IP Issues in Mergers and Acquisitions: Any Recent Examples of Due Diligence Failures Involving IP?

Corporate Counsel has published a pair of informative articles concerning due diligence and intellectual property.  The first article is titled, “Identifying IP Risks in M&A and Tech Joint Ventures: Beyond the Data Room”, by Anne Cappella, Charan Sandhu and Brian Chang of Weil, Gotshal and Magnes.  The second article is titled, “The Financial Impact of IP Issues in M&A,” by Steve Ball and Jon Winter of St. Onge Steward Johnston & Reens.  Both articles provide useful advice designed to help counsel avoid missing intellectual property issues during due diligence.  The overarching message is that corporate counsel should include intellectual property specialists in any due diligence of a potential target.  Both articles raise specific points that should be considered such as: proactively examining a target’s competitors to ascertain whether patent trolls have litigated against the target’s competitors to determine if your target is next; considering potential trade secret misappropriation actions by competitors of the target based on new hires by the target; ensuring that third parties who have worked with the target have not improperly claimed intellectual property possibly owned by the target; having clear title to intellectual property; and properly recording title.  The second article provides a couple of examples where intellectual property counsel were not consulted or there were intellectual property issues missed in the due diligence.  One problem involved Rolls Royce and BMW:

[I]n 1998 the Volkswagen AG Corporation purchased the automobile assets of the bankrupt Rolls-Royce Motor Cars Limited for $790 million, with the value of the physical assets estimated at $250 million. Volkswagen was unaware that Rolls-Royce’s trademark rights were subject to a nontransferrable license from Rolls-Royce Aircraft. Volkswagen purchased the plant, the machinery and the automobile designs from Rolls-Royce, but only learned after the deal that the purchased assets did not include the Rolls-Royce® trademark. So while Volkswagen was able to build the car, it could not brand it with the famous trademark. BMW then acquired the trademark rights for $65 million from the bankrupt Rolls-Royce Aircraft and forced Volkswagen to concede the brand, resulting in a huge windfall for BMW.

The most recent example included Apple’s acquisition of Beats Electronics:

Apple Inc. agreed to acquire Beats Electronics for $3 billion. In doing so, Apple purchased an infringement suit by Bose Corporation, which owns a number of patents directed to noise-cancelling headphones. After the deal was announced, Bose filed infringement suits in district court as well as at the International Trade Commission seeking to ban imports of the Beats headphones into the U.S.

I have to imagine that Apple’s counsel knew they were likely to be sued by Bose Corporation.  Are there any more recent public examples of IP failures in the due diligence before merger or acquisition with a target company? 

Two Final Thoughts on Big Pharma Acquisitions

A coda in two parts to my recent postings on the mega-transactions by Pfizer, Merck and Roche of Wyeth, Schering-Plough, and Genentech, respectively.

Coda No. 1

I had surmised that one of the possible outcomes of the current spending spree by Big Pharma would be that promising small companies in the pharma area, and in particular, biotech companies, would be gobbled up principally for their promising technology. However, if the observations by Ben Levinsohn are correct ("Biotech Bonanza", Business Week, Feb. 16th), I may have to modify by predictions.

According to Levinsohn, writing in the "Money Report" section, the driving dynamic of Big Pharma is that it needs quickly to replace (read cash) to make up for the fact that many blockbuster drugs will be coming off patent in the next several years. If so, and relying on the views of an industry analyst (Leerink Swann), what Big Pharma needs is "manufacturing knowhow of big biotechs to bring new biopharmaceuticals to market." If that be correct, then the biotech companies most likely to be in play are those with manufacturing capabilities and not merely promising technology. Stated otherwise, small biotech companies without a manufacturing capability will be less likely to be acquired than their larger and more integrated corporate brethren.

I think I need some help here. A mantra being expressed a lot these days is that it is a buyer's markets for those flush with cash seeking to buy promising technology on the cheap.Perhaps this is only true for pharmaceutical products that are not biotech per se, where "cash is king" still enables nimble, dynamic small companies to attract a willing purchaser for its technology. If Swann is correct, however, that mantra is less appropriate for biotech products, where the desire by Big Pharma for quick revenues means that manufacturing prowess may be no less important than promising biotech technology.

Biotech: it may be about manufacture after all

So what happens to the smaller biotech companies, especially if they need to obtain additional financing during the coming years? Does this mean that there will be less aggregate development for biotech because of this concern for shorter term revenues? If not, exactly what is the mechanism for ensuring that technological developments remain apace in the biotech area? I would be delighted for some insight here.


Coda No. 2

Perhaps I got a bit carried away when I assumed that Big Pharma was funding these acquisitions by their cash reserves. It seems that all of these purchasers-Wyeth, Merck, and Roche--are in fact reaching out to the bond market as well to borrow money from the public to fund at least apart of the acquisitions.

As reported by Bloomberg.com on March 17th ("Pfizer May Get Lower Rates Than Roche in Planned Bond Offering", by John Detrixhe and Gabriella Coppola), drug makers have already offered $27 billion dollars in bonds in 2009, as compared to $13 billion dollars in all of 2008. While these may not be bind-boggling sums in an era of AIG excess, they still point to a willingness by the public to buy the debt of Big Pharma to fund these purchases and the willingness of the public to invest in this corporate paper.

Maybe I should have bought those big pharma bonds all along

I need some help here as well. Given the sums being borrowed by corporate Big Pharma for the acquisitions via bond offerings, I would like to understand better how Big Pharma is funding its R&D efforts to replace its product lines. Is it being funded internally by company cash, by bank loans (that hardly seems likely in today's lending/borrowing climate), or otherwise? And whatever the answer to this question, is this funding adequate to support the kind of R&D that will be needed to replenish the drug pipeline? In the flurry of the business press to cover these mega-acquisitions, the issue of product R&D has been largely ignored of late. I, for one, would be grateful if it would return to center stage.