Intellectual Property Rights, Merger And Acquisition Strategy, And Transaction Costs

Do the transaction costs of allocating intellectual property rights in collaborative R&D influence merger and acquisition strategy? When it is difficult to write intellectual property agreements, does it makes sense for managers to turn to a merger or acquisition as the solution? The answers have consequences for how business strategy and legal strategy interact.

What Are Transaction Costs?

Transaction costs are costs incurred in participating in economic exchanges through the market, as opposed to doing an activity within a single firm. An example of a transaction costs is negotiating and writing a contract to allocate intellectual property rights of a R&D collaboration between two companies. See Ronald Coase's classic 1937 paper The Nature of the Firm for the original statement of transaction cost analysis. (Note that Coase did not use the term transaction costs. Oliver Williamson, the 2009 Nobel Co-Laureate in Economics, first used that term.)

Case Study: The Transaction Costs of Allocating Intellectual Property Rights In The Roche And Genentech Merger

In March 2009, Roche completed its acquisition of Genentech by purchasing the remaining 44% of Genentech stock it did not own. Among other things, the merger will facilitate collaboration between Roche and Genentech in developing personalized medicine. Roche is a leader in diagnostics -- technologies doctors use to determine which patients will respond well to which drugs. Genentech pioneered diagnostics with Herceptin, a breast cancer drug that contains a genetic test to identify suitable patients for the treatment.

This excerpt from a Business Week article summarizes the management benefits of eliminating the transaction costs of allocating intellectual property rights:

When they were separate, Genentech and Roche rarely tried to co-develop diagnostics, because it took too long to work out patent rights and other legal logistics. "Now there's no intellectual-property discussion, there's no negotiation—we're the same!" Scheller says. "You wouldn't believe how much easier it is."

Three points regarding intellectual property and merger strategy immediately come out.

1. The transaction costs associated with dividing intellectual property rights deterred collaborative work between the companies.
2. The acquisition eliminated the transaction costs, thereby facilitating collaboration.
3. The merger aligned incentives for collaboration and innovation.

Discussion

The article raises questions about the relationship between the transaction costs of intellectual property agreements and merger and acquisition strategy. Two questions deserve further analysis:

1. What causes transaction cost failures in the intellectual property context?

2. When does transaction cost failure influence merger and acquisition strategy?

The takeaway is that the economic analysis of intellectual property agreements informs important business activities, including collaboration, innovation, management, and mergers and acquisitions. Using transaction cost analysis to analyze intellectual property agreements and business activities is a prime example of how Legally Informed Strategy adds value to clients. By understanding how transaction costs connect to a company's activities, business and intellectual property attorneys can write contracts that better meet their clients' priorities.

Douglas Y. Park
Twitter: @DougYPark

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