August 2012 – Facebook acquires Instagram for $521 million.
Amount paid for Intangible assets – $138 million.
October 2013 – Microsoft acquires Skype Global S.a.r.l. for $8.6 billion.
Amount paid for Intangible assets – $1.648 billion.
August 2014 – Google acquires Motorola Mobility for $12.4 billion.
Amount paid for Intangible assets – $7 billion.
A PricewaterhouseCoopers report states that public corporations in the US derive 70% of their value from intangible assets. In Technology, Media & Telecom, deal values rose from $331bn in 2012 to $511bn in 2013 and volumes climbed from 2,027 deals to 2,229. Of the total purchase price, intangible assets is >30% and the % of intangible assets of the total purchase price has steadily increased over the past few years.
The value of an intangible asset is subjective. However, it plays an extremely significant role in assessing the value of a start-up, especially because these companies do not possess much sales, revenue or other tangible assets. In such circumstances, IP valuation experts need to perform extensive due-diligence and understand the core technology disclosed in a patent vis-à-vis the market trend. For early-stage products the risk is high as there is very less information available regarding the viability of the product.
a) Market-based: This approach helps value an IP asset that has comparable transactions in an active marketplace. An IP valuator will need to compare the asset in various contexts, including transactions that were forced, litigated and bankruptcy filings to name a few. While a market-based approach is possibly the easiest method of IP valuation, it is an expert eye that needs to adjust comparables to derive an accurate value.
b) Cost-based: This is especially useful to measure the value of an IP asset that has manufacturing capabilities. A valuator will need to calculate the cost of materials, absolute production expenses, value of time taken to develop the product and also the profits that a manufacturer will accrue. These and many such factors add up to provide a value to the IP.
c) Income-based: This is possibly the most widely used parameter to assess the value of an IP asset today and practically judges the valuator’s analyzing capabilities at every step. In the income-based valuation approach, a valuator estimates the income that an IP asset can generate in the future based on its useful life. The income can be either through royalty or through rent. Assumptions may be based on the IP asset’s contribution the company’s benefits on an overall basis or only to a particular technology.
Depending on the uniqueness of an IP asset, comparable data that supports the valuator’s analysis and absolute judgment based on experience, an IP asset is given its monetary value.
When it comes to putting up a social value to their industry status, Facebook and Twitter are quite the dramatists. In 2014, both social media giants revealed the value of their IP, setting the wallet jingling heavy and noisy.
Following its acquisition of Instagram for $521 million in August 2012, Facebook increase the value of its intangible assets. As of December 2013, the company had 1858 issued patents and 2501 filed patent applications in the United States, and 494 corresponding filings in other countries. Most of these patents are related to social networking, web technologies and infrastructure, and related technologies. With most of its issued patents due to expire between May 2016 and June 2031, Facebook today values itself at $202.09 billion.
Twitter has an IP asset of 956 issued patents and at least 100 patent applications filed in the United States and other countries as on December 31, 2013. Most of its patented technology lies in message distribution, graphical user interfaces, security and related technologies. With a majority of Twitter’s patents also due to expire between 2016 and 2031, the company now values its enterprise at $22.9 billion.
With IP valuations dropping, the task to assign fair values to intellectual property is going to become a more daunting task for companies and valuators. The bigger a portfolio, the greater will be the time and effort spent to assign a monetary figure to it – an absolute challenging time ahead for IP valuators.
Great advice! So simple but often forgotten. Thanks for a great read.