Australian Securities Exchange (ASX) listed company IPH Limited (ASX:IPH) has announced that its New Zealand based subsidiary AJ Park has reached an agreement to acquire fellow NZ IP firm Baldwins. The NZ$7.9 million (A$7.4 million) purchase price includes a deferred consideration of NZ$400,000, with the initial amount paid 65% in cash and 35% in new IPH shares. The deferred part of the settlement will be paid in cash. (Read the full ASX announcement here [PDF 247kB].)
The acquisition of Baldwins by AJ Park will see the Baldwins patent attorney practice merged into AJ Park IP, and Baldwins’ legal business into AJ Park’s allied law firm, AJ Park Law. As a result, the Baldwins brand will become the latest casualty of the transformation that has been ongoing in the Australian and NZ IP profession in recent years.
The official line, as provided in the IPH announcement by AJ Park’s Managing Director, Dr Andrea Dickens, is that:
Baldwins is a highly regarded firm in the New Zealand market and we believe this acquisition will give our merged businesses greater depth and provide our clients with access to a complementary team of experienced IP professionals. We look forward to welcoming the Baldwins partners and staff to AJ Park.
The reality, based on my analysis, appears to be somewhat less rosy. Both AJ Park and Baldwins have experienced reductions in professional staff numbers and patent filings in recent years, and in these respects the acquisition of Baldwins will do little more than put AJ Park back in substantially the position it was in about a decade ago. Baldwins, for its part, appears to have been sold to AJ Park on a valuation that looks relatively low compared to past acquisitions in the profession – and particularly so alongside the recent acquisition of Sydney firm Cotters by QANTM IP Limited – suggesting that the firm may not hold a particularly optimistic view of its own future as an independent entity.
Recent Performance of AJ Park and Baldwins Patent Practices
Neither AJ Park nor Baldwins are the firms they once were. The charts below show their patent filing performance over the past decade, in terms of the annual numbers of filings for which they were responsible in Australia, in NZ, and under the Patent Cooperation Treaty (PCT).
Both firms have experienced a decline in NZ patent filings, but also an increase in Australian filings, although – as the total across both jurisdictions (‘AU + NZ’ in the charts) demonstrates – gains in Australia have not been sufficient to offset the losses in NZ. AJ Park has also suffered a steady decline in PCT filings, from over 100 each year in the early part of the decade, to around 80 in recent years. (The lower number for 2019 is probably not reliable, because some PCT applications filed last year have not yet been published, and are therefore not visible in the available data.) With the exception of a couple of better years around the middle of the decade, Baldwins has typically filed around 30-40 PCT applications each year.
And it is not only patent filings that have been in decline at AJ Park and Baldwins. As the chart below demonstrates, both have seen a substantial reduction in the number of patent attorneys on their payrolls since I began keeping records in January 2018. (Disclaimer: all of my data on registered patent attorneys are based upon the register maintained by the Trans-Tasman IP Attorneys Board (TTIPAB), and are thus dependent upon individual attorneys keeping their own records current.)
As the data shows, the total number of attorneys across both firms today is only marginally greater than the number at AJ Park alone just two-and-a-half years ago. The acquisition of Baldwins will therefore place AJ Park, in terms of its patent attorney head count, roughly back where it was at the start of 2018.
Also, as it happens, the total number of combined Australian and NZ patent filings by both firms in 2019, and the total number of PCT filings in 2018, are both just a little higher than AJ Park’s numbers alone back in 2010.
It therefore looks very much as though the acquisition of Baldwins is part of a strategy to arrest the decline at AJ Park. Although with both firms showing similar relative performance in recent years, on the metrics represented in the charts above, it will take more than merely combining their practices to achieve any gains. Somehow they will also have to reverse the trends of the past decade.
Clearance by the NZ Competition Regulator
The IPH announcement notes that ‘[c]ompletion of the acquisition is subject to a number of conditions including obtaining clearance from the New Zealand Commerce Commission’, which is responsible for regulating competition in NZ. The Australian regulator – the Australian Competition and Consumer Commission (ACCC) – has taken little interest in mergers and acquisitions at the level of individual firms (such as the merging of FAK Callinans and Cullens into Spruson & Ferguson, or the more recent integration of Watermark into Griffith Hack), although it did conduct a public review into mergers at the level of the publicly listed holding companies that own multiple firms. However, the New Zealand market is smaller, and has fewer competing firms than Australia, so it is possible that the NZ regulator will take a different view.
Nonetheless, there appears to be no good reason why the NZ Commerce Commission should not clear the acquisition of Baldwins by AJ Park. If anything, the net effect of recent upheavals in the NZ IP profession has been to increase, rather than decrease, competition. In January of 2018, there were 155 registered patent attorneys across 43 distinct firms (including solo practices) providing services in NZ. As of June 2020, there are 150 registered attorneys providing services from 50 distinct firms. Of the firms operating today, 17 comprise two or more patent attorneys, compared to just 13 with multiple practitioners at the beginning of 2018.
The removal of Baldwins from the market will thus still leave NZ innovators with more local firms to choose from than they had two-and-a-half years ago. Furthermore, clients worldwide requiring patent attorneys to assist with filing, prosecution, advice and other services have the choice of trans-Tasman attorneys qualified and registered to practice in Australia and New Zealand under the single regulatory system that has existed since 24 February 2017. Across both countries, there are currently 772 registered patent attorneys operating from 236 distinct firms, of which 75 are practices with two or more patent attorneys.
How Does the Baldwins Valuation Stack Up?
Last month, QANTM IP Limited (ASX:QIP) announced its acquisition of Cotters Patent & Trade Mark Attorneys for A$6.3 million. Cotters has (currently) eight registered patent attorneys. The firm filed a total of 311 Australian and NZ patent applications in 2019 (291 in Australia, 20 in NZ), and just 10 PCT applications in 2018. Furthermore, in the period prior to its acquisition Cotters lost around a third of the active cases in its care to other firms.
Baldwins, by comparison, has 14 patent attorneys. It filed a total of 730 Australian and NZ applications in 2019, and 32 PCT applications in 2018. These numbers look significantly better than Cotters’, and yet the price for Baldwins’ acquisition is just 17% higher at A$7.4 million. According to IPH’s ASX announcement, Baldwins’ EBITDA (i.e. earnings before interest, taxes, depreciation, and amortisation) for the 2020 financial year (after normalisation adjustments for partner salaries) was approximately NZ$2 million (A$1.9 million). This gives an enterprise value (EV)/EBITDA ratio of just 3.9, which seems low. (By way of comparison, when IPH acquired AJ Park in October 2017 [PDF 229kB], it did so for around A$60.9 million, at an EV/EBITDA ratio of 7.5, which is far more typical of such acquisitions.)
I am obviously not privy to any of the thinking or calculations behind these valuations, however by any measure Baldwins looks to have been a bargain compared to past acquisitions. None of the above analysis captures Baldwins’ performance outside of its patent practice, including that of its associated legal arm, which one would think could only add value to the acquisition. in comparison, it increasingly appears that QANTM may have paid above the odds for Cotters. Of course, the two firms are not in the same position – indeed, they are not even in the same country! And while Baldwins has been in decline for most of the past decade, Cotters (its recent loss of a major client notwithstanding) has been generally ascendant over the same period, so perhaps that goes some way towards explaining the difference in valuation.
Another possible factor is that QANTM, being very much the smaller player in the listed IP services marketplace, may have felt under some pressure to make an acquisition, whereas IPH can afford to bide its time and be more selective.
Conclusion – Another Venerable Brand Bites the Dust
There will doubtless be some sadness in NZ at the loss of the Baldwins name from the IP services market. The firm traces its history back to 1896, when Ernest Smith Baldwin – an engineer who had emigrated from England to NZ 10 years previously – qualified as a patent attorney and established the partnership of Hughes, Rayward and Baldwin together with his brother-in-law, W Ernest Hughes, and Henry Hampton Rayward. A firm with ‘Baldwin’ in its name has existed in NZ – and, for a time, also in Australia – ever since.
As I noted upon the passing of Watermark – one of the few firms to claim a longer heritage than Baldwins – these events provide a timely reminder that nothing lasts forever, and change is inevitable and unavoidable. The market for IP services in Australia and NZ is challenging, and neither AJ Park nor Baldwins has necessarily been weathering the conditions well over the past few years. Doubtless IPH will be hoping that an enlarged AJ Park can achieve some economies of scale, and additional market traction, to reverse the recent negative trends.
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