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Process and framework for
technology valuation
How to determine if acquisition of a
technology will create value for you and how much?
| "We are one of the largest manufacturers of in the world of a high-value consumer product
(but a very small market size) employing a range of technologies and know-how. We have now been offered a new process technology that its owners claim will significantly improve our current operations and we are interested in estimating the value of this technology to us so that we can have better information prior to commencing negotiations on the price. What process should we use?" |
The basis of
competition in the future will be determined by the portfolio of
technologies that you have. Thus, not only is a good idea to
constantly look out for accessing and incorporating new
technologies, you must also develop new technologies
in-house. When working with other companies to access their
technologies, it is common for sellers to hype the potential (and
the price) and that is why an objective assessment is
critical. Some of the key questions that you need to ask are:
- What is the potential value of this technology in your operations and as a source of additional revenue through licensing to others in future, if you decide to pursue that option?
- What is the best option for you to access this technology? For example, acquisition, license, joint venture, or any others.
- What are the possible payment options and which ones create the highest value for you?
You might want to
answer these questions along two dimensions.
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When
you want to access a new technology and pay for it, you need
to look at the potential for this technology to increase your
competitiveness in the marketplace. Whether it does so
by increasing your commercial, price, or intellectual property
advantage, or it protects you against commoditization for a
few years, it is best to document and quantify that before you
make any decisions.
The
other part of the same dimension is how this technology helps
you in growing strategically. Are you able to enter new
markets easily? Can you manufacture at a lower cost so that
you can start to serve new consumers in emerging economies of
Eastern Europe, China, and
India? Can you extend the
life of the product by a few years in your existing markets? |
| The second
dimension of technology evaluation is assessment of its potential in
making fundamental changes in your business. The first part of
this analysis involves the utility of this technology to your
business. Since licensing is an option that is increasingly being
considered by most technology owners, it will be useful to also assess if
other firms (your competitors included) might be able to use this
technology. Licensing can provide another stream of revenue as
many companies, large and small, are finding out.
In addition to this, you
also need to understand how long this technology will create value for
you and what the associated costs are. |
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Answering these questions will enable you to objectively analyze if this technology makes sense for you and at what price. The approach can be simple and straightforward if you follow a framework along the following lines:
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Conduct an objective, fact-based analysis of the value of new technology in your operations and out-licensing in future. To do this you must rely on facts obtained from external agencies rather than relying either on the vendor or your own staff. Input from both will be valuable but what you really need are hard facts.
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Evaluate the value to you of each option to access this technology. For instance, how much value will be created if you were to buy this technology outright? What can you do with it? Similarly, you can do this calculation for other scenarios like licensing, joint venture, etc.
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Finally, identify the highest-value payment option. Is a one-time payment a high-value
option for you too because the chances are that the seller
will try to push for this option? What happens if the technology does not deliver the results promised by the vendor now? Or should you buy the rights to the technology, pay yearly fee, with the option to buy the
technology at a later date? Such scenario analysis will allow you to minimize your risk and still have access to the technology.
Recommended article: How
to pursue products with short life cycles?
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Questions,
comments, feedback, and suggestions
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