valuing intellectual property (ip) · hermes principles market cap, ... brand valuation market cap...

Copyright 2006 ICMG All Rights Reserved

Valuing Intellectual Property (IP)

Dr. Patrick H. Sullivan

22 November 2006

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Accounting Firms•PwC- Value Reporting•Deloitte- In The Dark•KPMG•E&Y•GT•BDO•Other

Individuals:• Roland Burgman• Hubert St.Onge• Leif Edvinsson• Rob McLean• Pat Sullivan

Valuation Is Of Interest To A Number of Groups and Individuals

Consulting Firms•Accenture- High Performance •IBM Consulting –CFO audience•Deloitte Consulting•ICMG•Other

Institutional Investors

Academics• Kaplan• Christensen/ Raynor• Chesborough• Lev• Teece

Institutes:• AICPA - EBR• CICA –• CPAA• IDW• SAICA•Other:

Publications/ Journals•International Journal of Learning and Intellectual Capital

Associations:• IFAC(PAIB )-• LES• AAA -CPE Session• CAAA• ICM Gathering / IP Forum• FEI• CFA Institute• GRI – Sustainability Guidelines

Governments:• Scotland• Canada• Denmark/Europe

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What Is Intellectual Property?

•“Intellectual Property” has been defined by a series of international treaties stretching back into the 19th century.*

•These treaties created an evolving set of definitions and frameworks and two international secretariats, placed under the supervision of the Swiss Government.*

•At the 1969 diplomatic Conference in Stockholm, the World Intellectual Property Organization (WIPO) was created. All previous secretariats and activities were folded into WIPO.*

* Source: WIPO Handbook, Chapter 1.

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What Is Intellectual Property (Cont’d)?

Intellectual property is an intangible.

Intangibles

Tacit

Knowledge

Codified

Knowledge

IP

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What Are Intangibles?

Market-relatedTrademarks, trade namesService marksTrade dressNewspaper mastheadsInternet domain names

Customer-relatedCustomer listsCustomer contractsCustomer relationships

Artistic-relatedPlays, operas, balletsBooks, other literary worksMusical worksPictures, photographs Video & audiovisual material

Contract-basedLicensing agreementsAdvertising or service contractsLease agreementsConstruction permitsOperating and Broadcast rightsEmployment contracts

Technology-basedPatented technologyComputer softwareUn-patented technologyDatabasesTrade secrets, secret formulas

Source: U.S. Federal Accounting Standards Board

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What Are The Valuation Characteristics of Intangibles?

There are a number of important characteristics of intangibles that make them different from tangibles.

Two of these differences are particularly significant:

- Intangibles have value only in contextTangibles have intrinsic value

- Intangibles may generate multiple value streamsTangibles have only one value stream

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What Is Value

Oscar Wilde described a cynic as, Oscar Wilde described a cynic as, ““. . . A man who knows the price . . . A man who knows the price

of everything and the value of nothing.of everything and the value of nothing.””

To the economist, value is a measure of the utility derived fromownership of an item.

Value is not the same as price - price is the amount someone is willing to pay for an item.

Value is not the same as cost - cost is a measure of what is required to produce an item.

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How Is Value Measured?

Measures ofValue

Value-Based

-Value Category-Alignment with Visionand Strategy

-Satisfaction-Quality of Knowledge

Vector-Based

-Rate of Increase-Rate of Decrease-Backlog-Market Share Forecast-Coverage-Comprehensiveness-Stock price

Non-$

-# Evals/Unit Time-# of Staff-Age-Remaining Life-# Units

$-Based

-$ Invested-$ Revenue-Forecast Income-Costs to date-Forecasted Costs-Profits

Qualitative Quantitative

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Accounting Perspectives on Value

Intangible

“Accounting”Perspective(book value)

“Market”Perspective

(FMV)

ReplacementValue

Bankruptcy Value

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An Overview of Recent Measurement Thrusts

Principal focus on what we should

“disclose”

Principal focus on how we should

“measure”

Issue-specific General

SocialAccountability Sustainability GRI

ICStatements

PIP

DanishGuidelines

EU Standards

OECD AustralianGuidelines

IntangiblesReporting

Wissensbilanz

Japan

EBRCICA MD&AOFRs

IASBManagementCommentaryInfo for

better markets

Info for better

markets

Info for better

markets

IASBMeasurement

Project

VMRC/NPI

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VMRC Study of Intangibles Measurement

Looked methodically at intangibles measurement

• Classified the approaches

• Identified existing measurement approaches

• Explored “measurement fundamentals”

• Developed criteria frameworks based on the measurement fundamentals

• Embedded the criteria in online tools

• Tested the criteria by applying them to various measurement approaches

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Methods Examined

Hermes Pensions Management LimitedMarket cap, Value StreamsHermes Principles

GRIIndicatorsGlobal Reporting Initiative

Burgmann, AccentureMarket capFuture Value Management

St. Onge, ArmstrongCapitalsEnterprise Capital Model

AICPAIndicatorsEnhanced Business Reporting

Stern StewartMarket CapEconomic Value Added

IC CommunityIndicatorsDolphin Navigator

NTF Group (AU)CapitalsCustomer Value Measurement

SMSCapitalsCustomer Value Management

CognosIndicatorsCognos Scorecards / Dashboards

B. H. Hall (et al.)IntangiblesCitation-weighted patents

CelemiCapitalsCelemi Monitor

NCI Research (see Andriessen)IntangiblesCalculated Intangible Value

SandvikCapitalsBusiness IQ

Brand FinanceMarket capBrand Valuation

Kaplan, NortronIndicatorsBalanced Scoreboard

ACPQIndicatorsAPQC Performance Measurement

NashValue streamsAccounting for the Future (AFTF)

Innovator(s)CategoryMethod

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Methods Examined (Cont’d)

MERITUM projectCapitalsIntellectual Capital Report

StamCapitalsIntellectual Capital Monitor

BounfourIntangiblesIntellectual Capital Dynamic Value

ViedmaCapitalsIntellectual Capital Benchmarking System

BrookingsCapitalsIntellectual Capital Audit

Denmark Ministry of IndustryCapitalsIC Reporting

Intellectual Capital SwedenCapitalsIC Rating

Nordic Industrial FundCapitalsIC Monitor

CelemiCapitalsIC Evaluation

Sullivan, McLeanValue StreamsIntangibles Value Stream Modelling

AlleeIntangiblesIntangible Value Framework

SullivanIntangiblesIntangibles Valuation

LevIntangiblesIntangibles Scoreboard

SveibyIntangiblesIntangible Assets Monitor

ICAEWIntangiblesInside Out

MÕPhersonIntangiblesInclusive Value Methodology

Watson WyettCapitalsHuman Capital Index

VariousCapitalsHuman Resource Accounting

RoosCapitalsHolistic Value Approach

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Patent Value PredictorIntangiblesPatentValuePredictor

SiemensIndicatorsPatent Assets Monitor

Meyer MonitorIndicatorsMeyerMonitor

EUCapitalsMeasuring and Accounting Intellectual Capital (MAGIC)

EYI, LowIndicatorsMeasures that Matter

CICAIndicatorsMD&A Guidelines

SveibyMarket CapMarket Value of Intangibles

VariousMarket CapMarket to book ratio

LevMarket capKnowledge Capital

Marr, SchiumaCapitalsKnowledge Audit Cycle

Konrad GroupIndicators, CapitalsKonrad Group

KPMG (Bray)IndicatorsKey Performance Indicators

AICPAIndicatorsJenkins Report

Roos et al.CapitalsIntellectual Capital Index

StandfieldIntangiblesiValuing Factor

SveibyCapitalsInvisible Balance Sheet

StandfieldMarket capInvestor Assigned Market Value

Danish Patent OfficeIntangiblesIP Score

Sullivan, McLean, McCulloughCapitalsIPM Benchmarking

MouritsenCapitalsIntellectual Capital Statement

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Brookings InstitutionIntangiblesUnseen Wealth

ICAEWIndicators21st Century Annual Report

Anderson, McLeanValue StreamsTotal Value Creation

RSA LondonIndicatorsTomorrowÕs Company

TobinMarket capTobinÕs Q

Dow, A.D. LittleIntangiblesTechnology Factor

EkosIndicatorsSustainability Value Measurement

VariousIndicatorsSustainability Reporting

DenmarkIndicatorsStakeholder Accounts

VariousCapitalsSocial Responsibility Reporting

EdvinssonCapitalsSkandia Navigator

Various (see CICA)Market capShareholder Value Measurement

SAPIndicatorsSAP Value Measurements

PL-X Systems (and others)Value streamsReal options

QRPIndicatorsQRP Scorecard

PerformanceSoftIndicatorsPBViews

Cranfield School of Management, Accenture

IndicatorsPerformance Prism

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AndreissenIntangiblesWeightless Wealth Toolkit

PWCIndicatorsValueReporting

Verna AlleeCapitalsValue Networks

ICM GatheringCapitalsValue Extraction

KPMG (Andreissen)IndicatorsValue Explorer

Libert, Boulton, SamekIntangiblesValue Dynamics

E&YValue streamsValue Creation Index

LevIndicatorsValue Chain Scoreboard

PulicIntangiblesValue-added Intellectual Coefficient

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Dimensions Explored

– What management issue does each approach support?

– How the intangibles measurement problem is defined?

– How the solution is described?

– What it is that is measured?

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A Tool for Analyzing Measurement Approaches

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They Are All Different!

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Each and Every One Was Different!

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What Did We Learn?

1. When a Company receives a valuation of an intangible, it cannot understand what the valuation means unless it knows something about the valuation method used.

- there is information it needs to know in order to evaluate the meaningfulness of the valuation.

2. That the context for each measurement approach determines its applicability to the measurement circumstance a firm may face.

3. That there are five dimensions that can help a company define whether a measurement of value makes sense for them.

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The Five Dimensions For Interpreting A Value Measurement

1. Purpose of measurement:• Value?• Performance?

2. What is it that is being measured?• Objects (e.g., assets)• People• Enterprises

3. Perspective or Reference Point• Owner• Buyer• Shareholder• Fair Market

Book Value4. Timeframe

• Past• Present• Future

5. Unit of measure and scale• Value, Vector, Non-currency, Currency• Internal benchmark, relative to owner or buyer, relative to Market Cap

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Additional Learning

• When a company wishes to value an intangible, the selection of an appropriate method is important.

• In order to identify the methods that apply to the management issue under examination, there are 10 questions one must answer in order to select the “best”methods.

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The 9 Questions for Selecting a Valuation Method

1. Detailed Objectives (Value or Performance measurement)2. Perspectives for Value Measurement3. Reference points for Performance Measurement

• Internal• External-in-trade• Market Cap

4. Timeframe (Past, present, future)5. Units of Measure6. Measurement Scale / Standards7. Required confidence level (How accurate must it be?)8. What is being measured (nominal measurement object)9. Underlying basis for measurement (real measurement

object)

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A Useful (and free) Resource

• When you want to learn about one or more of the approaches to measuring intangibles, you can access on-line tools at:

• http://npi.valuemeasurement.net• http://openmeasurement.net

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OK, So What Do You Do?

• First of all, recognize that most of the time, intangibles are valued using a “fair market value” methodology.

– We all understand that for intangibles, FMV has no meaning– Nevertheless, that is often how they are valued

• When you want to know the value of an intangible, we recommend the value streams method.

– It will more fully and accurately identify the multiple value streams that are possible”:

• For you• For a potential purchaser or licensee

• When presented with someone else’s valuation, remember to ask the 5 questions to learn what the value means (and to whom)

• When your firm wants to value an intangible, use the 9 questions to help you define which valuation method makes the most sense for your context.

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Questions?

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