1.1 billion in early April for hundreds of patents, the underlying value of the parent was illuminated as an important asset was monetized, causing the stock to gain more than 20 percent this year. Microsoft then turned around and sold another portfolio of patents to Facebook, including 650 of the 925 AOL patents and patent applications that Microsoft had just bought. Microsoft also licensed Facebook to use the rest of the AOL patents. In turn, Facebook will grant Microsoft a license to use the patents that Facebook is buying. Following these deals, investors are looking at what the patents of other undervalued companies, such as RIM, could be worth – and for good reason. Owning and licensing valuable patents increases the overall value of a technology-dependent company. It also helps them avoid lawsuits by building a larger – and more valuable – intellectual property portfolio that is more difficult for competitors to challenge. The concept of breaking up a company’s assets or selling off particularly valuable ones is not new. Conglomerates often have been measured on a sum-of-the-parts analysis, particularly when their operations span several industries, which can make them hard to value. The break-up value is calculated on what would happen if the company was split up and shareholders were given a proportionate interest in the newly-split off companies. The same analysis can envision selling each part of the company and returning the cash to shareholders. The break-up value of a company often serves as a floor for the stock price and a call to shareholder action when the stock price falls below the break-up value for prolonged periods. Of course, intangible asset valuation isn’t always so cut and dry. “The challenge with patent valuation is that comparative cost or market factors used to value traditional assets may not apply to patents, which by their very existence are novel and non-obvious over other properties,” says Susan Pan, attorney at Sughrue Mion, PLLC. “This makes it more difficult for companies and investors to accurately assess the value of IP assets for trading purposes.” What does all this mean? It seems that technology companies may be the new conglomerates, with portfolios of intellectual property than can be bought, sold, or traded like the divisions of yesteryear. For that reason, public companies need to highlight the strength of intellectual property portfolios so that market value does not underperform the underlying assets. When presenting technology companies to the market, such intangible assets should play a key role in the overall valuation message – and managements should be prepared to discuss not only the potential of these assets; but how the company – and its shareholders – can benefit from them. Kathleen Wailes is a Senior Vice President at Levick Strategic Communication, the nation’s top crisis firm. She is also a contributing author to Bulletproof Blog™.

Published In: Business Organization Updates, Mergers & Acquisitions Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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