Research Brief: Innovation as a Bankruptcy Lifeline
What Did the Study Look At?
Intellectual property is a valuable asset for many firms under bankruptcy protection. Canada has a particularly painful memory in this regard: in 2011, the once-powerhouse telecommunications firm Northern Telecom auctioned off its 6,000 patents for a record $4.5 billion, the biggest sale of technology patents in history. For Nortel, the sale was at the end of a three-year process of winding down the firm. Generally, however, IP is put in play early in the bankruptcy process as firms try to restructure. There are two views of why companies in such positions sell innovation: one, to unleash the full value of underexploited assets; or two, to raise financing through asset sales. Researchers behind this study aim to “establish the facts about selling innovation in bankruptcy, and more importantly, to examine the economic motivation behind such activities.” They say it is the ﬁrst empirical study of innovation reallocation during corporate bankruptcy.
How Was the Study Designed?
The researchers collected detailed information on patent holdings and the entire process of patent sales conducted by bankrupt ﬁrms. That involved patent reallocations for all U.S. public ﬁrms that ﬁled for Chapter 11 bankruptcy from 1981 to 2012 as well as information from the United States Patent and Trademark Oﬃce relating to each patent’s proﬁle, utilization, and transaction. From bankruptcy court records, researchers harvested asset sale motions, asset sale orders, and master purchase agreements.
What Did the Study Find?
- Bankrupt firms sell patents that are more liquid over those that are underexploited or peripheral. This is driven by ﬁrms that suﬀer ﬁnancial distress, experience industry-wide distress, and have no access to external ﬁnancing.
- Bankrupt ﬁrms reallocate valuable patents that are less likely to be sold by healthy ﬁrms or by ﬁrms undergoing asset restructuring without ﬁnancing needs.
- They sell a disproportionately large quantity of patents in the early period of bankruptcy restructuring, before other assets. On average, bankrupt firms sell 18 percent of their patent portfolios.
- Bankrupt ﬁrms selling innovation tend to retain inventors and continue to cite the sold patents after the sale.
What Do I Need To Know?
It’s clear from this study that firms in bankruptcy protection sell strategically significant intellectual property to quickly raise financing rather than as a means to restructure assets. It reflects their desire to avoid a prolonged restructuring process. As the researchers note, “ﬁrms may lose the property rights of innovation that they deem important to the ﬁrm. However, ﬁrms try to minimize the human capital costs of bankruptcy by retaining inventors as the property rights of innovation are transferred.”
The researchers say that there are several reasons to believe that innovation “is a unique asset class that best serves the ﬁnancing role.” For one thing, selling IP involves minimal adjustment of physical assets or human resources, thereby keeping bankruptcy-related costs to a minimum. For another, innovations in production are “mutually nonexclusive among ﬁrms, which means that reallocating innovation does not necessarily mandate the termination of related production in the selling ﬁrm.”
Title: Selling innovation in bankruptcy
Authors: Song Ma (Yale School of Management), Joy Tianjiao Tong (Fuqua School of Business), Wei Wang (Smith School of Business)
Published: Working paper available for download
— Alan Morantz