by Alan Cohen — TheDeal.com

What do Liza Minnelli, Donald Trump and Spic And Span have in common? It would seem to take a vivid - and perhaps not too healthy - imagination to find out. But the answer is surprisingly mundane: They've all been in multiple relationships over the years. Maybe Spic And Span doesn't have Hollywood glamour going for it, but, like a lot of trusted brands, it's been a hot commodity in M&A circles. Indeed, brands are being bought and sold in growing numbers these days. Yet like any celebrity marriage, getting hitched to a household name can be a complicated process fraught with pitfalls.

With brand acquisitions, much of the grief can come from the very thing that creates much of the value: the brand's intellectual property. To be sure, IP isn't the sexiest part of brand M&A, and all too often it's put on the back burner or not completely thought through. That can come back to haunt a dealmaker. For to a large degree, a brand is its IP. It is the trademarks that protect the brand's name and symbolize the goodwill associated with it; the patents that cover everything from manufacturing processes to packaging; the copyrights that cover a brand's advertising. It is trade secrets, domain names and licensing agreements. "There are a lot of things that can float under the radar," says Tim Humphrey, the chief trademark lawyer for Clorox Co., which has been involved in multiple brand acquisitions, ranging from its 1969 acquisition of Liquid-Plumr drain opener to its 2004 sale of its Soft Scrub cleanser and Combat insecticide brands to Henkel KGaA. "You need to ask questions, do your due diligence and make sure you have a plan and a timeline to avoid surprises after the closing date."

While unloading a moneymaking brand with name recognition and a loyal following may seem harebrained, it can be quite strategic. "A lot of large consumer companies are choosing to divest brands because the brands are not global, or sufficiently large, or core to their business," says Vincent Hemmer, a principal with GTCR Golder Rauner LLC, a private equity firm in Chicago that is actively pursuing brand acquisitions through two of its portfolio companies, Fairmount Food Group LLC and Prestige Brands Inc. "Pharmaceutical companies, for example, want to focus on their prescription drugs, so they'll sell their consumer brands and try to do a few things well instead of being everything to everyone," Hemmer says. "Yet there is still a lot of value in these brands." Of the 20-plus brands owned by Prestige - including well-known lines such as Spic And Span, Chloraseptic sore-throat relief products, Compound W wart removers and Comet household cleaner (see box) - 10 do more than $10 million a year in business, and the company as a whole had revenue of $300 million in 2004.

Prestige has also seen how IP issues can impact deals - not just before the deal closes but well after, too. Its most recent acquisition - a $50 million deal for Little Remedies, a line of pediatric healthcare products, in October 2004 - now has Prestige scrambling to register trademarks in key markets outside the U.S., something it had not had to do with other acquisitions. "Little Remedies had only been sold in the U.S., and its owner was an entrepreneur who only registered the trademarks in the U.S.," says Peter Mann, the president and CEO of Prestige Brands. "The bigger companies are better about registering marks around the world. They make a practice of getting trademarks for their major brands even before they go into those markets." For a buyer, even dormant trademarks can be critical, allowing it to keep competitors out of markets it may want to enter at some point, or to license rights in markets it has no plans to pursue. Even though Spic And Span was only sold in the U.S., the bundle of trademarks that came over in the deal included rights in Italy, where the brand had once been sold. "I didn't think much about them," Mann says. "But six months after the deal, I get a call from an Italian company interested in licensing the Spic And Span trademark and relaunching the brand." Mann, who had no intention of entering the Italian market, sold the rights for Italy for $3 million. "It was like money that fell into our lap," he says.

Yet just as IP rights can sweeten a deal, they can kill it as well. This is a lesson Prestige learned last year when it looked into purchasing a major consumer brand - Mann won't say which - and then looked a little closer at the brand's trademark rights. "We did a search and found that there were 20 other trademarks that were very close to it - some, in fact, were the same trademarks but in different fields," Mann says. Fearing that these other marks might cloud the legal landscape and crowd the market, Prestige walked away from the deal.

There are, of course, basic steps dealmakers can take to avoid IP headaches. These are Due Diligence 101: do a trademark search to make sure you have registrations for the marks you think are important in the countries you think are important (unlike the U.S., most countries grant trademark rights based on registration, not use). "Big companies are pretty systematic when it comes to protecting their brands, and they'll normally have a database, and records, of their trademarks that you'll want to look at," says Russell Falconer, a trademark lawyer at Baker Botts LLP in New York. As a buyer, you'll want to make sure you're getting all rights to all related names, as well as logos, slogans, patents, trade dress (the look and feel associated with a brand), advertising copyrights and trade secrets. You'll also want representations and warranties from the seller that you're getting all domestic and foreign rights and alerting you to any third-party IP disputes that may be brewing.

Where things get tricky - and where buyers can easily drop the ball - is the timing of due diligence. Red flags that pop up while vetting IP rights, such as threatened litigation or the existence of similar trademarks, will affect the value of the IP and, because the brand is so closely tied to IP, the deal value. That makes it all the more important to find the flags early. "You need to do the IP due diligence at the beginning of the process, not at the end," Falconer says. "If you wait too long, the price gets hard-wired. Then you find out that you've got serious trademark disputes in four or five jurisdictions and suddenly you don't want to spend so much money. It can make the M&A process turn a little ugly."

There are a host of seemingly trivial IP issues that can have dire consequences for a brand's new owner. Even something as simple as the name on a trademark registration can prove disastrous if not considered early in the process. "It's a common problem," Clorox's Humphrey says. Consider this scenario. Long before the sale of a brand, the previous owner changes its name but doesn't update the trademark registrations, figuring that it can save filing and attorney fees by waiting until the next renewal. But before that happens, the brand is sold. Now the new owner has to file - and pay for - all of the name changes. Worse, while it is waiting the many months it can take for paperwork to go through, the new owner may not be able to address trademark problems because it's not the owner of record. "It's an issue that is always swept under the rug [during the deal] because there is always a bigger issue popping up," Humphrey says. "But you need to take care of it or it can be costly. That means going through the seller's trademark database early in the M&A process and finding out what registrations need to be changed, when they are going to be changed and who is going to pay for it."

Run-up to a brand IPO

During nine months in 2004, the private-equity firm GTCR Golder Rauner acquired four companies that collectively owned more than a dozen brands. It combined its purchases under the name Prestige Brands, adopted from one of its acquisitions, and took the company public in February 2005, raising $448 million. The company's brand buying is part of a larger trend in which companies are acquiring brands as pathways to new markets - witness P&G's recent $57 billion acquisition of the Gillette Co. Here's a breakdown of GTCR's buying spree.

February - New-Skin liquid bandages, Cutex nail polish removers, Compound W, Denorex dandruff shampoos, Dermoplast pain-relieving spray - $240

March - Spic and Span

April - Comet, Clear Eyes, Murine, Chloraseptic, Prell est. - 500+

October - Little Noses nasal products, Little Tummys digestive products, Little Colds, Little Remedies New Parents Survival Kit - 49

Source: Prestige Brands

An even more troubling scenario: The seller itself bought the brand from a company now out of business that never filed the name changes. "Two months after the deal closes, you may have to renew a trademark, only to realize that you need to do a name change first because the old company is still the owner of record," Humphrey says. "But that company doesn't exist and you can't find someone to sign the name change, which delays the recording until the renewal time has lapsed. It's very possible to lose the trademark registration." Pitfalls such as this make it critical for buyers to get access to trademark records kept by the seller and create a plan for squaring away all of the nitty-gritty matters that can cause trouble down the line.

It's also critical to create a timeline of important, post-close events regarding IP rights - such as trademark renewals. "If you're purchasing a significant IP portfolio, you want the seller to give you a road map of the upcoming milestones and actions, so you can step right in," says Daryn Grossman, a partner in the transactional IP practice at Proskauer Rose LLP in New York.

Licenses can pose tricky IP issues, too. While the seller may own some of the patents needed to make its products, it may be licensing others. Buyers need to find these agreements, read them and figure out how they may impact the deal. Does the license call for terms that would make it hard for the buyer to do business? Savvy buyers will find out.

Trade secrets are particularly hard to vet before closing. "The seller will want to restrict knowledge of their trade secrets, and you may just get a broad look at it," Grossman says. That means that buyers need not only to lock up the IP but also the people essential for exploiting that IP. "You've got to go beyond due diligence, to talk to the people and make sure you're getting employment agreements and noncompete agreements from the key people," Grossman says.

Even post sale, buyers have to be careful how they use their new brand, or risk losing essential trademark rights. That's a lesson Sara Lee Corp. learned in 2002, when it lost all trademark rights for its Mark Cross brand. Not long after acquiring Mark Cross, a luxury leather goods manufacturer, in 1993, Sara Lee shelved the brand, focusing instead on its own Coach division, which had been faring better in the market. In 2001, a Florida entrepreneur, J.P. Wilkin, brought an action to cancel Sara Lee's trademarks in Mark Cross, arguing that the company had abandoned the brand.

Under U.S. trademark law, a trademark can be deemed abandoned - and thus up for grabs - if it has not been used for three consecutive years. "It was the classic corporate screwup," says Weston Anson, the chairman of Consor, a La Jolla, Calif., company that specializes in IP valuations and consulting. "[Wilkin] basically got the mark for free; the only thing he paid were litigation expenses." And Sara Lee wound up creating its own competition.

You don't have to abandon a brand to lose rights to it, either. Trademarks not only protect brand owners but also consumers. Every trademark is associated with a specific goodwill and quality, and if the new owner gets a little too creative - or a little too lax - with what it is selling, that can create a whole new impression in the consumer's mind. "You can get to the point where you jeopardize your old rights by going too far with something new," says Gregg Kirchhoefer, a partner in the intellectual property department of Kirkland & Ellis LLP in Chicago.

Brand acquisitions may be booming, but success means considering IP issues long before - and long after - the deal is made. "Everyone likes to celebrate on the closing date," Clorox's Humphrey says. "But for trademark lawyers, that's when we're just getting started."