In virtually every commercial bankruptcy today, the question of intellectual property—identifying, valuing and securitizing it—has become of serious importance. In this article, we provide an overview of how to identify intellectual property and intangible assets (IP) and how to group those components into bundles of discreet value. In a separate article, we will deal in greater detail with the valuation and securitization, monetization, sale and orderly disposal of IP assets in bankruptcy.

Our point of view is business or financially based. We do not intend to deal with all of the legal issues surrounding IP in bankruptcy. However, it is useful to review some of the most important questions one faces when sorting through the issues surrounding technology, IT, patents, trademarks, brands and other intangibles, collectively grouped together as IP. Some of those key questions are the following:

• What kinds of IP does a company have?
• How best can the IP be identified?
• Does the intellectual property maintain its value when it is in bankruptcy?
• Who owns and controls that value?
• Do existing licenses have value?
• Who controls the destiny of those licenses?
• How do you value these assets in a liquidation scenario?
• What sort of liquidation discount is experienced when a patent, trademark, copyright or software license is sold in an orderly disposal?
• Is there a formula to establish the descending value of these assets in liquidation?
• How do you market and dispose of these assets most cost-effectively and time-effectively?

Review of Recent Examples

Maidenform Inc. is another example of a company that used its IP and intellectual assets as collateral. Maidenform is a longtime manufacturer and marketer of underwear and women's lingerie. As it sought to reorganize its affairs, it used trademarks and future streams of royalties to collateralize a reorganization financing. Other examples include the securitization and sale of the Boston Market trademarks and the recent successful reorganization of Fruit of the Loom, which used its trademarks—including its BVD brand—to secure both DIP financing and take-out financing.

In a different case, when Montgomery Ward closed its doors last spring, it had a great deal of intellectual property and intangible assets to be sold off. When GE Capital decided to shutter Montgomery Ward, there were multiple groups of intellectual property and IT with value:

• trademarks
• trademark licenses
• domain names
• brands and sub-brands
• database
• mailing lists
• IT Operating Systems including SMARTauto, SMART merchant, SMARTservice and SMARTstaff
• shrink-wrap software

Our firm was retained to value the trademarks, brand names, shrink-wrap software, operating systems and software licenses owned and controlled by Montgomery Ward. One can review this process by going to the web site http://www.wardsit.com.

While each bankruptcy is different, there is a basic four-step process when valuing and disposing of intellectual property and intangible assets. Sometimes our task is to simply value the assets, while other clients have asked us to assist in the disposition or sale of their intellectual property. Some of the latter include Boston Market, Kenar, Montgomery Ward, Heilig-Meyers and Polaroid. In nearly every case, the process breaks out into four primary levels of activity:

1. First is the audit and identification process, during which all intellectual property, IT and other salable intangibles are identified.
2. The second step is to place market values on the assets.
3. The third step in the process is to develop a plan to monetize those assets;
4. Finally, the securitization, sale or disposal phase completes the process.

Identifying Components of Value

Intellectual assets can include patents, brands, trademarks and trade secrets. For many bankrupt companies and their creditors, they are simply another source of potential value to be recovered in a reorganization, liquidation or other resolution of financial issues. We have found that a company's family of intellectual assets, including all intellectual property and intangibles, can become the factor that makes or breaks the company's reorganization and successful emergence from chapter 11.

Intellectual assets—including IP and intangibles—have taken on a new level of importance, respectability and legitimacy for those institutions involved in bankruptcies. For example, providers of debtor-in-possession (DIP) financing or loans to insolvent companies, or exit financings for those emerging from chapter 11, often consider using the company's intellectual assets or IP as collateral. They often focus on individual elements of a company's portfolio of intellectual assets and on the revenue streams those assets can produce. In our firm, it is a core belief that one must focus on the components or elements of intellectual assets within a company and the role they play, not only in an ongoing enterprise, but also in the context of bankruptcy or liquidation. A company's intellectual assets should be viewed as a portfolio of IP and intangibles, and similar types of IP should be bundled into logical groups for valuation and sale or monetization purposes. These elements or components of value can include patents, trademarks and copyrights, as well as proprietary methodologies, databases, software, operating systems and other IT-based proprietary methodologies.

The question then becomes how to identify and separate these components of value, not only from the tangible assets but also from flanking or associated intangibles when necessary. When analyzing a company's intellectual assets and identifying those with value, a simple five-part process suffices:

• Identify all the elements of IP that may hold value.
• Look within all operations of the corporation, including marketing, IT, branding, legal and R&D, as well as operating subsidiaries and companies.
• Think of these individual assets as elements of a larger whole—components of value within a logical bundle or grouping.
• Identify all intangibles, even small assets that might not necessarily be large enough or important enough to isolate and sell on their own.
• Once the elements or components of value are all identified, the components can then be bundled into logical groupings for analysis, valuation and possible monetization.

For example, as we will discuss in the following section, a trademark may be bundled with a domain name and a logo or character device to make a logical grouping or bundle of value. Similarly, a single patent may be grouped with a proprietary technology and/or important trade secrets to make a logical bundle of value.

To reaffirm the process, then it is simply as follows:

• Identify all components, no matter how small.
• Begin the triage process by sorting into logical groups of components.
• Sort those groups into a hierarchy of relative value.
• Consolidate the important components in the logical bundles both from a commercial and legal point of view.

Intellectually, the process is simple. However, the actual identification, collation, triage and valuation of these components of value can be time-consuming, and the process is best left to intellectual property professionals.

Assembling Bundles of Value

When faced with a list of intellectual assets that can easily exceed 100 discrete elements of IP, it is often difficult to break this amorphous and intertwined asset base into manageable, salable and appropriate bundles. The assembly of components of value into logical bundles is one of the most important parts of the process. A misplacement of a key asset (e.g., putting a specific brand asset into a corporate identity package or vice versa) can make a substantial difference in the ability to securitize and/or monetize the asset.

Intellectual assets are unique in and of themselves, and unique between one company and another. In addition, unlike tangible assets such as real estate, where each asset can be sold alone, intellectual assets or IP need most often to be grouped into logical bundles in order to maximize value. For example, a company with four factories and six retail stores that they own free and clear can sell each of these ten discreet tangible assets individually, and perhaps maximize value that way. You could, of course, take all 10 pieces and group them into one bundle, but the overall result would be substantially lower.

To use an example of a current situation, Service Merchandise is now in liquidation. For many years a successful retailer and direct marketer of high-end consumer goods ranging from electronics to fine jewelry, Service Merchandise decided to exit the marketplace in an orderly fashion. As part of that process, we have been asked to identify, value, and monetize the intellectual assets and IP controlled by Service Merchandise. Using Service Merchandise as a case study to illustrate the benefits of grouping individual intellectual assets into bundles, let us look at the Internet-based assets of Service Merchandise. On the one hand, the company and its agents could offer to sell off each of the more than 15 important domain names that they control, such as "jewelry.com." In addition, the company could sell off its important 800 numbers, such as "1-800-jewelry." They could also separately sell their web site design, their linkages and other Internet-related assets. Clearly, however, Service Merchandise is much better served by grouping all of these assets into a single bundle and offering that single bundle for sale to the highest bidder—that bidder, in all probability, being one that can and will utilize the domain names, the 800 numbers, the web site design and the linkages in a viable, ongoing business.

On the other hand, one can find examples of companies where the unbundling of intellectual assets may be more appropriate. The situation of Sunbeam Corp. is entirely different. At first glance, it would appear logical to group all of Sunbeam's brands and trademarks into one bundle, including Sunbeam, Mr. Coffee, HotShot, and Mixmaster. However, in our view, it is more likely that greater value will be extracted by unbundling these assets and offering each of these trademark-based brands as individual assets for sale on their own. The process of assembling the assets includes five key words: research, identification, triage, grouping and bundling. The bundles must be logical, include compatible assets, include groupings that are both commercially feasible and legally appropriate, and be intertwined or supportive, and the value of the whole must be greater than that of the individual elements if sold separately.

A word of caution: Speed is of the essence, and these assets must be quickly and efficiently identified and packaged. It is important that key pieces of intellectual property not be skimmed off by secured lenders or others. The process cries out for the use of professionals experienced at the assembly, valuation and disposal of intellectual property. An IP professional will also work to speed the process and to ensure that all assets are identified and value-maximized.

Footnotes

¹ Weston Anson ([email protected]) is chairman of CONSOR® in La Jolla, Calif. He served six years as vice president of the Licensing Industry Merchandisers' Association and is a lifetime member of the Board of Advisors, as well as a Committee Chairman and Board Member of the Licensing Executives Society-International. Return to article