EDWARD COOKE
Mon, Oct 05, 2009
Intellectual property is a valuable asset in the knowledge economy – but can firms determine its value?
ONE OF the main outcomes of the financial crisis and the global recession has been a drying up of credit. The ensuing search for liquidity has meant businesses are looking beyond tangible assets on their balance sheets and towards the value of intangible assets like intellectual property (IP), staff know-how or company reputation.
This switch in focus should be regarded as a natural progression as we move from an industrial-based economy towards a knowledge-based one.
Recognising this link between innovation and growth, it is appropriate to regard IP assets such as patents, trademarks, copyright and design rights as knowledge economy currency. How is this currency valued?
There are over 50 different approaches to IP valuation. That none of them have been adopted on any significant level is testament to the complexity involved and the varying goals of the interest groups behind them.
However, if IP and patents are to become a viable asset class, some form of transparent, credible and intelligible valuation standard is required. In business there is the notion that the value of a company’s IP is equal to the sum of its market value, minus the value of its tangible assets.
However, while market value and tangible assets can easily be expressed in monetary terms, this is where their similarity ends.
The market value of a company can change rapidly based on the confidence shareholders have in its future, while the value of tangible assets are determined under different factors by different buyers and based on transaction prices occurring in the past. Given this fundamental difference in value, it is not meaningful to subtract one from the other to determine IP value.
Indeed the bankruptcy of GM has not led to a decrease in the value of its IP. However, there was a concern over IP ownership if the firm did not retain a major shareholding in Opel. Splitting the IP between the firms would be a terrible dilemma.
If the value of IP cannot be so easily computed, how difficult is it to value an individual patent? Financial accounting provides us with three theorems for valuing assets. Market value indicates the price of the asset based on the going rate for similar assets. The obvious problem is that a patent provides a certain market monopoly, and therefore it may be difficult to identify similar assets for comparison. While cross-licensing and auctions try to identify a price, this is rarely regarded as an objective one.
Alternatively, cost valuation uses the expenses generated during development, eg RD, fees for filing and renewal. However, this suggests a patent can be replaced or a new one developed using certain ingredients. Clearly, the value of innovation is more than the sum of its parts. Probably the most relevant approach is that of income value, which uses the projected value of the total monetary gain for valuation.
In certain circumstances this is a viable approach, as patents have a predetermined life cycle and if the income during this period can be computed, a value can be assigned. This is probably most apparent in the biotech and pharmaceutical industries, in which exclusive rights to sell a drug or medicine can be valued in billions. However, it is widely recognised that this approach is not suitable for all patents, and furthermore is a labour-intensive, costly and complex approach.
Despite the lack of clear valuation methods, corporations like IBM and Qualcomm generate huge amounts of revenue from the successful licensing of IP. Less well known is that IP is being used as collateral for securing credit and being auctioned. A number of Asian banks offer IP-backed loans.
In 2006, the Bank of Communications in China started offering loans of a maximum of 10 million yuan (€1 million) with a maturity of three years to certain SMEs. Patents, utility patents or trademarks could be used as guarantees. By the end of 2007, they had provided 300 loans based on 700-plus patents at a total value of 6 billion yuan. Also in 2006, the Development Bank of Japan accepted patents, patent applications and copyrights as collateral, and approved 250 loans. Probably the most substantial barrier to more banks providing IP-backed collateral loans is the extensive analysis they are required to perform for valuation. In an attempt to rectify this, the Initiative Finanzstandort Deutschland, which contains representatives from a broad spectrum of the German financial sector, has recently announced that it is working on patent valuation guidelines for banks.
In the IP auction arena, the biggest stakeholder is probably Ocean Tomo, which organises auctions and provides valuations for IP. The money raised depends on the quality of the IP and the market liquidity available. Last October, over US$12.5 million (€8.57 million) was raised on 48 lots, while at their last auction in March they managed to sell only six of the 80 lots of patents, generating US$2.9 million.
With vast quantities of IP churned out of multinational RD departments and only a fraction ending up in products, some of these normally closed companies are embracing “open innovation”.
Microsoft set up its IP Ventures group in 2005 to license its superfluous IP to entrepreneurs across the globe, and its collaboration with Enterprise Ireland has recently been cited as being one of its most successful.
Such collaborative schemes involving IP have the potential to generate valuable new revenue streams within economies.
It is apparent that the valuation of IP assets is more complex than tangible assets. However, it is also apparent that IP represents an untapped source of credit. Recognising these issues, the European Patent Office released in March the free software download IPScore, which enables users to analyse the value of individual patents using a multitude of different factors.
Independently, what might be regarded as an IP valuation community has started debating what would be required of an acceptable valuation standard.
The consensus is that it must define a glossary of terms; a definition of what should be in a valuation; an indication of the valuation’s context; the entry-level knowledge requirements for IP valuators, and a code of ethical behaviour. Whatever the outcome, now is the time to assess whether your company is getting value from its IP.
Dr Edward Cooke is a patent examiner at the European Patent Office
© 2009 The Irish Times
Posts
