Intellectual Property and its Importance in Acquistions & Mergers – By Manit Sharma

INTELLECTUAL PROPERTY
Intellectual property is basically creation of mind; it generally pertains to the original creation of human intellect such as literary works, artistic works, inventions, designs, symbols etc. The intellectual property rights relating to literary, artistic, and scientific works, performances of performing artists, phonograms, and broadcasts, inventions in all fields of human endeavor, scientific discoveries, industrial designs, trademarks, service marks, and commercial names and designations, protection against unfair competition, and all other rights resulting from intellectual act are defined in Article 2 of the WIPO Convention, 1967.
Intellectual property rights are the legal and exclusive rights that protect the creations of the human intellect for a certain period of time. These rights confer an exclusive right to the inventor to fully utilize his invention for a given period of time. The efforts and labor of the creators is what this property gives rights to. They are very important for technology or biotechnology companies and form a considerable amount of their business strategies and profits. Intellectual property has a critical role in developing the worth of the company and protecting its brand name in the market.

WHAT ARE MERGERS ?
Mergers basically occur when two companies of similar sizes join to form a new entity. These transactions generally happen between two businesses that are about the same size and which recognize the advantages the other business offers in terms of increasing sales, efficiencies, productivity and capabilities. The terms and conditions of a merger are often fair and mutually agreed to and the two companies or businesses become equal partners of the new venture.
Merger transactions are classified into following types –

1. Horizontal – This kind of merger basically occurs between two companies with the same line of product and those who remain in direct competition. These kinds of transactions are done with the assumption that this will improve the cost efficiency of the new venture. It helps in increasing the market size of the business.
2. Vertical – A vertical merger is basically a merger of two or more companies that provides supply chain functions for the common good and service. Most often, the merger happens to gain more control in the supply chain process, and lifting up the business. A vertical merger transaction generally results in reduced costs and
   increased productivity and efficiency.
3. Conglomerate – A conglomerate merger is a merger between companies that are involved in unrelated business activities. These mergers generally occur between firms within different industries located in different locations. There are two types of conglomerate mergers namely pure and mixed. Pure conglomerate mergers
   involve companies which have nothing in common, while mixed conglomerate mergers involve companies which focus on product and market extensions
4. Congeneric Acquisition – A congeneric acquisition occurs between two companies where, rather than having the same product line, the two companies are involved in different product lines and services but they operate within the same market and sell to the same customers. They are involved in indirect competition although they deal in different product lines. This type of merger can help the new entity to expand its product lines and increase market share as they have similar distribution channels.

WHAT ARE ACQUISITION ?
An acquisition is when a company purchases most or all shares of another
company to gain control of that target company it gives the acquiring company the power to make decisions regarding the acquired assets without the approval of shareholders of the acquired company. Acquisition is basically an effort which is made by one firm to gain a majority interest in the other. Companies acquire other businesses for various reasons like they may seek economies of scale, greater market share and cost reductions. In an acquisition there is no trade of stock as a new company but it involves one company purchasing the other. Acquisition are classified into 2 types –

1. Stock purchase – In a stock purchase the acquirer purchases the stock of the target company from its stockholders. The acquired company will be intact, but will be now under new ownership. The acquirer fundamentally owns all the assets firm to reach its goals and preferred objectives. The purchase of any IP asset leads to
   the development prospects of the firm by adding the latest and competent technology. It makes sure that the product profile of the firm is updated as per the demand of consumers in the market.
2. Diversification – The corporate strategy of merger and acquisition helps in exploring various new areas of business for the firm. Through merger and acquisition and purchase of IP assets such as trademarks and copyrights a firm gets pre-established sources, strategy and policies to explore new areas which helps in decreasing the cost of procedure and other costs that are required in the course of
   action. It gives the company new market opportunities and a wide consumer basket. It also helps in diversification of risk through divand liabilities of the target company. Stock purchase does not cause any disruption in the daily activity and procedures of the target company.
3. Asset purchase – In an asset purchase, the acquiring firm only purchases the assets and liabilities of the target company that are specified in the purchase agreement. The structure is desirable to the acquiring firm because they can select only those assets they desire to buy. Buyers generally use the asset purchase strategy when they want to acquire a unit or division of a business within a company. Acquisitions are generally beneficial for the acquiring company in terms of increasing market size and product line expansion.

IMPORTANCE OF INTELLECTUAL PROPERTY RIGHTS IN MERGERS AND ACQUISITION

1. Value enhancement – The Purchase and merger of IP assets can lead to an increased asset worth of the company. It helps in improving the asset profile of the company. To have consistent growth it is necessary for the firm that it should regularly evaluate its current profile to ensure that its present profile meets their present business objectives. The companies should search for new opportunities and offers by engaging in mergers and acquisition transactions to increase its
   product range and grow in market size. Purchase of IP rights through acquisition can help a firm to increase its product portfolio and increase its monopoly over a wide range of products. It will also help the firm to fetch a good brand value by purchasing the trademarks of a company through merger or acquisition.
2. Growth and Development – One of the basic objectives of this corporate strategy is to achieve growth and development for the maximization of profits. This helps theergence of portfolios of the companies which ensures companies sustainability.`
3. Technology transfer – It is fundamentally about access to ideas of the other company, purchasing of IP assets helps in accessing the technology of the acquired company and provides a level of exclusivity in the current market which helps the acquiring firm in promoting development by commercializing the acquired technology. It helps in transfer of crucial data, business intelligence etc.

DISCLAIMER- 

The views are that of author’s own and not necessarily the views of IPTSE Academy. This blog is a platform for academic discussions and hence authors have been given flexibility to convey their thought process.

AUTHOR:

Manit Sharma
1st year Law student
Institute of Law
Nirma University
Ahmedabad, Gujarat