RISK MANAGEMENT

Is There Hidden Value in Your Balance Sheet?

Guy Proulx remembers a number of conversations he had with Taiwan mobile devices maker HTC a few years ago about building a patent portfolio. “They essentially said: ‘We’re not interested, we’re fine, we don’t need any patents,’” recounts Proulx, chairman and CEO of Transpacific IP, which specialises in intellectual property issues in Asia.
 
It was a mistake. When Apple sued HTC in 2010 for allegedly infringing on patents related to the iPhone, HTC owned fewer than 100 patents. “Having 100 patents is way too few for a company like HTC,” says Proulx. “If you’re looking to sell smartphones worldwide, you definitely need thousands to defend yourself.” That’s probably why HTC signed a settlement agreement with Apple in 2012 for an undisclosed sum.
 
It’s an expensive lesson. (In a similar dispute, a US jury last year ordered Korea’s Samsung to pay Apple US$1.05 billion for infringing the patents of the iPhone and iPad.) “From a CFO’s perspective, one of the biggest issues in Asia is just setting aside money to build a patent portfolio,” says Proulx. While things are changing, many companies still see patents as a waste of money or are not convinced there is value in them.  
 
Proulx concedes that it’s not always a simple open-and-shut case. “It’s very difficult to recognise the true value of the intellectual property on your balance sheet,” he says. “What you carry on your books is what you paid for it, which in the case of a patent is the cost of drafting and filing the application.”
 
You get an indication of a patent’s hidden value only if you have licensed it out and the license fees come in or you sell the patent to someone else. “But most companies don’t see any dollars coming in from their patents,” says Proulx. “So a lot of them are taking a look at their portfolio and asking: ‘Are we getting real value?’”
 
For CFOs, the challenge is to decide whether it makes sense to patent (or trademark, in the case of brands) the company’s IP assets to protect against lawsuits and/or to make money off them. The alternative is let them become part of the public domain, meaning that anyone can then make use of them.
 
Know what you have
How to come to a determination? The first thing to do is to know exactly what IP assets you have. IP assets are not necessarily always inventions. “If you come up with a new economic formula or algorithm, something along those lines, that’s something you can register,” says Proulx. If not patented, ideas, innovations and products can be copyrighted or trademarked instead, such as mobile apps, for example.
 
Every company, in other words, has IP assets. The key is to know what and where they are. That’s not as easy as it sounds. “It’s true around the world, the patents on the balance sheet tends to be forgotten,” says Proulx.
 
The engineers, the R&D people and others in operations know they are there, but finance does not always realise their value and does not know how to monetize these assets. What stands out for finance is the money paid out for other people’s IP. “If it’s a royalty rate, it hits the gross margin; if it’s a license fee, it hits the expense line items,” says Proulx.
 
Technology companies the likes of HTC and Samsung obviously have IP assets. So do companies that make and sell routers, mobile base stations, TV and LCD panels, and medical devices. Universities have them, too, although finance and other administrators may not always appreciate them. In 2005, Proulx worked with one university in Hong Kong, whose researchers were publishing 2,000 papers a year – but was filing only 20 patent applications.
 
There are also cases where the company may not be aware of the existence of IP assets that came from an acquisition, for example. In an M&A deal, observes Proulx, “people tend to know that [IP assets] are there, but they don’t pay a lot of attention to them. In fact, they can be the most valuable part of the acquisition.”
 
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