AstroTurf ranks first in illustrating a particular lesson. Time can be an enemy to value when dealing with intangible assets. The interests of a lender can be very different than the interests of the borrower or owner of the intangible assets. We review what happened to a small but viable company that was the owner of a globally known name and dominant brand in artificial turf, as well as the owner of global technologies. It was an acknowledged industry leader that had surfaces for multiple sports from tennis to soccer, and for consumer home/indoor and outdoor applications. The company made the very successful AstroTurf products, as well as artificial surfaces for indoor/outdoor uses such as basketball and tennis.
Originally invented by Monsanto, the AstroTurf product was developed as a separate division and was subsequently spun off to ATI, AstroTurf Industries, Inc., in the late 1980s. This independent company was successful for some years. However, liability issues from athletic injuries as well as construction and other technical issues began to affect the business. This, combined with new competitors, new technology and improved products led to a cash flow crisis. ATI, Inc. was sold and re-immerged as SRI Sports.
The new company supported a relatively heavy and expensive debt load as a result of its reorganization but was operating successfully until a temporary cash crisis hit. After a brief period of time, senior creditors decided the company would be liquidated. Because the senior creditors held a lien against all assets, including intangible assets, everything would be disposed of. At the time the decision was made to liquidate the company and the sale process was begun, intangible asset specialists were not retained. Finally, ten days before the actual auction, the senior lender decided that they might have overlooked some value in the intangible assets. An intellectual property team was brought in to help the company and its creditors extract maximum value from the trademark, patents and other intangible assets in those last few days.
Unfortunately, insufficient thought had been given to the intangible assets and intellectual property prior to retention of the intellectual property specialists. As a consequence, the intangible assets had neither been fully identified nor broken out into sensible and valuable bundles, nor had any sort of triage or value analysis been done. Some of these bundles would have included the very valuable AstroTurf trademarks and other brand assets; as well as outbound international patent and trademark licenses using the AstroTurf name and technology. There were also in-licenses of critical technologies as well as the very valuable license to use the FIFA logo (Fédération Internationale de Football Association) on soccer field installations. Some of these asset groups and bundles are identified in Exhibit VI-1.
CHART A
Operating in South America, Asia, Europe and North America, the company had also entered the highly profitable China market via a license and supply agreement to use the AstroTurf name and technology. In essence, the intellectual property fell into four main groups: Trademarks and brand assets; patents owned by the company; in licenses from FIFA; the World Cup Soccer body; and out licenses to China.
The intellectual property team moved as quickly as possible within a 10 day time frame to identify and bundle four general areas of intangible assets into logical bundles, and then triage the assets and value many of the trademarks and some of the patents and technologies. The licenses were verified, both in licenses and out licenses, and a preliminary value for the assets was established. After reviewing the various configurations of intellectual property assets, it was determined the assets should be assembled in lots according to their business units.
The situation is shown in Exhibit VI-2. All of the foreign patents associated with the turf business should have been included in a separate lot with the unencumbered foreign turf trademarks. The license with the Chinese manufacturing company was a cash generating asset ($180,000 per year in license fees, along with material purchase requirements); this license and its associated trademarks needed to be classified as a separate lot or bundle.
CHART B
In a going concern or “NewCo” scenario, these intangible assets were worth somewhere between $15 million – $20 million to SRI or its successor. In an orderly disposal, with time to package and bundle the assets, and identify appropriate purchasers, the value in that process should have been $2 million – $5 million. In the immediate liquidation scenario, in which the secured lender put the company, the intellectual property team was unable to stop the sale process in time to maximize value from the intangible assets. As a consequence, in the final end game, less than half a million dollars was realized for these assets – despite the fact that the Chinese license alone was generating nearly $250,000 a year in cash flow.
Advertently or inadvertently, a company’s lenders can sometimes play a key role in determining the value of intangible assets during a transaction. The reason for this, more often than should be the case, is that a secured lien interest is provided to secured lenders when a company is borrowing asset secured debt. In many cases, the intangible assets are thrown in as an additional securitization for a corporate debt financing, without regard to the true underlying value of those intangible assets. AstroTurf is just such a case: Senior lenders were given a full securitized interest in all of the intangible assets without any regard or analysis as to the actual value of those assets.
The sad moral of this story is that if there had been a little forethought and another 90 days, the estate could have realized an incremental amount of money that may have been as little as $2M or as much as $15M – either way, it would have been more than $500,000 actually realized.
An unfortunate fact of too many bankruptcies is that senior secured lenders often have a blanket lien against all assets. As a consequence, they are indifferent as to whether any value is extracted from the intangible assets – often denying valuable cash flow and payouts to unsecured creditors, as happened in the case of SRI/AstroTurf.