Perspectives. Acquiring Your Future

Transcription

1 Perspectives Acquiring Your Future

2 Acquiring Your Future Assume that innovation will occur elsewhere. So says Joy s Law, a less famous cousin of Murphy s Law. But for many companies, Joy s is the far more important insight. Because at some point almost every one of them, wanting to grow, will be faced with the need to acquire the innovations of others. What acquirers often discover, though, is that it can be far harder to pin down the value of innovation than other forms of property. Companies often buy a business for its technology and discover that it has limited ownership rights to the functions its inventions purport to provide. They may offer a premium for a technology leader only to discover that the innovations of real value are developing in a different direction. And they may believe that they can rely on a target s patents to protect critical future product plans and cash flow streams only to find that the company has deferred maintenance of its portfolio of intellectual property (IP) to save costs and has eliminated key protections that were the basis of the deal. Acquirers make mistakes like these in part because they don t invest enough in the evaluation of the underlying intellectual property or rely too much on narrow legal assessments.

3 But there are more fundamental reasons why companies miscalculate the value of intellectual assets. Innovation-driven acquisitions generate value only if the target s IP assets provide advantage in the marketplace. And advantage matters only when considered relative to a competitor. IP-based advantage takes this basic concept of relativity and multiplies it in some nonintuitive ways, making it that much harder to assess value: Webs Versus Havens. IP assets lack clear property lines. Every bit of intellectual property you can own comes with connections to other valuable innovations. The defensibility of property rights that rest in a connected web of ambiguous specifications and claims requires subjective, often legal, interpretation. So although relative position with respect to a cluster of patent rights is both real and important, it can be much more difficult to determine than a relative cost position in, say, a manufacturing process. The Past Versus the Future. The value of innovation rights involves a mix of current claims and options on the future. Current claims provide a measure of security by ensuring the ability to stay in business and may even provide the ability to restrict the movement of competitors. But these current rights typically

4 have little role in sustaining competitiveness unless a company can extend their function and utility, connect flanking inventions to an original position, and secure some kind of value gate in a particular market or layer of the value chain. Creating value through such extensions requires a subtle understanding of the web of connections among IP assets and a disciplined approach to extending protection that can secure an option s value in the future. The Unexpected Versus the Familiar. Relative position in an IP competition is seldom a matter of competing with the usual suspects. Key competitors for valuable innovation rights can take different forms. They might be Rembrandt hunters, who see your current cash flows as a target for licensing revenue. They might be preemptive homesteaders, forecasters with no plans to build a business but who have attempted to anticipate technology trends and stake out their claims before anyone else can get there. In most areas of innovation, an unexpected set of competitors lurks disturbingly close to the profit sources, often closer than the known competition. Unorthodox competitors can pose greater threats to your future than familiar ones, whose

5 freedom to explore new avenues of innovation is typically more constrained. At the same time, observing the nature of their profit claims can give you considerable insight about new directions in both technology and market development. The managerial challenge of all of this is to approach intellectual property as a business issue and not merely as a legal or technical question. That means you will need to formulate a view literally a picture or landscape that includes an IP dimension as well as competitive and market parameters. You will need to find effective ways to map your position, your target s position, and the positions of others. And here s the new part: you will need to consider the target s assets in the context of the web of connected claims. How often are these claims cited and by whom, how recent are the claims, how vulnerable are they to other asset webs, and how relevant are they to the desired product performance or your ability to master a layer of the value chain? Ultimately, the question is one of economics: How much does the IP web shape your economics, your industry, and your competitors strategies? Assembling such landscapes is a collaborative and ongoing exercise. Sure, it involves legal and technical experts. But your top team

6 has to take ownership. What s more, the landscape needs to be complete. In addition to including the IP holdings of your target, it must also show the IP holdings of the target s key suppliers and customers. You will want to know not only the inventions at issue but also the names of the inventors, where they are now employed, and whether they have relationships with competitors or research institutions. This is hard work, but it can yield extraordinary insights. The amount of valuable competitive intelligence embedded in patent filings is phenomenal and largely untapped. This intelligence will help you make or save a great deal of money in three ways: Selecting Better Targets. Not only is buying innovation rights different from integrating product and market positions, but the product and market positions of a given target are often unrelated to the IP protection positions. To assess the total competitive position of your target, you need to picture both the competitive landscape of the product and the market, and the IP terrain. Knowing where to invest and which of the players to buy can save you from major blunders. In some cases, due diligence can even show you that a deal is unnecessary, because there are ways to use the technology without buying the company. And quite often you may end up buying different companies in different areas of the IP land-

7 scape for different reasons owning an interface or enhancing a potential spinoff, rather than securing a current product market or shoring up a weakness relative to suppliers. Making Smarter Deals. You should know the competitive value of what you are buying and not simply apply an intuitive discount to the expected technology hype. Knowing more about the technology and intellectual property than your target does can dramatically increase your negotiating leverage and ensure that you make the best possible deal. More often than not, the closer you look, the less you find. Suppliers may be developing technologies around interfaces that box in the target and hurt your bargaining power. At the same time, customers may be aggressively exploring product substitutes through their own use of intellectual property. Getting More out of Your Investment. Getting to the next level of value creation (and, quite often, recouping a sizable acquisition premium) requires a deep integration plan that has several possible objectives. These goals include protecting your ability to deliver a distinctive brand or benefit, owning a key interface, controlling a future supply chain, and, in general, being closer to the value gates of the business as it evolves. People will always be key, of course. Knowing how to identify the top innovation talent

8 and taking the steps to keep that talent can make the difference between a one-shot boost and a future with even more upside potential. Sometimes you may not be getting the people you think you are getting. When conducting due diligence, put together a list of those who were responsible for the intellectual property you hold most valuable and make sure they are still at the target company or have a plan for replacing them. Making an acquisition is, after all, a strategic commitment to the future, and you should use the occasion to reinforce the advantage of the expanded enterprise and invest behind it to strengthen it further. * * * Developing effective strategies that create and sustain competitive advantage has always required top management to apply several lenses simultaneously. These lenses are the basis for points of view about the evolution of the market, your relative capability to serve customers in that market, and the pieces of the value chain that will earn the highest returns. If senior managers don t take a strategic perspective and continually synthesize the pictures these lenses reveal, then their companies are likely to make major mistakes and miss major opportunities. This is especially

9 true when the challenge is to make the right acquisitions at the right price and then get maximum value from them. Now we must add a new lens to the formulation and execution of strategy. And that is the lens of intellectual property. With this lens in place, due diligence can take on new vitality and offer new potential for adding value. Mark Blaxill Kevin Rivette Mark Blaxill is a senior vice president and director in the Boston office of The Boston Consulting Group. Kevin Rivette, who is based in the firm s San Francisco office, is executive adviser to BCG s Strategy Practice Initiative and coauthor, with David Kline, of Rembrandts in the Attic: Unlocking the Hidden Value of Patents (Harvard Business School Press, 2000). You may contact the authors by at: blaxill.mark@bcg.com rivette.kevin@bcg.com To receive future publications in electronic form about this topic or others, please visit our subscription Web site at The Boston Consulting Group, Inc All rights reserved.

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