Technology assets have become a fundamental pillar for businesses in the fast-changing global economy.
Technology companies command a dominant share in terms of capitalization in global financial markets. Furthermore, with technology influencing every aspect of consumer behavior and diverse businesses, the overall share of intangible assets in market capitalization has increased significantly.
Source: Thompson Reuters, Financial Statements for S&P 500
Investment activity in technology startups rose globally over the last decade. Venture capital and private equity firms alike are investing in new tech-based platforms. However, the business valuation of these assets is complex and requires expertise.
Source: Pitchbook. Investments in Information Technology vertical over the last 10 years
Business valuation of technology assets has become more challenging with time.
Financial reporting standards have evolved globally in the past decade, incorporating the recognition of intangible assets in business combination situations. However, financial reporting-based business valuations (which are post-deal exercises) are often not particularly insightful for investors.
While technology assets are the key driver in these M&A deals, many companies have a tough time estimating their worth and these assets are probably the last on the list to get valued. Moreover, it is not uncommon in M&A deals that time constraints, coupled with the poor focus on technological assets, create serious issues related to post-deal write-downs, share price volatility and value destruction.
Business valuation frameworks for technology assets need to evolve to address key issues from the perspective of market opportunity, technology strength, commercialization strategy and assessment of eventual financial impact.
A robust business valuation framework must encompass a thorough evaluation of all risk/reward elements.
Business valuation often requires a multi-disciplinary approach. This is important to address key issues, ranging from a focus on technology strength to rapidly evolving market dynamics to the company’s business strategy.
Leveraging our experience of helping hundreds of global clients by delivering actionable opinions on the value of their IP assets across technology domains for diverse transactions, we, at Aranca, have developed a proprietary framework.
The process of valuing technology assets is complex, requiring expert knowledge and entailing in-depth analysis. At Aranca, we do a deep dive study and cover IP analysis, market analysis, business strategy & financial review, and valuation.
While pursuing M&A or licensing deals, it is best to start focusing on IP due diligence as early into the transaction process as possible. It should address ownership, enforceability issues as well as include preliminary analyses for valuation of technology and other IP assets. This will enable companies to overcome time-related challenges and turn valuation into a value-enhancing process from a mere compliance checkmark.