Historically, the roles of the appraiser, technologist, and investment banker were separate and unrelated functions in the deal-making process. However, as the global economy continues its decades-long transition from asset-heavy manufacturing to an intellectual property (IP) driven knowledge-based economy, the need for collaboration among these roles has become imperative to the comprehensive analysis of corporate strategy and value.
Components of S&P 500 Market Value
Ocean Tomo Intangible Asset Market Value Study 2020
In a knowledge-based economy, a thorough understanding of the strengths and weakness of a company’s IP and the related market risks and opportunities is a fundamental input into any strategic planning exercise or valuation analysis. For this reason, companies are demanding more than simple valuation based on assumptions provided by management, and as recent SEC and DOJ investigations prove, trusting management assertions requires technical validation, not just a quick peek under the hood. Our clients are asking us to pressure test the assumptions and provide thoughtful insights into the strengths, weaknesses, opportunities, and threats ahead.
Geopolitics and global disruption are creating many opportunities and challenges. Prime examples are fiscal incentives such as the Inflation Reduction Act (IRA) and CHIPS Act, which the U.S. has approved to provide confidence and risk reduction to investors in IP ranging from rare earth minerals, electric vehicles, and decarbonization technologies to semiconductors. Understanding the complex interactions and effects of economic, geopolitical, and technological factors on a business transaction is now imperative.
From a technical perspective, consider some of today’s most cutting-edge technologies: artificial intelligence, blockchain, advanced nuclear reactors, solid-state batteries, semiconductors, and genomics, among many others. Given the complexity of these technologies, potential investors will not be satisfied with the results of a “surface-level” financial analysis that is not supported by an analysis of the IP and its position in the broader ecosystem. Moreover, investors are looking for additional insights in connection with other risks such as supply chain constraints and trade barriers. Furthermore, when it comes time to execute, investors want the expertise of a deal team fluent in the language of IP, technology, and global commerce. More and more, parties to a transaction choose to work with firms that provide a comprehensive suite of services throughout the transaction lifecycle and beyond. It is much more efficient when the technical and regulatory analysis, due diligence, valuation, transaction execution, and fairness opinion can all be found in one stop.
The figure above illustrates the flow of such services from an initial technical review and assessment of the underlying technology all the way through transaction advisory and brokerage. A description of each service and step in the process demonstrates the value, and indeed necessity, of each part of the whole:
Technical Review & Assessment – Review of technical documentation, discussions with engineering personnel, and site visits to assess the validity, strengths, and drawbacks of technology relative to current and planned alternatives. This step also involves checking regulatory, trade, and implementation opportunities and risks.
IP Portfolio Analytics – Patent portfolio analytics to understand the scope of protections that a company has for the subject technology. Without adequate IP protection, innovation and competitive advantage may be lost to copycats or bad actors.
Market Opportunity Analysis – A team that lives and breaths the subject of technology and industry is essential to the validation of existing strategies, and the identification of marketplace participants that can serve as partners, acquirers, or licensees.
Valuation – The three steps above can serve as inputs and be synthesized into a valuation analysis of the company or standalone IP assets. The valuation analysis may analyze the assets using multiple methodologies or scenarios to triangulate on a highly supportable value.
Transaction Advisory & Brokerage – Armed with deep knowledge and understanding of the technology, IP, relevant markets, insurance perspective, and corresponding value, parties to a deal can partner with a strategic advisor that is fluent in all of the above steps of the process throughout negotiations in order to maximize desired outcomes.
Ocean Tomo and J.S. Held are experts in managing these types of multi-disciplinary analyses. Although many examples abound, one needs to look no further than their recent work as a financial advisor to the Special Committee of the Board of Directors of Ares Acquisition Corporation in its acquisition of X-energy, a developer of Small Modular Nuclear Reactors (SMRs). Understanding the strengths and weakness of X-energy’s technology, its financial, carbon, and insurance impacts, and the related market risks and opportunities was central to the engagement. The multi-disciplinary analysis of X-energy’s technology and strategy allowed Ocean Tomo to provide a robust Fairness Opinion to the Board of Directors of Ares Acquisition Corporation.
As we continue the rapid transition into an IP and technology-based economy, this holistic analysis will not only become preferred but expected, as investors and regulators from the U.S. to Asia to Europe demand detailed analyses supporting the material drivers (IP, supply chain, technology, etc.) behind the business.