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Technology Potency: Patent Citation Refinements for Merger and Acquisition or Joint Venture Analysis

By Erin-Michael Gill
May 26, 2005

The real value of a possible acquisition or joint venture partner is often in the potential of their next invention. As advisers, patent managers, and intellectual asset strategists, it is critical that the methodology and tools used for assessing patent quality accurately reflect a would-be ally's technological potency.

Recent studies have drawn positive correlations between the increasing or decreasing quality of a company's patent estate and its stock market value. Lanjouw and Schankerman, Economic Journal, 114 (April), pp. 441-465. Patent quality, in the broadest sense, is most often tied to the frequency a patent is cited by other patents. Hall, Jaffe, and Trajtenberg, Royal Journal of Economics, Jan. 2004. One study correlating market value with forward citations found that patents valued at $1 million received an average of about eight citations, while patents valued at $100 million received an average of about 14. Harhoff, Narin, Scherer, and Vopel, Review of Economics & Statistics, Vol. 81, Issue 3, August 1999, p. 511.

The underlying assumption of citation analysis is that citations reflect the influence a base patent has had on later developments. Gay and Le Bas, Econ. Innov. New Techn., Vol. 14(5), July 2005, pp. 333-338. This would certainly be true in the case of patents describing breakthroughs or a stepchange innovation. However, it is important when identifying a technologically brilliant partner to discern whether its patents are highly cited due to stepchange technology innovations or merely for purposes of completeness in succeeding applications.

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