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Seeking for Alpha and Portfolio Hedges

Daniel Casares-Lauritsen
Daniel Casares-Lauritsen
May 21st, 2020

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FLI comments on recent trends seen in Venture Capital (VC) and Corporate Venture Capital (CVC) using patents as the main source of competitive advantage in corporate portfolios specifically linked to technology firms. These principles have implications for in-house counsel, investment officers, and portfolio management.

In the semi-conductor and micro-processing industry for example, and in technology as a whole, patents are the true metric indicating the firm’s futurity of value. The means of unitary cost-per-patent optimisation through bottle-neck removals in the coordination of a sound CVC-process will yield the highest value in a complex corporate portfolio. This, in turn, will translate into an ability to “attack and defend ground” within the industry in developing barriers to entry, maintain and increase revenue, stabilize costs, reduce Beta within the volatile market, and increase the real return to shareholders outside of manipulating market capitalisation through short-term share-buy backs, or other “share-price pumping” strategies. However, although complex valuation models are regularly deployed by acquirers, the underlying strategy which determines key performance metrics, integration and absorption ability, and post-acquisition performance continues to be greatly influenced by the target’s industry, its geographical location, as well as the purpose of the investment or acquisition.

CVC and M&A strategies do appear to be generating wealth, as demonstrated by the significant link between Tobin’s Q and its cost-per-patent. There are several implications for practitioners; notably, non-sporadic CVC patterns may generate value should the process be optimized both ex ante to ex post: from target-selection to post-integration. Specifically, in following with RBV in dynamic, short life-cycle “red-ocean” industries, CVC is a means of acquiring assets which in turn yields future competitiveness. The success of such CVC investments relies on the experience of the managerial team – their personal and group attributes, the company’s CVC-specific arm – or lack thereof, the extent to which consideration to cultural and general CAGE factors is done within the balance between independence and integration, and their absorption ability. Finally, managers may be required to revisit their true sources of competitive advantages in the form of resources available and pivot their attention to generating resources for “tomorrow”. In the semi-conductor and micro processing industry, and in technology as a whole, patents are the true metric indicating the firm’s futurity of value. The means of unitary cost-per-patent optimisation through bottle-neck removals in the coordination of a sound CVC-process will yield the highest value in a complex corporate portfolio. This in turn will translate into an ability to “attack and defend ground” within the industry, maintain and increase revenue, stabilize costs, reduce Beta within the volatile market, and increase the real return to shareholders outside of manipulating market capitalisation through short-term share-buy backs, or other “share-price pumping” strategies. Although, a case-by-case assessment of the company’s market capitalisation, cost of capital structure (WACC), as well as their current subsidiary and investment portfolio is necessary to find the optimal position of RBV asset-generation strategies within the parameters offered. The implications invite a review of the efficacity of all stages of the CVC and M&A process, and the stakeholders involved, as well as assessing intra-CVC innovations through the creations of joint-ventures or alliances between various CVCs under the same parent.

In aligning the value-optimization and shareholder wealth-maximization, compliance managers and inside counsel may be required to play a more proactive role in target-selection, due-diligence, as well as the additional required steps in CVC and M&A. More importantly, a standardized and aligned approach to investments and its respective anti-silo measures are crucial to allow collaboration and interdependence between in-house legal departments and their respective outside/local counsel, and their clients' executive team.

FLI regularly advises clients on corporate portfolio management and strategy, with a key focus on global roll-outs and investments. With over 17,000 lawyers worldwide in over 100+ jurisdictions, FLI benefits its clients by providing access to local industry and jurisdictional experts

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Daniel Casares-Lauritsen

Daniel Casares-Lauritsen

Daniel has significant experience in advising clients’ corporate portfolios and optimizing multi-jurisdictional legal projects. His mission is to enhance clients’ leverage in complex multi-stakeholder deals through the power of FLI’s business model. He has also supervised the development and roll-out of FLI’s LegalTech Apps/PWAs, including FlightOne and FLInstitute in order to retain counsel in various jurisdictions, as well as promoting client co-creation and corporate compliance. These elements may include, but are not limited to: M&A, Entry/Expansions/Restructurings, VC/CVC/PE/Family Offices and Wealth Management, Compliance & Investigations, FDI, Import/Export Trade Regulations, Tax, Corporate Governance, and more.

Daniel regularly provides insights on industry trends, economic and legislative opportunities and threats, as well as strategic avenues for FLI accounts in conjunction with its subject-matter experts.

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