The 2005 case involving New York-based Collins & Aikman operations worldwide provides an instructive case study on the differences in how intangible assets are treated in different geographies.
Founded in 1843, Collins & Aikman provides automotive interior products to automakers around the world. In this case, Collins & Aikman found themselves in financial distress, needed to unlock significant value from its existing assets, and entered into Chapter 11 reorganization. Their tangible assets in the United States were being utilized to the fullest extent in light of the then-current situation in the automobile manufacturing industry. However, their European operations, specifically the intangible assets utilized therein, were not delivering value up to their full potential. It was determined that the European operations could bring greater current value to the overall operation via a sale.
Collins & Aikman wanted to sell their nine European companies and the more than 25 related factory operations at one time and relatively quickly – both to preserve assets and to accommodate a single serious bidder. There is important background to consider here: This was a troubled industry (automotive parts and components), with few viable companies and even fewer viable buyers for the nine geographically dispersed European operating companies.
Intangible assets played a critical role. How could the European operations be sold without the intellectual property and accompanying intangible assets of Collins & Aikman? C&A North America claimed ownership of the patents and other technology. Further, C&A North America was in the midst of selling several of its U.S. factories and assets. Consequently, the intangible assets became a pivotal issue. Without a successful deal for the intangible assets to be used or sold in Europe, it is questionable that the European operations could have been sold to anyone, and in all likelihood instead would have been liquidated. At that point in time, the key questions to be faced were the following:
- What intangible assets were being used by European operations (patents, trademarks, technical know-how, trade secrets, IT, etc.)?
- Which entity or entities owned the patents, trademarks, and other intangible assets?
- What trade secrets were being used in the European operations? Where were those trade secrets originally developed, and therefore, who had control of the trade secrets and technical know-how?
- How should the intangible assets be bundled for use by the various European operations in separate geographies?
- How should the assets be valued? By asset class? By country? By product line?
- Once valued, how should terms be set for the sale or license to use the assets by the European operations from C&A North America?
- How could C&A prevent competitors from getting control of critical C&A intellectual property?
- Finally, how quickly could the deal be completed? As mentioned, time was of the essence in consummating a deal for the European operations.
All of these questions were being juggled simultaneously by attorneys for C&A and by the group of intangible asset professionals – working in two distinctly different venues, with two distinctly different sets of laws governing the use and ownership of intellectual property. The tasks facing the intangible assets/IP team were basically threefold:
- First, to conduct an in-depth audit of the IP and intangibles owned and/or controlled by C&A North America, which in turn were being used within European operations.
- Second, to determine a fair market value for the assets and a disposition plan.
- Third, to provide a fairness opinion as to a negotiated deal for the transfer and license of the IP rights from North America to the European operations.
After a very intense period of due diligence, the intangible assets were categorized and organized as follows:
- More than 200 registered patents and published patent applications were identified as being in use in Europe. There were some questions of where ownership resided.
- The corporate name and other trademarks and goodwill of C&A Europe were identified and determined to be of relatively minor importance.
- Finally, trade secrets, technical know-how and IT were identified, and more than fifty specific trade secrets were identified and valued.
As to the patented technology developed by C&A and used in Europe, there were two main proprietary patented fields covering product design features, as well as patented manufacturing processes. The product designs and the manufacturing processes were valued separately, and value was allocated to the various European operations based on sales of products featuring the patented technology.
The trade secrets and know-how included a broad range of original concepts and ideas, including formulae, manufacturing equipment settings, process software, and other systemic inputs. These trade secrets and technical know-how elements were encompassed in a few “knowledge systems” developed by C&A North America and disseminated for use by the European operations.
The trademarks and goodwill had relatively little value, especially to a potential buyer. This is because they would only be given permission to use the trademarks during the initial transition period.
The final task was to establish fair market value and to assist in the negotiation, sale, and license of the assets to a purchaser of all of the European operations. Fair market value in this case was orderly disposal in an ongoing operation – with no real strategic alternatives or purchasers in the offing. Therefore, fair market value in this case was not going concern value, nor was it distressed liquidation value. Fair market value was, in fact, defined as a fair price between the two transactors under the reorganization circumstances that were in existence at the time.
As discussed earlier in this handbook, the value of an intangible asset in a distressed environment typically will be reduced substantially and can be anywhere from as little as 20% to as much as 90% of the value of the same asset in a context free from financial distress. This case proved to be no different. Indeed, the value for the entire family of intangible assets and IP being used in Europe turned out to be within a range of roughly 50% to 60% of going concern value.[1] So, instead of the $50 million that going concern value would represent, a deal was struck for approximately $25 million. [2]
There was substantial negotiation between the two venues not only over price, but over the terms and conditions under which the assets would be transferred: Would an outright sale take place? A short-term license? A fully paid-up license? Or some other approach? After intense negotiation between the two venues and their advisors, the assets changed hands under the terms of a very specific sale and license agreement.
In this particular case, a successful resolution and a fair market price were established for the intangible assets, and a successful transaction took place.
There are some interesting lessons to be learned from the C&A case:
- The fact of financial distress in an industry can drastically impact both the form and value of intangible asset sales;
- Conflicts between two venues dealing with assets of related companies make the management of the assets in each venue more complicated; and
- The terms and laws under which intellectual property is owned and controlled can, and do, vary substantially from one venue to the other.
Finally, two things are paramount: First, identifying the ownership and then bundling the assets appropriately has critical consequences in a multi-venue environment such as this. Second, the context of the valuation and sale process is, as always, critically important.
[1] Percentages altered to preserve confidentiality.
[2] Dollar amounts altered for reasons of confidentiality.