VALUATION OF INTELLECTUAL PROPERTY RIGHTS José - ECTA

VALUATION OF INTELLECTUAL PROPERTY RIGHTS José - ECTA

VALUATION OF INTELLECTUAL PROPERTY RIGHTS José Monteiro Senior Legal Director, L’Oréal, FR “When you measure what you are speaking about and express...

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VALUATION OF INTELLECTUAL PROPERTY RIGHTS José Monteiro Senior Legal Director, L’Oréal, FR

“When you measure what you are speaking about and express it in numbers, you know something about it, but when you cannot (or do not) measure it, when you cannot (or do not) express it in numbers, then your knowledge is of a meagre and unsatisfactory kind” Sir William Thompson

Part of intangible assets of company’s value Company's value $30 000

L'Oréal

39% $25 000

Louis Vuitton

40%

Axa BNP Paribas

$20 000

Gucci

23%

$15 000

11%

Chanel

48%

66%

9%

$10 000

25%

Orange

12% 9%

Carrefour Auchan

$5 000

Société Générale

$0 $63 900

$63 232

$24 094

Brand's value

$124 167

$21 120

Challenges of valuation ► A precious economic value ► A competitive advantage: source of differenciation ● Trademark ● Patent ● Copyright

Goal of valuation 1) To identify ● Intangible assets within the company ● IP assets within the intangible capital

2) To estimate – (the barriers) ● « A recent concept » ● « Valuation is subjective » ● « Valuation is uncertain » : absence of independent, liquid and transparent asset markets.

Nature of valuation

►« Valuation does not mean valorization» ►« Valuation is not guess work » ►« Valuation is a contraint OR an option »

REASONS FOR VALUATION

Internal Reasons ► Balance sheet ► Monitoring & management ► Taxation ► Capitalisation ► Restructuring

«What can be measured can be managed»

External reasons ► Financing – Insolvency – Tax ► Mergers & acquisitions ► Licencing ► Joint-venture ► Litigations

ACCOUNTING RECOGNITION OF IP ASSETS

Challenges of accounting valuation

►To include IP in the balance sheet ►To determine a non disputable - value

Accounting value of IPRs ► Resources: the new accounting normalisation ● Concept of « correct value »: based value on future generative cash-flows

IAS 38 / IFRS 3 ► Advantages: ● Readability of the accounts (relevant cash-flows, competitor threat,link between IP & position of the company)

IPRs VALUE ASSESSMENT

Pyramid of valuation Solution Methods Profile Base

5 steps valuation: ● ● ● ● ●

Legal (D1) Economic (D2) Strategic (D3) « Separability » (D4) Financial (D5)

Value= D1xD2xD3xD4XD5

Qualitative analysis 1 A. The legal profile ►



defining the scope of protection, the content and the holders of the rights. evaluating the risks

B. The commercial profile ► Component elements ► Different methods for analysing competitive and commercial dynamics

Qualitative analysis 2 C. The strategic analysis ► Company’s ability to constitute a brand / patent capital, to innovate, to communicate D. The separability analysis ► Degree of independence of the IPR relative to the company, its directors, its products

Quantitative analysis FINANCIAL PROFILE = impact of IP asset on the chain on value of the product or service.

FINANCIAL PROFILE

Accounting data: income, costs, investements

Strategic information: Price rises, costs economies, Capital surpluses

Several financial evaluation

A. Traditional valuation methods 1. Approach by COSTS "Substitution and balancing of costs“ ► define the value of the asset by putting oneself in the position of the investor 2D valuation: ● Historical costs ● Remplacement costs

A. Traditional valuation methods 2. Approach by the MARKET "competition and balancing of the price“ ► method based on comparables: confronting offer and demand in the market in order to measure empirical value. 2 variants: ● Market value: based on recent transactions relating to comparable or similar P, in the same (or similar) sector. ● The principle of normality:standardised "range" of fee rates.

A. Traditional valuation methods 3. Approach by INCOME "identification, separation and quantification“ ► method based on the "intrinsic value“. 3 elements: ● Projected cash-flows ● Economic life of the IP ● Discount rates

3 variants: ● “Relief from royalty” ● “Excess earnings” ● “Premium pricing”

A. Traditional valuation methods ►“Relief from royalty” ● to estimate the future theoretical royalties (for a licence relating to a comparable IPR)

►“Excess earnings” ● approach based on surplus profits or on stock market capitalisation.

►“Premium pricing”: ● differential between a branded product and the same nonbranded product.

B. Modern valuation methods 1. The approach by NET PRESENT VALUE (NPV) and decision trees NPV = Ɖ of the updated cash flows

2. Valuation by real options (transposition of the method of valuation of virtual options in the assets market)

► breaking a project down into key phases in order to re-evalute.

CONCLUSION

A synergy of valuation methods

Has valuation become a precise science? Towards harmonisation?...