Technology’s role in the lifecycle and automation of IP
As the role of IP has evolved so has the technology used to source, monitor and manage a company’s patents, copyrights, licenses and trademarks. The management of cross-border IP has increasingly demanded effective automated systems for reporting, compliance and protection.
This trend has impacted M&A not just for IP focused organisations. Platforms that can deliver real-time IP reporting are crucial in accurately valuing a company and are therefore useful for any business looking to prepare their company for sale – a need that will ultimately only increase.
For technology companies specifically, proprietary intellectual property is the primary asset, so much so that this has now entered the global political forum. Trump’s protectionist agenda is in stark contrast with Xi Jingpin’s ‘open for business’ approach to the China-based management of IP, which will no doubt have an impact on technology hubs like Silicon Valley.
The increasing role of China in global IP
The political IP agenda is being led by China, with heavy investment from government officials including new legislation and economic targets. Chinese companies and innovators filed a record 48,882 patents last year with the World Intellectual Property Organisation (WIPO) stating “At current trends, China is projected to overtake the US within three years as the largest source of applications filed”. Slowly, China is shaking off its reputation as a copycat and instead, becoming a centre of excellence for the development of new products. In respect of China patents, WIPO chief Francis Gurry said these “represent the best new technology that is arising in the world.”
As China continues to shift its IP focus from introvert to outward looking, we expect to see two things: firstly, consolidation in Southeast Asia (e.g. CPA’s acquisition of MarkPro last year), and secondly an increasing interest from Chinese capital in US and European IP services providers. What remains to be seen, however, is what impact a US-China trade war will have on China’s attitudes to IP.
As the role of Chinese IP develops, and the US protectionist rhetoric continues, Europe has attempted to gain a competitive advantage by implementing its new streamlined patent.
Europe’s new Unitary Patent (EUP)
If they roll out this year, the new EUPs will make it possible to obtain patent protection in up to 26 EU Member States by submitting a single request to the European Patent Office (EPO), significantly simplifying the procedure and ensuring a more cost effective route to securing IP for businesses.
The likelihood of the EUP coming into force is still up for debate. What is clear is that it is less likely now than pre-the Brexit referendum, and time is ticking for the UK to ratify it before the end of March next year. When factoring in the political environment in Germany and Italy – with the latter set to play a larger role if the UK leaves the EU before ratification – the EUP’s future is uncertain.
In any event, we suspect that there is enough flexibility in the sector and amongst the most sophisticated providers to absorb any change. Regulatory change in any sector tends to drive consolidation, and the introduction of the EUP may well be net positive for IP M&A. Indeed, with the potential implementation of the EUP looming, Europe has seen three major transactions in the last three months, with IK Investment Partners agreeing to acquire Questel and Castik announcing its planned acquisition of both Delegate and IPAN.
Irrespective of the EUP roll-out, Europe’s new European Unitary Patent Court will rule IP moving forward which is indicative of the need to separate IP from other asset litigation. This distinction is a nod to the fluidity of IP in today’s flexible economy – where ownership and rights have in many ways become subjective.
IP’s role in a more flexible economy
As the global economy becomes increasingly flexible, with increasing numbers of SMEs being established, the role of IP will become more important to smaller businesses. The days of only large multinational corporates focussing on IP protection are gone, and as with most functions outsourced by SMEs, we expect their focus to be on a “one-stop shop” for IP, which should play into the hands of the integrated service providers.
The increasing significance of IP sets the stage for an increase in subsequent M&A activity. Platforms concerned with IP management are likely to be of increasing interest to buyers – in particular those with international reach. Additionally, IP’s role in the valuation of assets will continue its importance – so companies looking to track this effectively will be in need of efficient and appropriate services or platforms.
With the inevitable move towards technology now affecting every sector of the economy, the services offered by IP providers have had to become more and more sophisticated. All the major players have moved away from their legacy niches to become integrated service providers, able to offer their clients all the services they require in a neat, tech-underpinned package. In order to get there, the sector has seen a great deal of investment, both through acquisitive growth and major capital expenditure programmes.
We expect these trends to continue and see no reason why the attractiveness of the sector to financial investors will slow down. It is easy to see why the majority of the large IP services providers are currently in private equity ownership. The sector fundamentals of asset-light operating models, infrastructure-like annuity revenue models and impressive cashflow conversion very appealing to financial investors.
Valuation multiples across the sector have been persistently impressive over the last 10 years, and as the sector continues its move from services provision to tech-underpinned services to effectively a SaaS model, the strength in valuation is likely to be a fixture of the market for the medium term. In order to capitalise on current market conditions, sector operators must remain informed on industry M&A activity to ensure a competitive advantage – particularly where the uniting of IP service and tech firms are concerned.