Transcript ORIENTATION PROGRAM ON INTELLECTUAL PROPERTY FOR MANAGEMENT STUDENTS FROM IIPM (INDIA) May 3, 2007, Geneva Valuation of Intellectual Property Assets Christopher M.

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 valuation
models
Mkt value - Book value
model
More info: Valuation of Intellectual capital and Real Option Models by Sudarsanam, S. et al
http://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.
Discounted Cash Flow
Dynamic
Models
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 incomeproducing 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 DCF
APPLIED TO THE BUSINESS ENTERPRISE UNDER
CONSIDERATION
•The Net Present Value (NPV) of a strategy or business is the sum of its
expected free cash flows to a horizon (H) discounted by its cost of
capital (r)
NPV = Year 1 Cash Flow + Year 2 Cash Flow ... to say Year 5 Cash Flow
(1 + r)
(1 + r) ²
(1 + r)H
PLUS
The terminal value which is the value of the business at a horizon (HV)
HV = Cash Flow
(r - growth)
Also 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
Expected long-term growth rate
In economic income
Projected
economic income
PV factor using
15% discount rate
PV over discrete
projection period
3%
Period 1
Period 2
Perio 3
Perio4
Perio 5
Terminal
value
100.00
103.00
106.00
109.00
113.00
966.00
0.8696
0.7561
0.6575
0.5718
0.4972
0.4972
87.00
78.00
70.00
62.00
56.00
PV of terminal
value
Cumulative PV
15%
480.00
833.00
Source: Meinhart, T. Intellectual Property Discount Rate and Capitalization Rates (ed) Reilly, R. & Schweihs R. The Handbook of
Business Valuation and Intellectual Property Analysis