value of intangibles hurra h's creativity
DESCRIPTION
Course Assignment, HBR article AnalysisTRANSCRIPT
The Rea
lvalue
of
Intangibles
Intellectual Property
PatentsTrademarks/Trade
NamesCopyrights
Trade Secrets
Intellectual Assets
Know-howContracts
Permits and Licenses Non Compete Agreements
Intellectual Capital
Human CapitalCustomer Capital
Organizational Capital
Distributor CapitalSupplier Capital
Intangible Assets
Value of a company = Intangible Assets + Tangible Assets
Value Intangibles
THE IMPORTANCE OF VALUATION
A major contributor to corporate worth
Value of alliances, network, human capital and leadership greater than $1 trillion for USA(2001)
Exclusion causes underestimation of the corporate worth
Impact on investor decision making
Necessary for creation of open, fair and efficient markets
Intangible Asset – Customer Relationships
In March 2005, bought for £1.113bn. £260m was assigned to the brands RAC and BSM
and a 'market' value of £132m was put on contractual customer relationships.
I wish I had worked out the
value of intangibles as
well…
Market Overvalues – Wastage of Capital
Market Undervalues – This Burdens firms with an excessively high cost of capital
VALUATION & MISPRICING
Company Estimated Intangible Capital (in $ billions)
Ratio of Market Value to Comprehensive Value
General Electric 324 0.79
Pfizer 200 1.29
Exxon Mobil 164 1.04
Altria Group 143 0.55
IBM 134 0.93
Merck 124 0.99
Microsoft 123 1.59
Verizon 105 0.8
Intel 95 1.09
SBC Communication 62 0.9
By Calculating a company’s “comprehensive value”, which takes into account its intangible assets as well as its physical and financial assets, you can assess whether the
enterprise is overvalued or undervalued by investors.
Source: Harvard Business Review
Undervalued or Overvalued
0
2
4
6
8
10
12
14
16
18
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35
Retu
rns %
Months After Portfolio Formation
Future Risk-Adjusted Stock Reurns to R&D Capital-Intensive Companies
Sourc
e:
Harv
ard
Bu
sin
ess
Revie
w
Delayed Market Reaction to an R&D Investment
Shift from “R” to “D”
Misallocation of resources – a consequence of Undervaluation
…my teacher warned me, never to under-estimate the REAL value of intangibles…
“The Soft Assets – a hard Competitive Advantage”
Impact of Correct Valuation
Source: Harvard Business Review
EXPLOITABLE HUMAN CAPITAL
Determine which part of the business to audit.
Create the content of the audit
Gather data from multiple groups on current and desired
a) 90-degree assessmentb) 360-degree assessmentc) 720-degree assessment
Synthesize the data to identify the most critical capabilities
Put together an action plan
Identifying the Capabilities
Companies are reluctant to disclose competitive disadvantage
Issues with identification of the valuableintangibles
Shareholder liability issues
Managers may misuse information
Forgoing innovation and risk reduction by focusing more on the productivity of the intangibles
Issues with Reporting Intangibles
A lot of value creation is not translated into financial terms
Inability to identify which asset to value - what is the source of value creation?
Inconsistency in valuation by different organizations
Fear of giving away proprietary information
Issues with Reporting Intangibles
Absence of effective accounting of intangibles
Conventionally, intangibles reported on balance sheet only in course of an acquisition as ‘Goodwill’
Until 2001, GAAP required firm to amortize goodwill as expense
FASB stopped requiring companies to amortize Goodwill as expense
In 2003, SEC established new guidance for MB&A statements which address the disclosure of non financial performance measures
FASB and AICPA developed lists for intangibles but lists barely resembles
Traditional Recording Methods
Based on traditional methods, goodwill appears only upon acquisition.
No clear definition – When is technology an expense and when a capability?
Irrationality of amortization – Some assets have an indefinite useful life.
Exclusion of intangible assets developed internally
Inconsistency in reporting Standards
Issues with Traditional & Existing Reporting and Valuation Methods
Transparent process and assumptions
Clear definition of intangible asset
Quantifying the value of the intangible asset
Effective Valuation tool
Addressing intangibles in internal strategy and communication with shareholders
Reporting of intangible ratings in annual reports
Distribution of white papers & measurement tools by ministries in Japan
Treatment of R&D as an investment and not an expense by BEA
R&D satellite accounts by BEA to supplement GDP accounts
Danish IC Statements
Recent Developments
Government Initiatives in collaboration with stakeholders and interested parties - executives, banks and statisticians
The role of macro-economists
Accounting bodies should make it mandatory for companies to disclose meaningful information regarding intangibles assets.
Companies should voluntarily go for disclosure.
Appropriate Measures
• Using Intangible assets as a collateral !!!!
Burn Stewart Distillers refinanced with KBC Business Capital$31million Package was linked to the values of brands, accounts receivables etc.
NEW TRENDS….
Understanding the Value of Intangible Assets
Any Questions???
Thank you!