In the first part of this article (published in the May 2002 issue), we began by discussing the process of identifying all intellectual property in order to maximize value from those assets in a bankruptcy. The basic steps to follow are quite simple, although the process may be complex:

• Research all sources, subsidiaries and partnerships.
• Identify all intangible and intellectual assets.
• Triage those assets based on relative importance, value and marketability.
• Group individual components of value into specific logical bundles.
• Value those assets based on current market and liquidation considerations.
• Finally, monetize the assets.

In this article, we provide a quick guide to the bundling of assets. We review 15 primary and secondary groups of IP. We also touch on the valuation process and look at the basic formula for establishing value for intangible assets in bankruptcy. Four current methodologies for valuation are reviewed. Again, it is important to stress that currency of the valuation for any piece of IP is critical since conditions change very quickly for intangible assets, and that an appropriate liquidation discount is imperative.

The monetization process for these assets is touched on, including securitization, sale, license, swap for debt, etc. The topic of monetization is more fully covered in another article. Finally, there are two key thoughts that we hope will be taken away at the end of this article. First, that virtually all companies have intellectual property and intangible assets that have real and realized value. Second, it is imperative to have accurate valuation to reflect current market conditions in order to maximize value.

Bundles of Value

Each company is different, and therefore the IP of value in each reorganization will be different. Some companies have substantial value in their trademark assets, others in their information technologies. Others may have real estate-related intellectual assets or broad groupings of patents and proprietary software. There are some groups or bundles that, in most situations, will have primary value, and others that will be less important. In this article, we identify 15 different intellectual asset bundles and briefly discuss each.

Over the last two decades, we have learned through hands-on experience that six to eight groups of IP assets will typically fall into the primary area of value, and often these groups have an interrelationship. In fact, the first three groups that we discuss below are closely interrelated. This is particularly true in a consumer-driven business. Below, we identify a handful of specific assets within some of the groups. This listing is not intended to be exhaustive. Instead, it is offered as an overview checklist or guide to IP value.

1. Trademarks
   • primary classes of registration
   • secondary classes of registration
   • with and without logo device
   • primary country
   • secondary countries
   • pending applications
     • Foreign
     • Domestic
2. Other Brand-related Assets
   • logo design
   • character devices
   • jingles, music
   • advertising concepts
   • copyrights
   • sub-brands
   • trade dress
3. Internet-related Assets
   • domain names
   • web site design
   • 1-800 numbers
   • linkages
   • retail systems
   • embedded customer base

   These first three groups, mixed and melded together, form what we sometimes refer to as the master bundle of brand assets. Perhaps the easiest way to think about this is to think of Coca-Cola as an example. The core trademark assets include the Coca-Cola name itself, the Coca-Cola logo and the word "Coke." Related to, but separate from that primary group, are the other brand assets controlled by the company—including secondary brands such as Diet Coke, marketing techniques, logo devices, corporate colors, etc. The third group of assets within that brand bundle are the so-called "new economy" brand assets, which include web site design, Internet-based consumer promotions, domain names, etc.

   As we move to identify the balance of the bundles of intellectual assets, it is well to remember that two or three bundles—such as patent-related and other technology assets—will often be grouped together for later sale or monetization. Additional bundles of value are:

4. Patent-related Bundles of Value
5. Other Technology Assets
6. Product-related Assets
7. Corporate Identity Assets
8. IP Contracts
   • in-licenses and out-licenses
   • franchises
   • co-branding agreements
   • endorsement deals
   • spokesperson contacts
   • venue naming rights
9. IT/Software
10. Data/Information-related Assets
11. Research-related Assets

    The 10 bundles briefly discussed above typically provide the core elements of value within most companies. Of course, there are important and ongoing exceptions. In the case of technology-rich companies, research-related assets or communications-related assets can be much more important. In the cases of companies like Global Crossing or Enron, transmission, communication and IT assets, not the trademark and brand assets, are the more important bundles of value. Other bundles include:

12. Real Estate-related Assets
    • zoning rights
    • permits
    • rights of way
    • easements
    • building rights
    • air rights
13. Communications-related Assets
    • cable rights
    • transmission rights
    • FCC licenses
    • bandwidth
    • certifications
14. People-related Assets
    • embedded workforce
    • work-for-hire contracts
    • pre-paid temporary help contracts
    • specialty business skills
    • customer relations/lists
    • non-compete clauses
15. Miscellaneous
    • packaging technology
    • product shapes
    • retail systems
    • coating technology

This review of primary and secondary bundles is not intended to be complete, nor are the listings of individual elements within each of the bundles intended to be complete. Most companies in reorganization or liquidation will have at least a few components of value in each of their most important five or six bundles. However, it is unusual for a company to have more than five or six meaningful bundles of intellectual assets. This review of primary and secondary bundles is not intended to be complete, nor are the listings of individual elements within each of the bundles intended to be complete.

Once the identification, research, bundling and triage process is done, the critical issue remains: how to value the assets under one or more scenarios. The balance of this article covers valuation and monetization.

The Valuation Process

Going-concern, bankruptcy, reorganization, liquidation and/or orderly disposal are all conditions under which a company needs to value its intellectual assets. Here we look briefly at how to value intellectual property, IT and other intangible assets in a bankruptcy environment. This article does not deal with legal issues of ownership, transferability, salability, etc. Instead, we are determining which assets have value and what that value is.

There are substantial questions surrounding intellectual property asset values: What are a company's key intangible assets or intellectual property, and what value did they bring when the organization was a viable, robust, ongoing company? In a reorganization environment, do these assets continue to have value or add value to the other operations? The most important question becomes, "How is the bankruptcy or reorganization going to affect the value of these assets?"

In broadest terms, the formula for valuation of intellectual property in a bankrupt company is essentially based on current, ongoing market value, minus a sizeable liquidation discount, minus further reductions if similar assets from another bankrupt company are on the market. Methodologies for valuing these assets have become more sophisticated over the last 20 years. Typically, when working with a bankrupt or potentially bankrupt company, we work from one of four valuation methodologies:

Replacement Value. As an alternative to the traditional cost methodology, replacement value establishes the minimum hard costs for a competitor or other acquirer to duplicate a piece of intellectual property. For example, if a mailing list from Montgomery Ward is available for purchase during its liquidation proceedings, the replacement value would be measured as the hard costs of acquiring an equivalent mailing list from Sears Roebuck or JC Penney.

Relief From Royalty Method. Often people refer to this as the "imputed-income method." In bankruptcy, it should be used primarily with those assets that have a remaining useful life, and that likely will be acquired and marketed in a relatively seamless ongoing continuum, such as a well-known trademark and brand or a well-established patent. Actual market-based royalty rates from our proprietary database, or from public sources, are applied to future projected revenues for the assets to be acquired. In the Warnaco bankruptcy and reorganization, one of the methods used to value the Speedo brand would be applying a market royalty rate to existing and projected sales levels.

Liquidation Value. In a distressed environment like bankruptcy, this methodology is often used and can be thought of as the comparable sales approach. In its simplest terms, liquidation value is the lowest price at which an asset will be pegged to ensure that there will be an acquisition. Liquidation values are very context specific and much affected by other assets that may be available. For example, in selling off the Lechter's name and trademark, liquidation value would be established based partially on the selling prices for similar retail trademarks such as Montgomery Ward, Bradlees and Service Merchandise. Liquidation value becomes that price below which we know with some certainty the price will not fall.

Technology Factor. This is used with patents and other technology-based assets where there is proven or probable commercial value to competitors. This approach is effective and often used in conjunction with liquidation values and/or comparative replacement costs. The technology factor approach establishes value by analyzing the asset along two primary dimensions: against competitive technologies and against market conditions. This analysis is then enfolded into a calculation of value based on market size and projected income stream.

A vexing issue in establishing value in bankruptcy is to ascertain liquidation value in a rapidly changing environment. Questions most often asked include, "What liquidation discount is experienced with a patent vs. a trademark vs. software?" and "How do you predict the descending value of these assets when they are faced with a liquidation scenario?" Often the question asked is, "What is the best method to establish market value and dispose of these assets in a cost-effective and time-effective manner?" We will briefly deal with the disposition or monetization issue in the final section of this article.

Some general observations: A valuation of an intangible asset or IP that is more than six months old will probably not be valid if the asset is tied up in a reorganization or liquidation. Bankruptcy proceedings can last a very long time, and the market can change dramatically for IP and intellectual assets. The combination of speed and desperation can also drive the value down dramatically. For example, liquidation discounts from market value can be as little as 30 percent and as much as 90 percent, if not more. Also, as the situation becomes more critical, the value of a given piece of intellectual property can fall by 2-5 percent a month, with some assets such as databases and mailing lists degrading faster than trademarks and brand assets.

The issues in valuing intellectual property and intangible assets continue to engender substantive and important debate among IP and bankruptcy professionals. Methodologies continue to evolve as baseline values are established both for royalty rates and sales transactions of individual pieces of IP. However, the subject of valuation of intellectual assets certainly deserves an article of its own.³

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[I]n the midst of the radical change that liquidation or bankruptcy brings on, management needs to look immediately to its intellectual property and intangible assets in order to maximize value. The company or the trustee should begin the process of monetization as soon as possible and in parallel with other liquidation activities.

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In a bankruptcy valuation of IP, one must look at similar asset sales, as well as competing bankruptcy disposals in the marketplace. Currently, there are multiple retail and retailer names and brands available, ranging from Montgomery Ward and its Northwest Blue house brand, to Lechters, Heilig-Meyers, Service Merchandise, Quality Stores and Bradlees. All of these retailers have trademark assets for sale, and therefore the value of any given asset is greatly reduced. The final thought in bankruptcy valuation is: Market value, less liquidation discount, less a further discount for competitive bankrupt asset offerings, will bring you to a realistic and attainable market value.

Securitizing and/or Monetizing IP Assets

The word "monetization" is used often in today's business vocabulary, particularly in bankruptcy. Monetization simply means identifying different methods to extract value from assets, including intellectual assets. The monetization alternatives available to the court and the estate in a bankruptcy proceeding include:

• securitization via a lien on a specific asset or bundle of assets for secured or unsecured lenders
• debtor-in-possession (DIP) financing
• take-out financing
• partial sale of non-core assets to third parties
• award of some non-core asset to creditors
• blanket sale of all intellectual assets in a stalking-horse auction or other proceeding
• the orderly disposal of these assets via the retention of a firm of IP professionals to maximize value

Securitization of the assets has become an effective strategy that often generates the most value for a company, whether in bankruptcy or not. In the past, many lenders required that all intellectual property be included with tangible assets in any financing arrangement. Today, that is less often the case, with intangibles or IP being split off into separate securitization agreements. Courts and management have awakened to the realization that these assets can generate significant new financing options. Instead of simply having the IP act as insurance above and beyond the required collateral in a tangible-asset loan, trademarks, patents and other IP can be pledged as primary sources of collateral in a wide range of situations.

Providers of DIP loans to chapter 11 companies or exit financing for companies emerging from chapter 11 often use intellectual assets as collateral. For example, Maidenform Inc., an underwear and lingerie manufacturing company, used its trademarks and future stream of royalties from those trademarks as collateral for an $83 million financing. Congress Financial supplied the loan so that the company could emerge from chapter 11. Another example is the loan secured by the Boston Market trademarks during that company's bankruptcy and subsequent liquidation. As part of the process, Heinz acquired the rights to the Boston Market brand and trademarks for use in supermarket frozen food sales, while at the same time, McDonald's Corp. continues to use the brand and trademarks on the Boston Market restaurants. Were these deals successful for the lenders? Both Heinz and McDonald's have prospered from the acquisition of the intangible assets, with Heinz Frozen Food Co. experiencing more than $125 million in sales using the Boston Market trademarks last year. Others using their intellectual assets to help securitize financing in bankruptcy and reorganization include companies as diverse as Marvel Entertainment, Barneys, Polaroid and Global Crossing. Among the financial institutions that have extended financings based, at least partially, on intellectual assets are GE Capital, CitiGroup, JP Morgan Chase, Goldman Sachs, Congress Financial, CIT, Bank of America, Bank of New York and the Blackstone Group.

The process of monetizing intellectual property can take many forms, from outright sale to secured financing, to orderly management and disposal of the assets. The disposal process, marketing and selling the assets, will be treated in a different article where we can deal with it more fully. In all monetization scenarios, however, whether for securitization or sale, several key points need to be made. First, accurate inventories of all of the components of value must be accumulated and verified. Second, shrinking or disposable assets such as databases must be transferred and maintained. Third, vendors, licensors, licensees and other stakeholders must be notified. Fourth, a sales or securitization plan must be put together, and if outright sale is elected to maximize value, then a full disposal plan must be implemented.

Conclusions

Virtually all meaningful operating companies in nearly every industry will have intangible and intellectual assets with substantial value. Using appropriate valuation methodologies and with appropriate management, the value of those assets can be maximized through sales, securitization, license or other monetization.

Though the legal issues regarding intellectual property in bankruptcy are complex, in the midst of the radical change that liquidation or bankruptcy brings on, management needs to look immediately to its intellectual property and intangible assets in order to maximize value. The company or the trustee should begin the process of monetization as soon as possible and in parallel with other liquidation activities. IP professionals need to be identified quickly, not only to value the estate's assets, but also to manage the process of disposal or monetization.

Any overview of valuation and securitization must stress thorough identification and accurate valuation, as well as looking at all of the options to monetize the assets. Intellectual and intangible assets represent the industrialized world's most undervalued group of assets. Among the trends that drive the need for accurate identification and valuation are:

• increasing globalization of the business community;
• a need to maximize return from all assets, not just tangible assets;
• expanded global use of intellectual property such as trademarks, brands and patents;
• an increasingly competitive corporate environment;
• a rising tide of product parity in terms of quality, appearance or function so that an intangible asset may be the sole differentiating factor; and
• increasing use of licensing and leveraging of IP as a strategy to build corporate value.

Most importantly, there is an increasing recognition by bankruptcy, tax and other courts of both the importance and the value of intellectual property. Similarly, secured and non-secured creditors, trustees, corporate estate management and other stakeholders all recognize the growing importance and value of IP assets.

Footnotes

¹ Weston Anson is chairman of CONSOR®, an intellectual asset consulting firm specializing in trademark, patent and copyright licensing, valuations and expert testimony. The firm is headquartered in La Jolla, Calif., and has offices in New York and London. Return to article

² Richard Schioldager is vice president of CONSOR. Return to article

³ For more information, see Parr, Russell and Smith, Gordon, Valuation of Intellectual Property and Intangible Assets, Second Edition (Wiley & Sons 1994); Anson, Weston, "Valuing Internet Brands: The Internet Value Equation," The Licensing Journal (September 2000); Anson, Weston, "Accounting and IP Valuation: New Merger Accounting Rules Impact the Value and Valuation of Trademarks and Other Intangible Assets," The Licensing Journal (March 2001); Drews, David C., "Á-Bundling We Will Go: When It Comes to Intangible Assets, the Sum Is Often Greater than Its Parts" (October 2000); Khoury, Sam, "Valuing Intellectual Properties," Profiting from Intellectual Capital (Wiley Intellectual Property Series); Anson, Weston, "Corporate Identity Value," The Licensing Journal (Spring 1999); Anson, Weston, "Establishing Market Values for Brands, Trademarks and Marketing Intangibles," Business Valuation Review (June 1996); Anson, Weston, "Identify, Value, Leverage Your Intellectual Assets," les Nouvelles, Journal of the Licensing Executives Society (March 1998); Anson, Weston, "An Approach to Brand Valuation," Trademark World (September 1990); Anson, Weston, "Building Brand Value," Licensing Today Worldwide (Autumn/Fall 1995); Anson, Weston, "Putting Market Values on Trademarks/Brands and Marketing Intangibles," Licensing Today Worldwide (Spring 1996). Return to article