High-tech startups, highly leveraged businesses, companies anticipating growth, a turnaround, or that are otherwise in need of capital, may not always find a willing investor or acquirer that is able to finance what can be an expensive investment or M&A. Willing buyers may also be confronted by a lack of funds when acquiring another company’s business, especially when the acquisition is a forward looking strategic move.

In many cases, the patent portfolio of the target company is often overlooked by the target company itself, and by the prospective acquirer, as a tool to help finance the transaction. While patents are still a relatively underutilized form of collateral in financing transactions because of their illiquidity and difficulty in valuation, businesses have managed to use patent portfolios to finance and unlock additional value in non-patent transactions using creative deal structures.

This article explains how a target seeking capital, and an acquiring company in need of funding to finance an acquisition of the target, can use the target’s patent portfolio to locate third party funding from an entity interested in buying or licensing the patents themselves.

THE STRUCTURE(S)

There are a variety of structures that can be used to help finance an acquisition of a company with a patent portfolio. In one, an acquiring company (the “Acquirer”) provides the target company (the “Target”) with a combination of cash and loans in exchange for the Target’s shares. A financing entity (“Financier”) can then provide the Target with additional cash in exchange for the Target’s patents, and then grant a non-exclusive license to the patents back to the Acquirer, to enable it to continue to practice the patents used for the Target’s products and services. Thus, the Financier, interested in buying the Target’s patents for cash, helps to finance and conclude the deal in exchange for the patents, while both the Target and the Acquirer, as the new owner of the Target, receive a license to the patents to continue running the business.

In an alternative structure, assuming the Acquirer is not bound by too broad an IP cross-license with one or more third parties, it can, in place of the Financier, acquire the patents, and in turn provide the Financier, which is still the entity funding the M&A, with an exclusive license to the patents, together with sublicensing rights, to enable the Financier to monetize the patents through litigation and licensing campaigns. The question, as to which entity buys the patent and which entity receives a license in the transaction, can be determined on a patent-by-patent basis.

WHO IS THE FINANCIER?

The Financier in these scenarios can be a general purpose funding entity, with or without a patent arm, or a non-practicing entity that can monetize the patents through litigation and licensing campaigns. On the other hand, one or more practicing entities may be interested in buying the portfolio for the purpose of entering a new market or to use the portfolio defensively against competitors. For example, in November 2012, chipmaker Imagination Technologies bought competitor MIPS. In order to help finance the transaction, a group of companies interested in the patents, which included IBM, Intel, Oracle, Google, Philips and Sony, bought most of MIPS’s patents, to which MIPS retained a perpetual license.

Although third party Financiers or combined groups can be very large and powerful, the deal does not have to be lopsided in their favor. In cases such as these, an Acquirer may benefit from the fact that the Financier’s ability to acquire the patents is dependent on the M&A deal itself, because the Target itself may not otherwise agree to a sale of its patents as an assert separate from the rest of its business. In addition, a Target that finds both a willing Financier and a willing Acquirer may benefit from a larger total sale price and a consequently greater return.

OPEN-SOURCE CASE STUDY

Some patent portfolio-financed acquisitions may require additional creativity to avoid regulatory hurdles, such as the sale of a large portfolio hindering the development of open-source software.

In November 2010, Novell was acquired by Attachmate for $2.2 billion, with certain patents being bought by a consortium led by Microsoft Corporation. The Department of Justice originally objected, concerned that the patent sale would hurt development of mobile operating systems and other important open source software. This led to all of the Novell patents being acquired subject to an open source license called the GNU General Public License, Version 2.

CONCLUSION

Creative use of a patent portfolio in an acquisition can unlock additional value. A deal in which a large entity buys the patents does not have to favor the patent buyer, who needs the other parties to agree to sell or license the patents. Finally, the deal can be tweaked on a patent-by-patent basis and structured to avoid capture under a cross-license, open-source concerns, and other commercial and regulatory issues.

Lillian Safran Shaked is Founding Partner of Shaked & Co. Law Offices. She has worked with many intellectual property holders in the U.S. Europe and Israel, and has facilitated more than 500 patent transactions for numerous operating and non-operating businesses across many industries.