Do you conduct patent due due diligence in accordance with standard practices of M & A lawyers and investment bankers as a business or investment professional ("M & A") involved in M & A? When patents form an important aspect of the value of a transaction, you may receive erroneous advice on how to implement due diligence. In the due diligence process, you need to consider the competing patent system. If competitive patents are not included in the assessment process, there is the possibility of considerably overestimating the target company.
Over the years of intellectual property rights and patent experience, patents have engaged in numerous M & A transactions, which account for a significant portion of the important value of transactions. As a patent expert on these transactions, M & A attorneys and investment banks approved by C-level management instructed us to become actual experts. Because they completed dozens of deals per year. For this purpose, the patent experts were instructed to check the next four boxes of the patent due diligence checklist.
- Is the patent paid to the Patent Office?
- Does the seller really own the patent?
- Does at least some patent claims cover the seller's products?
- What sort of silly mistake did the seller's patent attorney make it difficult to force the patent in court?
I very much tied my patent due diligence work and I have no doubt that I had "CYA & d" in these transactions. However, it is clear that the patent side of M & A due diligence basically meets the idea of a way of not making a silly mistake in a transaction involving a patent. In fact, I did not feel anything like the patent due diligence "airplane", but I did not have the right to decide against the standard operating procedures of M & A experts. And I learned how incomplete the standard patent due diligence process is when we are left to pick up transactions done in accordance with standard M & A procedures.
In this transaction, my client, a major manufacturer, bought "CleanCo", a small manufacturer of patented consumer products, expanded the offering of noncommodity products. My client found that CleanCo is a good target for acquisition as CleanCo's products met the strong consumer's needs and at that point demanded premium prices on the market. CleanCo experienced significant growth in sales, due to strong consumer acceptance for the only product, and continued growth was expected. However, CleanCo owned only a small manufacturing factory and it was difficult to respond to the growing needs of the market. CleanCo's venture capital investor was anxious to cash through the company's somewhat marginal business continued financing for several years. My client and CleanCo's marriage seems to be a good match, and the process of M & A due diligence is ongoing.
At due diligence, CleanCo revealed that there are few small assets covering a small manufacturing factory, but limited but sales and distribution expansion, and only CleanCo products. Despite these apparently minimal assets, CleanCo asked for more than $ 150 million. This price only means one thing - the value of CancelCo is only the possibility of sales growth of the patented product. In this scenario, it was correctly understood that the exclusive nature of CleanCo products is the basis of purchase. In other words, if someone can knock off CleanCo's differentiated products, competition will always occur, and betting will be discontinued for growth and sales forecasts that form the basis of the financial model to promote acquisition.
In accordance with instructions from M & A attorneys and investment bankers' leaders, the patent side of the due diligence process was tied according to standard procedures. Everything was checked out. CleanCo owns the patent and paid the fee. CleanCo's patent attorney was doing a good job on the patent.ClearCo products were well covered by the patent and there was no obvious legal mistake in getting a patent. So, I kindly made a deal from a patent perspective. When everything else looks positive, my client has become a proud owner of CleanCo and its products.
Fast forward is several months. . . . I began calling frequently the members of the client's marketing team, focusing on CleanCo products, on the competitive products that were seen in the field. Given that more than $ 150 million was spent on CleanCo acquisition, these marketing experts are not surprised that competing products must be infringing CleanCo's patents. However, I discovered that each of these competing products is a legitimate design of a patented CleanCo product. Because these knockoffs are not illegal, my client did not have a way to remove these competing products from the market using legal action.
As the competition of this CleanCo product intensified, prices began to decline. The fiscal forecast that form the basis of the client's acquisition of clean moss began to collapse. Although CleanCo products are still being sold strongly, due to this unexpected competition, customer's expectation margin is not made, investment in CleanCo requires a lot of time-consuming and expensive marketing. In short, to date, the acquisition of $ 150 million CleanCo seems to be a bust.
In fact, the competition of CleanCo products could have been anticipated during the M & A due diligence process. As we learned later, searching patent literature revealed that many other methods were exhausted to meet the needs of consumers working on CleanCo products. The success of CleanCo in the market seems to be due to the superiority of the first Mover, as opposed to the actual technical or cost advantage provided by the product.
If I know what I now know, I would have strongly consulted with the expectation that CleanCo products would demand premium prices due to market exclusivity. Rather, I will demonstrate to the M & A team that the competition of CleanCo products is possible and certainly is likely to be revealed by myriad solutions to the same problems that are shown in the patent literature. The deal may still be advanced, but I believe that the financial model to promote acquisition becomes more realistic. As a result, my client could develop a marketing plan based on the understanding that competition is possible as well as reasonable. The marketing plan would have been aggressive, not defense. And I know that my client did not expect defense by spending over $ 150 million on CleanCo's acquisition.
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