Use your Intellectual Property to drive growth in the acquired firm
Acquisitions are not always about gaining access to a capability which can be used directly within the buying company. Sometimes it is about providing a capability to the acquired firm to lift their growth and profitability. This is certainly the case when intellectual property is provided to the acquired firm to enhance its market performance.
By providing an acquired firm with the right to use restricted, licensed or protected knowledge contained in patents, copyrights, brands, trademarks and licensed rights, the acquirer is providing market leverage to its subsidiary, often at little cost to itself. Such intervention can often enable the acquired firm to leverage new market power. The subsidiary can take on many of the IP benefits which accrue to the acquirer. In the case of brand or trademarks, it may immediately provide a new market advantage, not only generating revenue but often making it cheaper per transaction to acquire new business.
IP in the form of patents and licensed rights can provide significant market competitive barriers to competition. A new subsidiary taking on the advantages of such IP will have an immediate lift in market competitiveness.
Ensure the acquired firm has the capability of leveraging the IP
In developing an acquisition strategy, the acquiring company should review the market leverage it could apply by providing acquired firms with its IP. If the IP has strong market leverage but the constraint is people or distribution channels, a strategy to acquire firms which have people and distribution channels that could leverage the additional IP would make a lot of sense. The strategy should be to target firms which have the capacity and capabilities to fully leverage the inserted IP. A business which is thus acquired at market valuation based on some EBIT multiple could become much more profitable through such intervention without placing any significant burden on the acquirer. In such situations, the acquirer might be prepared to pay a premium over conventional valuation to get the right target firm. This would make sense if the business being acquired had good management systems and people and had the capability and capacity to quickly exploit the inserted IP.
A corporation with strong IP but limited expansion capital should consider some creative strategies for expansion. If the IP can consistently improve the profitability of partner firms then the IP can be used to leverage various longer term acquisition strategies. A sell down strategy could be used to entice business owners to sell part of their equity in return for higher valuation exits in the future. Joint ventures can be used where contribution can be part in IP and part in finance. Distributors in new geographies can be signed up with future buy out options.
Intervention could drive increased returns
Expansion through acquisitions is a very common strategy for building capacity but too often it fails to deliver the anticipated benefits. Too often the strategy is one of merger rather than intervention, where the former process has higher inherent risks. By leveraging IP and keeping the acquired firm as a stand-alone entity, an acquirer expand but could take some of the risk out of the acquisition process.
