The IP formula of a merger

In my current round of discussions with a client, he asked me to formulate not only a legal document but also a mathematical prescription to explain his particular boss the importance of measuring their intellectual assets. I hope it helps a few more who read it here. When two firms come together to form a single entity with special focus on merging their assets and liabilities – a business merger is born. If the two entities are equal (in their non-IP value/worth), mostly, an exchange of stocks will take place. The acquirer will issue new shares to the shareholders of the target firm at a ratio. The target’s shares get replaced by the acquirer’s shares. The combined values of the two firms after the merger should be mathematically equal to their values had they been combined before the merger. Now, since we know that because the ratio of the exchange of shares will not be in harmony (the target’s shareholders are paid premiums) with the value of the firms with respect to each other, the individual values of the firms will be different than their values before the merger. One major spin off which emerge out of a merger, I call the ‘BIPE (The benefit of IP exchange). It is the total of the benefits the new entity gains post merger when the intellectual assets have been combined. Abandoning the other ‘share value effecting’ aspects of such a transaction, lets focus on the BIPE for the purposes of this brief. The pre merger price (in relative values) of the share for all the shareholders will always be equal to the post merger prices, if the following can be equated by putting a certain value for the BIPE –

Post merger value of a share = (combined premerger value + BIPE) / post merger no. of shares = post merger value of shares.

If the firms can’t meet the BIPE value so as to make the equations work, then it is indeed a bad merger.