As a follow-up to the recent M&A post, this article examines common IP-related drivers of ROI, from the perspective of an investor, such as a private equity firm.
For illustration, let’s look at 2 extremes – an investment target with a “rich” IP portfolio and a target with a “poor” IP portfolio. A discussion of portfolio quality could fill pages, but for brevity, let’s define a quality portfolio as one that has been built strategically. In other words, the firm developed a thoughtful plan for supporting its business with IP and has been executing on this plan over time. The plan might include a combination of its own issued patents, patent filings, purchased or licensed patents, trade secret process, trademarks, and so on.
IP-rich companies provide superior ROI with less risk. A few positive ROI drivers include:
Figure 1 shows the hypothetical cash flows associated with an investment in an IP-rich target.
On the other hand, IP-poor companies tend to be riskier without the potential for commensurate returns. The counterpart ROI drivers include:
Figure 2 shows the hypothetical cash flows associated with an investment in an IP-poor target.