4. Intellectual property is a unique class of intangible asset different from
other intangibles in how it is created, developed and protected
» Intangible assets are economic resources, often created in the normal course of
business, that lack physical presence, but have value due to the rights, benefits,
and privileges they convey to their owner
› Brand names
› Customer lists
› Non-compete agreements
» Intellectual properties comprise a subset of intangible assets that are created
consciously through the intellectual effort of specifically identifiable individuals, and
are registered and legally protected by federal and state statute
› Patents
› Copyrights
› Trademarks
› Trade secrets
› Know-how
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5. The value of intellectual property is a function of the property rights and
economic benefits associated with its existence
» Property rights associated with intellectual property include it being subject to
› Private ownership and legal transfer
› Specific identification and description
› Legal existence and protection
› Tangible manifestation
› Coming into, and going out of, existence at a specific time or due to a specific event
» Economic benefits associated with intellectual property ownership, and that
are required to quantify value, include:
› Incremental income
› Decremental costs
› Contributory value enhancement
» Economic phenomena lacking these attributes may not qualify as discrete
intellectual property or intangible assets
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6. Intellectual properties can be grouped by category and type based on
similarities in development, use, features and legal protection
Marketing Technology Artistic Data processing Engineering
works
Creative • Trademarks • Literary • Computer
software
• Trade names • Musical
• Integrated circuit
• Service • Dramatic masks and
Marks masters
• Artistic
• Logos • Proprietary
• Film databases
Innovative • Product patents • Trade secrets
• Process patents • Designs
• Patent • Drawings
applications
• Blueprints
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8. The demand for intellectual property valuation is driven by a variety of
legal, financial, regulatory and commercial needs
Category Reason
Damages for infringement, breach of contract,
Litigation business interruption, fraud, property
settlements
Enterprise purchase price allocation, IP purchase,
Accounting, and financing
collateral value, reorganization, licensing,
transactions alliances, SFAS 141 and 142
Resource allocation, evaluation of returns,
Corporate planning management strategy, development, protection,
commercialization, monetization
Transfer pricing, transfer of IP to investment
Taxes holding company, estate/gift tax, ad valorem
property tax
Page 8
9. Under ASC 350, acquired intellectual property must be recognized based
on fair value separately from goodwill and amortized over its useful life
» Recognizable intangibles are assets that lack physical presence, have a finite life,
and
› Have an underlying contractual or legal basis, or
› Can be separately sold, transferred, licensed, rented, or exchanged
» Recognizable intangibles with finite useful lives are accounted for based on fair
value, amortized, and tested annually for impairment
» Recognizable intangibles are amortized over their useful lives, no longer limited
to 40 years, but subject to any residual value
» Identifiable intangibles with indefinite lives (trademarks and brand names) are
not amortized, but must be tested for impairment
11. The value of intellectual property will vary based on the standard of value
applied
» Fair market—the value at which a buyer and seller would transact, neither being
compelled to do so and both having reasonable knowledge of relevant facts
» Fair—the value to fairly compensate an owner for being involuntarily deprived of
the economic benefits of an asset for which there is neither a willing buyer nor
seller
» Investment—the value to an individual investor based on investment expectations
and requirements
» Acquisition—the price a specific buyer would pay based on the unique benefits to
that buyer
» Use—the value of an asset given a specific, defined use
» Owner—the value given the current owner’s field of use application and ability to
develop the asset commercially
» Insurable—the amount required to replace an asset with one of comparable utility,
function, and income-generating ability
» Collateral—the amount a creditor would loan with the asset serving as collateral
» Ad valorem—the value of an asset for property tax purposes under jurisdictional
statutory standards
12. The value of intellectual property will vary based on the assumptions
underlying the premise of value employed
Valuation Valuation Highest and Premise of
purpose objective best use value
Why performed •Deal pricing •Consistent with •Continued use
and structure applicable laws as part of going
Intended use and regulations concern
•Financing
Audience •Physically, •In place, but not
•Tax planning functionally, in current use
technologically
•Strategic possible •In exchange in
planning an orderly
•Financially disposition
•Reorganization viable
•In exchange in a
•Litigation •Results in the forced
highest value liquidation
13. Intellectual property incorporates legal rights that are distinct, separable,
transferable, and of varying economic value
Interest Summary terms
Fee simple Total and absolute ownership of all legal rights
Life or estate Rights to ownership of IP for the life of the owner, or the rights to income
from IP for the life of the tenant
Term Ownership rights to IP for a specified term or number of years
License/franchise Rights retained by the licenser/franchiser, or granted to the
licensee/franchisee, for specific term, use, market area, etc.
Reversionary Rights to future ownership of IP owned by another party
Development Rights to develop and commercialize subject IP for transferee benefit
Exploitation Rights to make use of subject IP (natural resources, mining, forest)
Use Rights to derive some manner of benefit from the use of an IP (often related
to specific areas, industries, products and/or services)
14. As the value of intellectual property changes over time, valuations should
be qualified “as of”, and relied on only for, a specified date
Historical Contemporaneous Prospective
•Prior to date of •At date of valuation •At a date subsequent to
valuation valuation
•Requires disclosure
• The appropriate valuation date is often tied to the intended use of the valuation
Decision making
Information
• May be a function of statutory or regulatory ruling
Date of asset transfer, merger, lien, reorganization
• Should be agreed to by analyst and user, together with valuation purpose
and objective
15. The value of intellectual property is in part a function of the time period
over which it is expected to contribute to future cash flows
Expected
Expected use
useful life of
related assets
Maintenance The useful
expenditures life of an asset Legal
required to is a function limitations
obtain future of
cash flows
Obsolescence,
competition,
demand, Regulation
technology
16. The risk inherent to an intellectual property is measured by the cost of
capital used to discount economic income generated by the asset
» The cost of capital is the expected rate of return required to compensate for the
time value of money (real rate of return plus inflation) and risk of an investment
» Several options are available for estimation purposes
› Buildup, CAPM, MCAPM, WACC, P/E, VC
» In practice, the appropriate cost of capital depends on whether the IP will be
valued as part of a going concern or on a standalone basis
› Under going concern assumption, rate is a function of business enterprise
‒ Results in estimate of value in continued use as an integral component of going concern
entity
› With stand-alone basis, rate is tied to risks of specific asset
‒ Results in higher rate than going-concern assumption and value of IP as independent asset
» Ultimately, the choice between capitalization scenarios will rest on the
› Valuation objective
› Highest and best use of the IP
› Actual use of the IP
18. The Uniform Standards of Professional Appraisal Practice recognizes
three basic approaches to valuation
IP valuation
methodologies
Income Market Cost
Value is equal to the Value is inferred from Value is equal to
present value of future comparable asset accumulated costs
economic benefits market transactions
— Discounted cash flow — Comparable asset — Reproduction
sales
— Direct capitalization — Replacement
— Relief from royalty — Relief from royalty
— Profit split
— Excess earnings
— Loss of income
20. The owner of a patent may recover damages equal to lost profits
attributable to infringement, but never less than a reasonable royalty
» Lost, “but-for” profits damages are equal to the difference between expected
and actual profits absent the infringement
› Assumes infringer not licensed to use patent
› Requires showing of causation per the reasonable probability standard of Panduit
‒ Existence of demand
‒ Absence of acceptable non-infringing substitutes
‒ Manufacturing and marketing capacity
‒ Supportable estimate of lost profits
» Reasonable royalty damages are equal to the amount that would have been
paid by the infringer in an arms-length transaction for the right to use the
patent
› Assumes infringer licensed to use patent
› Sufficient to show infringing sales actually occurred
› Reasonable royalty based on hypothetical licensing agreement approach and Georgia-
Pacific factor analysis
» Statute and case law permit damages of lost profits and reasonable royalties
combined along with prejudgment interest; also trebling and attorney’s fees
22. Intellectual property damages can be valued by the “before and after,”
“but-for,” and “actual/opportunity cost” techniques
» Under these methods, damages are assessed as the:
› Decrease in IP or enterprise value, or
› Value of the damaging event
» Each method can be applied across a variety of situations
› Fraud, infringement, lender liability, breach of contract, business interruption, etc.,
» Further, damages under each method can be measured by changes in
› Unit volume, price, revenue, market share
› Costs of production, operations, and research and development
› Capital investment and financing costs
» Conceptually and in execution, each method is analogous to one of the three
approaches to valuing intellectual property
› Before and after » market approach
› But-for » income approach
› Actual/opportunity cost » cost approach
23. Comparison of intellectual property damages method calculations
Before and after But-for Actual/opportunity cost
Value of IP/Enterprise Value of past but-for Restated past cost of
before start of damage income from start of developing IP
period damage period
Plus:
Restated past
Less: Plus:
opportunity cost of not
developing IP
Value of IP/Enterprise Value of future but-for
after end of damage income to end of
Plus:
period damage period
Future opportunity cost
Equals: Equals: of not commercializing
IP
IP/Enterprise value Value of lost profits
diminution Equals:
Value of damages
25. Acquisition of technology use rights
» Situation
› A large international conglomerate acquired rights, formerly licensed, to technology
developed in Europe and Asia together with a joint-venture partner
» Considerations
› Purpose and objective—to value acquired assets for financial and tax reporting
purposes
› Premise and standard of value—fair market value in continued use and as part of a
going concern
› Highest and best use—continued use as part of going concern yielded highest
valuation
› Rights subject to appraisal—ownership and use rights to background and foreground
technology used in developing and manufacturing products
› Useful life—equal to amortization period
› Cost of capital—WACC based on premise and contributory nature of IP
› Valuation date—beginning of calendar year to conform with fiscal period
26. Acquisition of technology use rights
(cont)
» Valuation
› Relief from royalty—qualifies as both income and market approach
‒ Historical royalty rates for licenses for the subject IP
◦ Comparability established
◦ Clear “but-for” standard
‒ Arms-length royalty rates from licenses of comparable IPR
◦ Based on analysis of ownership rights, financing, industry, geographic market, transaction duration,
terms, and secondary market conditions
› Reproduction cost
‒ Current costs of research, development, and design services required to exactly duplicate IP
› Avoided cost
‒ Research, development, and design services costs not incurred due to the benefits of
ownership
27. Relief from royalty valuation
In-The-M oney C orporation
IP T echnology
(1)
R elief from R oyalty M ethod (U .S.$000s)
A s of January 1, 2003
2003 2004 2005 2006 2010
(2)
R evenues $ 811,720 $ 893,250 $ 888,000 $ 1,036,800 $ 1,130,220
G row th From Prior Y ear 16.8% 10.0% -0.6% 16.8% 0.0%
R oyalty R ate (3) 4.0% 4.0% 4.0% 4.0% 4.0%
G ross R oyalty Savings 32,469 35,730 35,520 41,472 45,209
L ess:
A m ortization 7,398 7,398 7,398 7,398 7,398
M aintenance expense 16,300 16,300 16,300 16,300 16,300
N et R oyalty Savings 8,771 12,032 11,822 17,774 21,511
T axes (3,184) (4,368) (4,291) (6,452) (7,808)
A fter-T ax R oyalty Saving s 5,587 7,664 7,531 11,322 13,702
Plus:
A m ortization 7,398 7,398 7,398 7,398 7,398
A fter-T ax C ash Flow 12,985 15,062 14,929 18,720 21,100
T im e Factor 0.5 1.5 2.5 3.5 7.5
Present Value F actor 0.9678 0.9064 0.8489 0.7951 0.6118
Present Value of R oyalty Savings $ 12,567 $ 13,653 $ 12,673 $ 14,884 $ 12,910
C um ulative Present Value of R oyalty Savings @ 1/01/03 $ 110,970
V alue (R ounded) $ 111,000
Sensitivity analysis based on varying gross royalty rates:
A ssum ptions: R oyalty R ate V alue
2.00% $ 18,000
W eighted Average C ost of C apital 6.77% 3.00% $ 64,000
R oyalty R ate 4.00% 4.00% $ 111,000
T ax R ate 36.30% 5.00% $ 158,000
Y ears am ortized 15 6.00% $ 204,000
28. Avoidable cost valuation
I n -T h e -M o n e y C o rp o ra tio n
I P T e c h n o lo g y
A v o id e d P u rc h a s in g C o s t V a lu a tio n (U .S . $ 0 0 0 s )
A s o f J a n u a ry 1 , 2 0 0 3
2003 2004 2005 2006 2010
E n g in e U n its 1 4 0 ,0 0 0 1 5 0 ,0 0 0 1 5 0 ,0 0 0 1 8 0 ,0 0 0 1 8 0 ,0 0 0
P r ic e R e d u c tio n fo r I P R T r a n s a c tio n $ 79 $ 79 $ 79 $ 79 $ 79
P r ic e R e d u c tio n fo r O n g o in g E n g in e e r in g 1 1 6 .4 3 1 0 8 .6 7 1 0 8 .6 7 9 0 .5 6 9 0 .5 6
B e n e fit F r o m P r ic e R e d u c tio n 2 7 ,3 2 5 .0 0 2 8 ,1 1 2 .5 0 2 8 ,1 1 2 .5 0 3 0 ,4 7 5 .0 0 3 0 ,4 7 5 .0 0
O n g o in g E n g in e e r in g E x p e n s e (1 6 ,3 0 0 .0 0 ) (1 6 ,3 0 0 .0 0 ) (1 6 ,3 0 0 .0 0 ) (1 6 ,3 0 0 .0 0 ) (1 6 ,3 0 0 .0 0 )
T o ta l o f A v o id e d C o s t 1 1 ,0 2 5 .0 0 1 1 ,8 1 2 .5 0 1 1 ,8 1 2 .5 0 1 4 ,1 7 5 .0 0 1 4 ,1 7 5 .0 0
L ess:
A m o r tiz a tio n 4 ,0 6 6 .6 7 4 ,0 6 6 .6 7 4 ,0 6 6 .6 7 4 ,0 6 6 .6 7 4 ,0 6 6 .6 7
N e t A v o id e d C o s t 6 ,9 5 8 .3 3 7 ,7 4 5 .8 3 7 ,7 4 5 .8 3 1 0 ,1 0 8 .3 3 1 0 ,1 0 8 .3 3
T axes (2 ,5 2 5 .8 8 ) (2 ,8 1 1 .7 4 ) (2 ,8 1 1 .7 4 ) (3 ,6 6 9 .3 3 ) (3 ,6 6 9 .3 3 )
A fte r -T a x C o s t S a v in g s 4 ,4 3 2 .4 6 4 ,9 3 4 .1 0 4 ,9 3 4 .1 0 6 ,4 3 9 .0 1 6 ,4 3 9 .0 1
P lu s :
A m o r tiz a tio n 4 ,0 6 6 .6 7 4 ,0 6 6 .6 7 4 ,0 6 6 .6 7 4 ,0 6 6 .6 7 4 ,0 6 6 .6 7
A fte r -T a x C a s h F lo w $ 8 ,4 9 9 $ 9 ,0 0 1 $ 9 ,0 0 1 $ 1 0 ,5 0 6 $ 1 0 ,5 0 6
T im e F a c to r 0 .5 1 .5 2 .5 3 .5 7 .5
P r e s e n t V a lu e F a c to r 0 .9 6 7 8 0 .9 0 6 4 0 .8 4 8 9 0 .7 9 5 1 0 .6 1 1 8
P r e s e n t V a lu e o f A v o id e d L ic e n s in g C o s t $ 8 ,2 2 5 $ 8 ,1 5 8 $ 7 ,6 4 1 $ 8 ,3 5 3 $ 6 ,4 2 8
C u m u la tiv e P r e s e n t V a lu e o f A v o id e d L ic e n s in g C o s t @ 1 / 0 1 / 0 3 $ 6 0 ,8 1 9
F a ir M a r k e t V a lu e @ 1 / 0 1 / 0 3 $ 6 0 ,8 1 9
V a lu e (R o u n d e d ) $ 6 1 ,0 0 0
W e ig h te d A v e r a g e C o s t o f C a p ita l 6 .7 7 %
T a x R a te 3 6 .3 %
Y e a r s a m o r tiz e d 15
29. Reproduction cost valuation
IP Technology
Current Dollar Conversion Valuation
($ million) Historical Dollar Costs
1996 1997 1998 1999 2000 2001 2002 Totals
IP Technology $ - $ - $ - $ - $ 63.1 $ 5.2 $ 24.6 $ 92.9
Current Cost Conversion
Factor 100 = January 2003 0.9405 0.9560 0.9784 0.9849 0.9971 0.97936 0.96399
Current Dollar Costs
1996 1997 1998 1999 2000 2001 2002 Totals
IP Technology $ - $ - $ - $ - $ 62.9 $ 5.1 $ 23.7 $ 91.7
31. Boris J. Steffen, CPA, ASA, ABV, CDBV
(202) 538 – 5037
boris.steffen@naviganteconomics.com
» Boris Steffen is an expert in financial and managerial accounting, corporate finance and valuation
with significant multi-industry, multi-company and cross-border experience in operations, finance,
strategy and litigation. As an advisor in financing, investment and restructuring transactions and
claims, matters in which he has consulted or testified include antitrust and competition policy,
bankruptcy, restructuring and solvency, contracts, intellectual property, international trade and
arbitration, mergers and acquisitions, business valuation, pricing, costs and profitability, securities
and taxes.
» As a corporate development executive and consultant, Mr. Steffen has advised in transactions and
claims valued in excess of $100 billion. Sectors in which he has consulted include the aerospace,
automotive, beef processing, biotechnology, business services, cable network, chemical, consumer
product, defense, document management, electronic imaging, financial services & banking, food &
beverage, healthcare, independent power, information technology, insurance, internet, newspaper,
magazine, pharmaceutical, oil & gas, printing, pumps & controls, retail, satellite, semiconductor,
software, steel, telecom, tobacco and electric utility industries.
» Mr. Steffen has held positions in finance, public policy, corporate development and consulting with
Inland Steel Industries, the FTC, Bureau of Competition, U.S. Generating, and LECG. He holds a
Master of Management degree with specializations in accounting and finance from the Kellogg
School of Management of Northwestern University, and a Bachelor of Science degree in Finance and
Bachelor of Music degree in Applied Music from DePaul University. He is an Accredited Senior
Appraiser, Certified Public Accountant, Accredited in Business Valuation, Certified Distressed
Business Valuation Analyst, and member of the AICPA, ABA, ABI, Insol International, AIRA, ASA
and American Finance Association.
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