Strategic Alternatives for Owners of Strong IP How to Accurately Value and Strategically Use IP at Key Inflection Points

 By Elvir Causevic, Ed Fish, Pascal Asselot, and Bojan Marijanovic

Tech+IP Capital

November 18, 2024

 Every business evolves and changes, and as business leaders know firsthand, sometimes those changes sneak up very fast and suddenly force the business to face a major decision-point: it’s time to sell itself, buy someone, fundraise, exit or enter a market segment, or spin something out as a standalone business.  Luckily, there is a global army of well-meaning and competent consultants, bankers, accountants and attorneys ready to help boards and executive teams with traditional business modeling, analysis and recommendations.  Why, then, do so many high-quality businesses, armed with the best advisors, often omit, ignore or undervalue one of the company’s most valuable assets: its intellectual property (IP), and especially its patents?

Having advised hundreds of companies globally over the past 12 years on strategic alternatives and the value of their IP and led dozens of IP transactions worth billions of dollars (MIPS, Yahoo!, BlackBerry, Avaya, AMD, GlobalFoundries, IBM, GE, Dolby, Nokia, Philips, Google, Meta, among others), we remain puzzled at how hard it still is today to convince sophisticated owners and managers to really pay attention to IP at major transitions, and to trust that IP can often make a material difference.  Based on this experience we have identified some core reasons why this is the case.

We have also learned that if managers and owners understand the strategic and financial value of IP, they can very quickly leverage that IP to make a big difference in speeding up deal closing, materially increasing deal value, securing an advantageous fundraise, or helping to stave off a bankruptcy. A key purpose in writing this article is to provide guidance on some key steps that can be taken to strategically leverage IP at these critical choice points. 

IP is in the background: Its financial and strategic value is typically unknown

IP (and especially the value of patents and trade secrets) is not typically at the forefront of discussions for most companies in their weekly management meetings or quarterly board meetings, other than as a line item in some presentations. Typically, IP is treated as a back-office operation: harvest ideas and inventions, categorize them as patents, trademarks, or copyrights, and file the patentable subject matter globally while tightly controlling the trade secrets. And many companies, especially in technology rich business segments, do a good job of growing and grooming their IP estates in the ordinary course of business, but do not think much about it beyond that “ordinary course.” Surveys show that many public boards simply do not think IP is that important[1], or that there is much risk from it[2]. In a survey conducted by Deloitte[3], for example, the only place IP is even mentioned is in manufacturing, and there, only the theft of IP is cited as a cyberthreat facing manufacturing executives. Not much has changed over time with boards or senior executives. A detailed survey commissioned by Intellectual Ventures over a decade ago found that while 92% of C-suite executives at companies larger than 250 employees felt that patents are “important” for innovation and their businesses, only 24% of those executives felt “very informed” on the topic.[4]  Further, when asked about their top strategic priorities, patents came in 14thplace, well behind “Customer Satisfaction,” “Sales,” and “Competitive Edge.” In far too many instances, patents are seen merely as an intangible asset, hard to understand and even harder to leverage strategically to protect or advance a company’s business.

Hence, companies typically do not invest in considering strategic and financial value of their IP years after it was created. Then, when the management team suddenly has to think about really big changes affecting the entire business outside of the day-to-day, all available bandwidth is consumed by traditional things: deal pricing, deal structures, all the internal and external approvals, taxes, diligence, big risks. Without a benchmark to value, IP cannot really be considered, not only because it’s absent from the radar screen, but also because managers may not know its overall financial value, especially in contexts like ‘Should we sell?’ or ‘Should we raise more capital?’. 

IP is not a monolithic asset: some is “Core” and some is “Non-Core,” depending on context in which it is used

Typically, all of a company’s IP is viewed as a single unit. The company has its products, services, employees, assets, and its IP. We often get asked: “What is our IP worth?” looking for a single dollar figure. But far more often than not, our experience shows that there are very distinct segments of IP that have quite a different value to the business, depending on the context.[5]  

To start, the biggest distinction is whether or not some IP is “core” vs. and some IP “non-core.” Core IP includes patents, trademarks, trade secrets, and increasingly data and algorithms, essential for operating the company’s various business segments both now and in the future. Quite often, the company also has separate, non-core IP, meaning patents, trademarks or trade secrets that may no longer be actively used in its business, or that no longer differentiates products, or protects the Company from competitors. This non-core IP can be of material value in the market and, depending on the circumstances, critically important in M&A, fund raising and other contexts. More on that further below.

How do companies end up with so much non-core IP in the first place? Often, it originated in past acquisitions – the various targets over the years did not really separate their own IP into core and non-core and when acquired, the targets “gifted” the non-core IP to the buyer. Also, as companies exit business lines or shut down or sell off specific products or services, they often keep the IP – sometimes because of a clever patent attorney who saw value in those assets and realized the buyer didn’t, and sometimes because there just wasn’t time to parse things out. In other instances, non-core IP resulted from past R&D, which was bold and innovative, but then certain market or business pivots happened such that the ultimate marketable product or service does not really use some of the original inventions.  The older the company, the more it grew through M&A, the more it invested in R&D over the years, and the faster the market in which the company operates – all the more likely it is that there is non-core IP that may have substantial market value.

Most of Tech+IP’s projects start with the analysis and separation of IP by technology and product mapping, and then further divided into core and non-core segments, as shown in Figure 1 below.

Figure 1: Market-Product Mapping of IP Portfolio and Licenses

Very few companies manage their IP assets with this distinction and even fewer intentionally keep and grow their non-core IP assets, let alone assess whether they could sell them and derive revenue as opposed to abandoning them or letting them lapse. A traditional view has been that it is hard and risky to monetize any IP, core or non-core, so it is easier to just let non-core IP protection lapse. 

What is the Financial Value of Core and Non-Core IP? Not what litigation would say.

 IP valuation, and in particular patent valuation from a market point of view, is non-trivial. Most traditional IP valuation experts come from IP litigation support, calculating in detail how much (or how little) the defendant should owe the plaintiff for patents found to be valid and infringed. Hence, most valuations of portfolios mimic litigation-based valuation.

But there are key distinctions between litigation-based valuation and going concern patent valuation. First, there are typically only two parties in litigation: the patent owner and the alleged infringer[6]. Second, in patent litigation typically only a few patents are asserted against a defendant, (most often 3-5, and only in very few cases more than 10). In contrast, a typical tech company patent portfolio can have hundreds or thousands of assets, some stronger, some weaker. Next, a key assumption many IP valuation advisors make in patent portfolio valuation is to assume that the patents are “valid and infringed”. This is done in litigation, because while infringement liability portion of the case is going on, the economic damages portion of the case is being developed as well. But this is a crucial mistake that can wildly misinform the management and owners of the market value of the patent portfolio in a going concern scenario.

Instead, careful consideration of patent portfolio value outside of litigation must consider at least the following issues:

1.       What are the key technology areas that the portfolio covers (broader than in what products does the owner use the described and claimed invention)?

2.       Where is each technology area in its adoption and obsolescence cycle?

3.       How many patents are applicable to each technology area, how many of those are “important,” what is their geographic coverage and how does that relate to applicable markets?

4.       How early are the patent filing dates of key patents, and who else was patenting early?

5.       What is the total “stack” of patents by all the key patent holders in a particular technology – does the portfolio have 1% or 50% of the important and early patents, and are there 10 or 10,000 patents in that area (i.e. medical device vs. 5G)?

6.       Have any of the patents in the field, or in a particular portfolio, been tested in litigation or in arm-length licensing?

7.       What is the “going rate” for patents in each technology area, separately for litigation, licensing, and patent sales? – this is particularly hard to find as most deals are confidential

8.       Are there any current infringers of the key patents in the portfolio, how hard is it to prove it, how easy or hard is it to design around, and is that infringement major enough to be risky and expensive to the infringer? How is that infringement likely to change in the future?

9.       Has the company already licensed the subject patents to third parties, or are there potential restrictions on how a third party might exploit the patents, for example, due to the current owner’s customer/supplier or other relationships?

10.   Are the potential future licensees vigorous “no holds barred” defenders, or even aggressive IP licensors themselves?

Each of these factors, and many more, can be either determined and quantified by people with experience in both patent valuations and patent transactions, or at least reasonably estimated for the purposes of strategic alternative analysis. To attempt such an analysis with only the background of valuation without considering the patents and the technology, however, can produce unsatisfactory results because it is often not tethered to the “real world.” At the same time, in the context of going concern IP valuations, it’s not necessary to know whether the non-core IP portfolio is worth $32.6M or $37.1M, for example, but it is very helpful to know if it’s worth $3M, or $30M or $300M, at least for initial analysis. And that estimate needs to withstand scrutiny for decision making and, ultimately, in the market.

Having had to live with (and get paid based on) real market IP transactions that resulted from our initial valuation estimates – with some tough lessons along the way – Tech+IP has learned through rigorous trial-and-error what really matters in the IP market versus what is just wishful thinking. 

Use of IP in M&A

Once the value of core and non-core IP is well understood, it can be used with confidence in various M&A contexts. In sell side contexts (when the entire business is being sold), a clearly articulated and well-documented IP value can be strategically leveraged. First, once the potential buyers of the entire business are made aware of the separate value of core and non-core IP, they can potentially consider a higher purchase price and justify it to their own management. If IP becomes a line-item, a buyer can use the core IP to de-risk the business they are buying, and they can use non-core IP either for their other businesses, or to re-sell it later on. If they do not have use for the non-core IP, they will not pay for it, but also, they won’t expect the seller to just “toss it in” – the seller can keep it and monetize themselves.

How would a seller monetize their IP? We often see major misunderstandings of who the potential buyers of IP really are, and what their motivations may be for buying. At Tech+IP, our typical sellside process can involve 50-80 buyers, split between financial and strategic ones. Figure 2 below shows some of the motivations for different IP buyer types.

Figure 2: Buyer Types and Common Reasons for Acquisition

The patent sale process for a large portfolio is highly complex: it must have all the discipline of a well-run M&A transaction, while at the same time the process must be sensitive to confidential and legally privileged information, all the while having to keep pace with the often parallel “business” M&A process. Figure 3 below illustrates a typical patent sellside process.

Figure 3: Patent Portfolio M&A Sellside Process

In 2013 MIPS Semiconductors was the first and is possibly the best example of doing this in an M&A context at scale. After advising the board of this $125M enterprise value company that the IP was worth north of $300M, they promptly hired JP Morgan to try to sell the business and/or its IP. After several failed attempts, the board hired principals now on the Tech+IP team to run a separate IP deal. JP Morgan sold the core semi business to Imagination in the UK for $100M, and the separate sale of the patents generated $350M from a consortium of 18 buyers.

Yahoo! also did this – when it was selling itself after an activist campaign from Starboard Value, the board hired business bankers (Goldman Sachs, JP Morgan, and PJT Partners) for the internet business, and separate IP bankers (Tech+IP’s predecessor) to run a special parallel process for non-core IP (after we first separated core vs. non-core IP and management and the board approved the strategy). Potential buyers for the core business were told they could “write two checks” if they also wanted the non-core IP. Ultimately, Verizon bought the business for $4.8B[7], and IP stayed in Yahoo!’s “remain co”, Altaba, eventually generating over $740M for Yahoo!’s shareholders, almost 20% of overall M&A deal value.[8] Importantly, separating the core and the non-core IP and running the separate process also helped cure a problem that arose in the main Company sale, but those details are no public. More importantly, when during its diligence Verizon discovered a major Yahoo! email breach problem which nearly tanked the whole deal, rather than dropping the deal or substantially adjusting purchase price, Yahoo! just “gave” some additional important patents to Verizon and the purchase price changed by under 8%- and the deal closed.[9]

Other examples of the value of separating core from non-core IP involve Tech+IP’s Q1 2024 sale of a large portfolio of Avaya Voice Over IP patents following its Chapter 11 reorganization and Blackberry’s 2023 sale of a large set of patents no-longer core to the business “for up to $900M, of which $200M was up front cash.[10] Combined with other non-core patent licensing in, for example, Blackberry’s 4G/5G and Wi-Fi patents estimated at well over $1B, the result of strategic use of IP was quite favorable for a company whose market cap at the time fluctuated between $3B and $5B.

On the buyside, in the summer of 2024 Tech+IP advised Dolby in its acquisition of GE Licensing for $429M, a transaction entirely driven by IP.[11] While the $429M acquisition was not significant relative to GE Aerospace’s $180B market cap, it had a substantial impact on Dolby’s revenue generation, as evidenced by the positive market response to its accretive licensing revenues.

Despite these success stories, there are, unfortunately, many more counterexamples of companies being sold without any regard to their core or non-core IP, and essentially gifting that value to the buyer rather than shareholders who originally paid for it. One thing that in particular stands out is the sale of Entropic semiconductors to Maxlinear – because so much of this transaction was public. Maxlinear’s press release and investor presentation literally had a slide outlining the number and value of Entropic’s patents and the fact that it was simply included in the deal, the purchase price of which was already fully justified by EBITDA alone.[12] Maxlinear, the lucky buyer, recently appears to have entered into an agreement with a patent monetization entity relating to these patents from Entropic patents, suing Comcast and others.[13] 

Use of IP in fundraising

There are two primary ways companies can leverage intellectual property in fundraising efforts.

The first is by directly generating cash through the sale of non-core IP. This approach can reduce, and in certain cases eliminate, the need for external fundraising. Selling non-core IP allows companies to maintain their operational focus while unlocking hidden value from unused assets. For example, a business might own patents that are not essential to its core operations but hold significant value to other entities. Selling such assets can provide a much-needed cash infusion, enabling companies to fund critical initiatives without diluting ownership or increasing debt.

The second method involves using IP as collateral in IP-backed lending, a niche within the broader asset-based lending (ABL) sector. In these arrangements, the lender uses the borrower’s IP portfolio to secure the loan, providing the borrower with access to capital that might otherwise be unavailable. This form of lending has gained traction in recent years, with several high-profile deals underscoring its potential.

A noteworthy example is TiVo’s $715 million IP-backed financing in December 2019. This deal occurred after a significant drop in TiVo’s market capitalization. Remarkably, less than a month after securing this financing, TiVo merged with Xperi, facilitated by an additional $1.1 billion in financing arranged by Bank of America and RBC. These transactions highlight how IP-backed lending can not only provide liquidity but also serve as a strategic lever in broader corporate manoeuvres, such as mergers and acquisitions.

These two approaches—IP monetization and IP-backed lending—demonstrate the versatility of IP as a financial instrument. They allow companies to strengthen their balance sheets and fund growth initiatives while retaining operational control and flexibility. 

Use of IP in financial restructuring and bankruptcy

Just like IP can be used in M&A and fundraising contexts, understanding and quantifying the value of IP and what IP is core or not core to the business is critical in the case of financial restructuring and, to the extent the business is forced to move into it, the context of bankruptcy.

In many ways, this process follows the above-described methodology of valuing the IP of the business (as opposed to a damages assessment in litigation). Just like all of the various assets of the company are assessed for value in a restructuring context to work out a deal with creditors (to stave off a bankruptcy filing, to prepackage a solution for consideration in a Chapter 11 context to stave off a Chapter 7 proceeding, or literally dozens of other permutations), it is important -- whether on the debtor or creditor side -- that IP assets are carefully examined not only for value, but also for whether and to what extent value may be found in non-core assets.

Tech+IP has been engaged on the creditor side and on the debtor side in a great number of engagements like this in its 12 years, most often alongside specialized restructuring advisors and law firms with deep bankruptcy expertise. Uniformly, the lesson learned from the restructuring of technology companies, whether with asset values in the billions such as Avaya in 2017 and 2022 and Lumileds (the lighting spinoff from Philips owned by Apollo and others) to companies with value in the millions, like Violin Memory (the inventor of all flash arrays) or Greenwave (an IoT Company based in San Diego), is to address the issue in three distinct steps:

1)      Is the value of the IP potentially material to the overall asset value and/or potential solutions being considered? It is important that this be done quickly and efficiently to not derail or impede in any manner the fast-moving core restructuring process, given the number of different constituencies involved.

2)      Assuming the answer to question 1 is “yes,” what is the approximate value of the IP, and what may be required to realize it? While this valuation step closely aligns with any Company IP valuation, the restructuring context is particularly important. Given the complexity of patent sales and the market, values can vary dramatically depending on the timeframe of the bidding process and the context in which it occurs. An orderly process sale (typically 6 months) is a hugely different value equation than a liquidation sale context at 2-3 months or a short-fuse Chapter 7 auctioning of the IP. These later scenarios can have a dramatic effect on patent valuation (often up to 25-33% depending on complexity and size of the portfolio, and in some instances over 50%). In the context of Avaya’s 2017 restructuring, for example, the court asked us to do both a valuation of the IP assuming Avaya as an ongoing concern, with an orderly process and in an expedited scenario.

3)      Assess the degree to which IP may be core to the remaining restructured operating business and whether material non-core IP exists (and what is its value). Building off the earlier portions of this article where valuation of core and noncore assets was discussed, the restructuring context raises many important issues concerning the value of non-Core IP and how that might be handled.

In the Avaya context, for example, following emergence from Chapter 11 Avaya immediately embarked on a sellside program with respect to non-core IP assets. This included a widely reported sale of a large number of Avaya Voice Over IP to a patent licensing firm, with both upfront cash and revenue sharing components.[14] That successful sale has led to another process concerning Avaya Networking patents, which the company wisely kept after it sold its Networking business unit to Extreme Networks in 2017.[15]

In different context, this time on the side of creditors and much earlier than a contemplated chapter 11 potential process, when creditors were approached about changing certain aspects of their debt with a client company, Tech+IP identified a set of patents related to connected lighting that were no longer core as our client pivoted toward a different product strategy. In that instance, the patents were sold, and the creditors received some compensation when agreeing to other concessions. Here, knowing that the patents were not core to the business was critical to not only the lenders, but also to the company and equity holders as well.

While historically the issue of the value of IP has tended to be either on the side of the debtor or the creditor, and arise much closer to a restructuring or bankruptcy filing, given the widely reported trend in financial markets about “creditor on creditor violence”[16] it may behoove creditors to look much further upstream, perhaps into the documentation of covenants and the underwriting thesis itself, to assess both whether there is material IP and, separately, whether there is non-core IP which might have material value. While such a valuation exercise would not be expected to be as robust as a valuation report in a formal Chapter 11 proceeding, understanding the elements of value especially where not tied to the core business itself may be very useful to a new set of covenants that anticipate rather than react to creditor-on-creditor issues. 

Properly planned and executed, it’s not hard or risky to monetize IP: Sophisticated companies have been doing it for years

Monetizing intellectual property is neither novel nor inherently risky. In fact, hundreds of companies, including many of the world’s largest and most successful technology firms, have been leveraging IP to generate substantial revenue for years.

Consider the examples of Intel, Microsoft, IBM, Nokia, Ericsson and Qualcomm, all of which at various times have disclosed annual IP revenues exceeding $1 billion, most with high gross margins. Similarly, Nortel Networks’ non-core patent portfolio fetched $4.5 billion in a landmark transaction, AOL’s portfolio sold for $1.02 billion, and we discussed above the compelling cases of BlackBerry, Avaya and others. These cases underscore the immense value that strategic IP management can unlock. The first step in each successful case involves the assessment and categorization of core and non-core IP and assigning at least an order of magnitude in value to it.

Whether through licensing, asset sales, or IP-backed financing, intellectual property can significantly enhance corporate value by unlocking new revenue streams and improving balance sheets. The key is recognizing and harnessing its potential at critical business inflection points. With the right strategy, companies can leverage their IP not only as a defensive shield but also as a dynamic tool for growth, differentiation, and financial strength.

Appendix 1

IP valuation primer

For company management and investors, understanding how patents can be monetized is crucial for informed decision-making, effective IP strategy, and long-term business planning. Knowing the financial potential and strategic impact of a company’s patent portfolio is essential for evaluating debt and equity investments or assessing overall business value.

 Patent Valuation Approaches

Patent valuation is complex and requires tailored methodologies based on specific business objectives. But three main approaches usually cited by industry are:

•   The income-based approach projects the future economic benefits a patent could generate and calculates its present value through methods like royalty relief, direct cash flows prognosis or by directly attributing revenues or excess earnings to the patent asset. This approach highlights the patent's benefit generating potential and strategic worth by considering its contribution to the company's overall business projections and/or potential savings.

Cons: A key limitation of this income-based approach is that it often provides a skewed assessment of patent value because it appraises the patent as part of the overall business rather than as a standalone cash generating asset. This is the main shortcoming as they use company lenses to appraise the value rather than to appraise how much they would get on the market.

• The market-based approach estimates the value of a patent by comparing it with similar assets sold in the market, using transaction data and industry benchmarks.

Cons: Patent transaction market has significant shortcomings that make this approach challenging. The market often lacks transparency, with most transaction details remaining confidential, making it difficult to find reliable and recent comparable data points. Due to these issues, using comparable transactions can lead to skewed or unreliable assessments. Such shortcomings are characteristic of a system that does not exhibit the attributes of a well-functioning financial market[17]. Consequently, while the market-based approach can provide useful context, it is often more suitable as a supplementary reasonableness check rather than a primary valuation method.

• The cost-based approach evaluates the value of patents by estimating the expenses needed to develop or replicate the technology.

Cons: While this method is straightforward and offers a clear baseline, it fails to capture the potential for income generation or market dynamics that impact a patent’s true value.

Appendix 2

Tech+IP’s Approach: Hypothetical Licensing Program

Tech+IP utilizes an income-based patent valuation method called the “Hypothetical Licensing Program”. Unlike traditional income-based valuation methods that focus on how patents contribute to the company's revenue, profit or potential savings, the Licensing Program centers on what the company could generate by directly monetizing its patents. By focusing on potential cash flows derived from licensing, independent of the company’s core business operations, the method tries to appraise how much patent portfolio would get on market.

Tech to Market Mapping

Applying this approach requires an in-depth analysis of the patent portfolio, including its attributes and claimed inventions, to identify the most significant technological concepts and categories. These concepts and categories are then mapped to market products and services that potentially infringe on the patented inventions and their innovative aspects. This mapping process results in the creation of “technology-to-market” maps, foundational to any valuation model. These maps provide insights into where and why patents can be monetized effectively and convey the importance of the innovative concept to specific products or services.

Total Addressable Market

After completing the tech-to-market mapping and identifying relevant markets or market segments, the next step is to conduct an addressable market analysis. This analysis is essential for assessing the potential value that can be captured through a patent licensing program and is typically carried out using two complementary methods: Top-Down Market Research and Bottom-Up Market Research, with either method or a combination of both selected depending on the project needs and available data.

Top-Down Market Research: This method takes a macro-level view, leveraging industry reports and data from relevant product or service categories. It aims to estimate the overall market size and then segments this data by key factors such as:

• Market share held by key participants within each market segment

• Geographical distribution of each segment

• Market share by segment and other market-specific dynamics

The goal is to generate a comprehensive market analysis that captures the broad competitive landscape and highlights the potential market size relevant to the mapped technologies.

Bottom-Up Market Research: In contrast, this method focuses on a micro-level perspective, starting with individual companies and products. Detailed data is gathered on sales figures, shipment volumes, and prices within the identified market segments. This method offers a more granular view of the addressable market by examining company-level data, providing deeper insights into specific revenue potential, market penetration, and product dynamics that may not be visible through the top-down method.

Tech+IP selects or combines these methods based on the project’s goals, available data, and market characteristics. The research is supported by a range of data sources, including paid reports, publicly available datasets, client data, internal databases, and industry expertise, ensuring comprehensive and tailored market analysis. The results from this research are used as input for the next step of the analysis, aiding in estimating the royalty base for the licensing program.

Royalty Base

The Royalty Base represents the Total Addressable Market (TAM), refined to reflect realistic expectations for the Hypothetical Licensing Program. This adjustment process considers key factors that ensure the royalty base aligns with actual market conditions:

·         Technological adoption rate adjusts the TAM annually, to focus on segments expected to adopt the patented technology, potentially infringing upon it. This adjustment is based on anticipated adoption patterns, which vary by industry and technology maturity. Tech+IP utilizes industry knowledge[18], comparable technologies, and research-backed market data to support and refine these projections, ensuring a realistic and historically informed adoption rate.

·         Geographic patent coverage narrows the TAM to regions where the patent portfolio has enforceable protection. This is determined by evaluating patent family counts, the company’s international filing strategy, historical patent allowance rates, and the strength of patent regimes in each region. Regional market share data further refines the royalty base, acknowledging that some regions have stronger patent protection and more active markets, with North America being a key example of a region with high patent engagement.

·         Patent expiration accounts for patent portfolio expiration profile. This adjustment refines the addressable market by considering the competitive landscape and technological advancements, particularly how patents expirations impact contract terms like royalty rates and market coverage. It is crucial to align potential cash flows with the economic life of the patent assets.

·         Encumbrance adjustment excludes market portions already covered by existing licensing agreements. Tech+IP conducts in-depth analyses of current contracts, reviewing the companies involved, their market share, and their position in the market. For instance, if a company holds a license and has a significant market share, that portion is considered encumbered and excluded from the royalty base. This ensures the royalty base reflects only the unlicensed, available market, providing a more accurate representation of licensing potential.

·         Licensing penetration rate estimates the reach of the licensing program in an addressable market within the projected timeline. This rate considers the company’s patent portfolio pioneering role, industry benchmarks, and the performance of comparable licensing programs in similar markets. Tech+IP also analyzes broader market dynamics, such as competitive forces, technological trends, and regulatory factors, to refine and support the penetration estimate. An illustrative timeline for licensing the Avanci patent pool is shown below in the chart.[19]

These adjustments aim to refine the estimate of the available royalty base, providing a more realistic foundation for applying royalty rates and success rates in subsequent valuation steps.

Net Royalty Income

Once the royalty base is determined, the next step is to calculate the potential royalty income, which represents the projected cash flow from royalties that could be collected through a licensing program, based on the following research inputs:

Royalty rates are primarily derived from comparable data points, including patent licensing agreements, damage awards, and settlements. These data points come from public sources, client-provided data, industry studies, and internal databases. Relevant royalty rates are determined by:

• Selecting potentially comparable data points and assigning them relevancy score based on importance and applicability of technology to mapped addressable market

• Adjusting the rates to reflect only the specific IP elements being valued. For example, if the valuation covers patents alone, the rates are adjusted to exclude non-patent elements like trade secrets, trademarks, or software[20]

• Finally, selecting appropriate rate is based on relevancy weighted royalty range.

To ensure the objective and realistic scenario of the licensing program, Tech+IP adjusts the cash flow for a success rate. This rate represents the likelihood of obtaining favorable outcomes in patent licensing or litigation (e.g., PTAB, District Court, UPC) and is informed by industry studies such as the “PwC Patent Litigation Study”, annual “PTAB Trial Statistics” and similar sources of data on patent success in licensing and litigation.

Net royalty income represents free cash flows to the program and is calculated after applying both royalty and success rates, by deducting associated licensing program expenses. Tech+IP leverages its industry experience to estimate the costs incurred throughout the various phases of a patent licensing program, which typically lasts more than 6 years. These costs include program setup, patent analysis, charting, market and product research, infringement notices, negotiations, deal finalization, and potential litigation. Licensing expenses also can be estimated using a multi-year adjusted EBITDA margin[21] of publicly traded patent licensing companies.

Net Present Value

Finally, all cash flows are discounted using technology-based discount rates to derive potential market value.

Technology based discount rates are derived by assessing the level of risk associated with the investment or project, as characterized by factors like technological familiarity, market maturity and evidence of demand.

• Risk-free rates are assigned to licensing products or services in technologically and commercially mature markets (example: Wi-Fi 6 routers)

• Low-risk discount rates apply to licensing products or services where licensing emerging technologies in well-established markets or mature technologies in commercially emerging markets (example: Biometric cards)

• Medium-risk discount rates are applied to licensing products or services in markets characterized technologically and commercially emerging markets (example: Humanoid Robots, Smart textiles)

• High-risk discount rates are applied to projects with the greatest uncertainties, such as launching a startup for a completely novel product in an unproven market with unknown technology (example: Quantum computing, True holography)

Each risk level correlates to a specific discount rate that reflects the expected return necessary to compensate for the associated risk.[22] [23]

The final step involves conducting sensitivity and scenario analysis. Sensitivity is conducted on key inputs, such as NPV sensitivity to changes in royalty and discount rates, while potentially considering other variable inputs. Additionally, when appropriate and needed specific scenario analysis can be evaluated for more complete valuation picture (financial distress, financial vs. strategic buyer, longer vs. shorter technology adoption timeline).

Valuation using Hypothetical Licensing Program method helps stakeholders to assess the possible market value of patents, highlighting patents as strategic tools for profitability and decision-making. By aligning valuation with market value, Tech+IP empowers stakeholders to make informed choices that enhance risk management and drive long-term returns.

[1] Governance Insights Center, PwC’s 2019 Annual Corporate Directors Survey (2019).

[2] Protiviti Inc and North Carolina State University, Executive Perspectives on Top Risks for 2018, Key Issues Being Discussed in the Boardroom and the C-Suite (2018).

[3] https://www2.deloitte.com/content/dam/Deloitte/us/Documents/manufacturing/us-manufacturing-cyber-risk-in-advanced-manufacturing-executive-summary.pdf

[4] http://www.intellectualventures.com/index.php/services-solutions/csuite-insights, as of May 16, 2013

[5] Effectively Discharging Fiduciary Duties in IP-rich M&A Transactions, Berkeley Business Law Journal Vol 14:87, 2017

[6] In case of multiple infringers, each case against each defendant has to, in practice, stand on its own, even if the same patents are asserted. Patent litigation nuances are beyond the scope of this paper.

[7] https://www.financierworldwide.com/yahoo-sold-to-verizon-in-48bn-deal#:~:text=For%20a%20company%20that%20once,the%20internet's%20first%20global%20giants.

[8] https://techcrunch.com/2017/03/13/yahoos-excalibur-ip-search-mobile-and-other-patents-valued-at-740m/; see also https://www.rpxcorp.com/news_release/rpx-corporation-announces-licensing-transaction-with-excalibur-ip/

[9] https://www.reuters.com/article/business/verizon-yahoo-agree-to-lowered-448-billion-deal-following-cyber-attacks-idUSKBN1601EK/

[10] https://www.blackberry.com/us/en/company/newsroom/press-releases/2023/blackberry-announces-new-patent-sale-transaction-with-leading-patent-monetization-company-for-up-to-900-million

[11] IAM reference

[12] “Entropic's portfolio of approximately 1,500 issued and pending patents are highly complementary, and MaxLinear is uniquely positioned to capitalize on these assets.” https://www.globenewswire.com/news-release/2015/04/30/731087/10131981/en/MaxLinear-Completes-Acquisition-of-Entropic.html

[13] https://www.lightreading.com/cable-technology/the-comcast-maxlinear-entropic-legal-saga-just-got-a-bit-more-complicated ; https://www.lightreading.com/cable-technology/comcast-sues-maxlinear-for-breach-of-contract

[14] https://www.techip.cc/news/techip-advises-avaya-on-the-largest-patent-sale

[15] https://investor.extremenetworks.com/news-releases/news-release-details/extreme-networks-completes-acquisition-networking-business-avaya

[16] https://www.bloomberg.com/news/features/2024-08-11/hedge-funds-are-capitalizing-on-rampant-creditor-on-creditor-violence

[17] CFA “Market Organization and Structure, WELL-FUNCTIONING FINANCIAL SYSTEMS”

[18] Example would be technology adoption S-curve

[19] Publicly available, historical, data on Avanci 4G Auto pool based on count of brands licensed. Also includes technology adoption effect. Real life programs can take shorter/longer timelines depending on factors such as technology/market maturity, implementers willingness to license/litigate…

[20] Licensing Executives Society Royalty Rates Survey Reports

[21] Excluding R&D, M&A, restructuring, and other non-recurring and non-licensing related expenses

[22] This analysis builds on insights from research in the such as “Razgaitis, R., Valuation and Dealmaking of Technology-Based Intellectual Property: Principles, Methods, and Tools, John Wiley & Sons, Inc., Hoboken”.

[23] Practitioners should be careful here not to double count the risks as licensing programs inherently involve both licensing and technology risk