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
39% $25 000
Axa BNP Paribas
$0 $63 900
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)
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.
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.
A synergy of valuation methods
Has valuation become a precise science? Towards harmonisation?...