The Global Economic Impact of Private Equity Report 2008 - World ...

alternative names associated with the firms, add‐onacquisitions and exits, which are useful for searching patentrecords. We also use a wide variety of databases, includingthose from Capital IQ and SDC and compilations of newsstories, to identify the characteristics of the transactionsand the nature of the exits from the investment.B. Capturing patent dataWe then match the names of the private equity portfolio firmsto those of the US Patent and Trademark Office (USPTO).To do this, we employ the Harvard Business School (HBS)patent database, which includes all electronic records of theUSPTO up to May 2007. Since the names of assignees inthe original USPTO database are riddled with misspellingsand inconsistencies, the names in the HBS patent databasehave been researched and consolidated.We then search the database for each of the bought‐outfirms, using both the original name and any alternative namesfrom Dealogic. We examine firms based both in the US andabroad: patent protection is nation‐specific, so non‐US firmswith important discoveries will apply for patent protection inthe US.We only identify cases where we were confident that thename and geographic location of the firms matched. (Thepatent data have information on the location of both theinventors and the entity to which the firm was assigned atthe time the patent issues, which is typically the inventor’semployer.) In many cases, we encounter ambiguoussituations where the firm names are similar, but not exact,or where the location of the patentee differs from the recordsof Capital IQ. In these cases, we research the potentialmatches, using historical editions of the Directory ofCorporate Affiliations, Hoover’s Directory, the Factivadatabase of news stories and web searches. Only whenwe are confident of the match is it included in the sample.In all, we identify 496 entities with at least one ultimatelysuccessful patent application from the calendar yearstarting three years before to the calendar year startingfive years after the year of the private equity investment. 3We believe the seemingly small number of patentees reflectstwo considerations. First, in many instances, the privateequity‐backed firms are “old economy” ones that rely ontrade secrets or branding to protect intellectual property.Second, the acceleration of private equity activity means thatmany of the transactions were undertaken in 2004 and 2005.In cases of divisional buyouts where new firms were created,we have only a short period to observe patenting activity.Even if these new entities have filed patents, they are unlikelyto have issued by May 2007. (We are only examining patentapplications that are successful, that is, have been grantedby the USPTO.)One challenge is that, of the 8,938 patents we identify,more than one‐quarter (2,440) are assigned to a single firm,Seagate Technologies. The next largest patentee accountsfor under 5% of the sample. Because Seagate woulddominate the sample, we do not include it in the analyses.Thus, our sample consists of 6,398 patents from 495 firms.Table 1 and Figure 1 summarize the data. In Panel A, wesummarize the years of the private equity investments andof the exits from these investments. (Many investmentsremain in progress, and we are not able to determine theyear of all exits, especially those involving private sales.)The transactions are concentrated in the second half of the1990s and the first half of the 2000s. This pattern reflectsboth the increased volume of private equity investmentsduring these years and the growing representation oftechnology firms (which are more likely to have patents)among more recent investments (Strömberg 2008). Theabsence of transactions from 2006 and 2007 reflects theconstruction of the sample, as described above. Exits, notsurprisingly, lag the transactions by several years.Panel B shows the transactions are a mixture of types.Most common are buyouts of corporate divisions, followedby private‐to‐private (investments in unquoted entities),secondary (that is, groups already with a private equityinvestor) and public‐to‐private deals. These patterns mirrorprivate equity investments more generally, as does thepreponderance of exits by trade sale revealed in Panel C(Strömberg 2008).Panel D reveals the industry composition of the firmsand patents in the sample. (All patents in this tabulationare assigned to the primary industry of the parent: in lateranalyses, we use the patent‐specific information revealedin its classification by the USPTO.) No single industrydominates the population, which consists of a mixture of“old” (e.g. auto parts and building products) and “new”(for instance, application software and healthcareequipment) economy sectors.Panel E displays the timing of the patent applications andawards in the sample. The application dates of the awardsin the sample extend from 1983 (three years before the firstprivate equity investment) to 2006. (No applications from2007 appear because we are only examining successfulapplications that have already been granted by the USPTO.)The number of grants mirrors the pattern of applications witha two‐to‐three year lag. The number of awards falls sharplyin 2007, because we only identify grants up to May 2007.The growth in private equity investments and patent grantsis also captured in Figure 1.Panel F, which shows the distribution of patenting relativeto the private equity investments, illustrates one of the3We follow the literature in focusing only on standard, or utility, patents, rather than other awards, such as design or reissue awards. Utility patentsrepresent about 99% of all awards (Jaffe and Trajtenberg 2002).The Global Economic Impact of Private Equity Report 2008 Large-sample studies: Long-run investment 29