Written by: Gabe Fried
Streambank LLC; Needham, Mass.
Intangible assets have been among the last class of assets to garner respect in bankruptcy proceedings. Until recently, trademarks, patents and know-how have withered on the vine as bankruptcy professionals (financial advisors, restructuring professionals and attorneys) have focused on other areas to maximize value and achieve a timely outcome. Now that intangibles are starting to gain more attention, professionals may wish to revisit the traditional asset sale process. When attempting to maximize value from assets in a bankruptcy, the short and certain path of an auction often trumps other disposition methods. This is due in large part because of the perceived opportunity and carrying costs associated with a long sale process. However, IP assets enjoy some unique characteristics for which an alternative disposition approach will often yield substantially higher value than a quick auction.
IP assets are unique. The nature of IP (brands, patents, know-how) is such that it provides the owner with the right to exclude others in the marketplace. The uniqueness associated with brands and patents, and the fact that they do not often change hands in bankruptcy, makes it difficult (if not impossible) to consult recent transactions to develop a metric for fair value as one can with real estate, rolling stock, inventory or other commodity-like assets. Additionally, it is precisely the uniqueness of these assets that created strategic value to the debtor in the first place, and therefore would confer a similar strategic value to a buyer. Unlike buyers of hard assets, who are often experienced in dealing with the bankruptcy process, sale procedures and sale orders, it is often the case that a patent or trademark buyer or licensee is wholly unfamiliar with the process and therefore unreachable through traditional sale notices. Because investors loathe uncertainty, rushing first-time buyers through a quick sale process to an auction will likely hurt the recovery.
Fortunately for bankruptcy stakeholders, a small but increasing number of professionals is giving IP assets a closer examination when determining sale strategies. In In re Bombay Co., Case No. 07-44084 (Bankr. N.D. Tex.), for example, when a lone bidder emerged to purchase the company’s trademark and product design portfolio, the creditors insisted on a trailing interest in the brand assets. Because the initial offer would have resulted in only a minor improvement to the recovery of creditors, it was an easy decision to make with little risk. In In re Collins & Aikman Corp., Case No. 05-55927 (Bankr. E.D. Mich.), the debtor was left with a substantial patent portfolio after the sale or closure of its manufacturing facilities. Rather than resort to an auction, the debtor’s management and consultants crafted and executed a longer-term process that involved a combination of sales and licenses to maximize recovery from these assets. The process enabled buyers to conduct very intensive due diligence and provided the seller with the opportunity to maximize value based on the strategic subtleties of the industry. Equally as important to the process was the ability to overcome objections based on license encumbrances that would have sapped interest or value in a quick auction.
In each of these cases, the decision to elongate the recovery process was made after careful examination of the options and driven, in no small part, by the acknowledgement that liquidating chapter 11 cases often take much longer than anticipated for reasons that have little or nothing to do with IP asset sales. Bankruptcy practitioners and financial advisors should give these assets a close examination and should not immediately assume, as many do, that “if the patents/brands had any significant value, then the company would still be alive.” Nor should they immediately put the assets up for auction without carefully examining the costs and benefits of alternative disposal methods. Under the right circumstances, significant value can be achieved by breaking out of the debtor’s pre-petition insistence on exclusivity. For example, a process patent that enables a manufacturer to lower its production cost may have broad licensing potential to the debtor’s surviving competitors if their products compete on non-cost attributes such as design or brand.
When the option of creating new licensees exists, the certainty generated from having even a modest royalty stream in place will often have significant impact on the total recovery. Rather than have the creditors create a trust to receive royalties, the debtor can sign new licensees and then sell its interest to a third party along with the rights to collect royalties. The income stream solves some of the capital risk challenge for the ultimate buyer and will yield a much better return than selling the IP to the same buyer without the licensee in place.
As with all asset-recovery strategies, the critical decisions are the early decisions. The rejection of license agreements, abandonment of patents or the inclusion of IP rights with the sale of the debtor’s non-IP assets will all have an impact on recovery. Starting early and maintaining a long-term view are the key steps to maximizing recovery from IP assets in a bankruptcy.