Value of business intangibles over at IAM

by Andrew Watson on 26 January 2009

Just a quick note to say that there is an involved discussion on how to value intangibles as part of a company, which will be expanded in an upcoming issue of IAM by Nir Kossovsky of IAFS. The gist:

[T]hat corporate intangible values in the US … have collapsed over the last 12 to 18 months, from a median of 70% of market capitalisation to under 50% now.

This calculation (looks to me) to use the difference between cost of physical assets and the stock price of the company – broadly any intangibles.  IP makes up part of these intangibles, as does things like confidence of investors and reputation of the company. Pat Sullivan (in the comments and in another upcoming IAM article) proposes a different way of calculating the value of IP, based on its worth to the company.

My perspective it doesn’t matter how you calculate its value: IP is an underutilised and too often unmanaged asset. Calculating the number is an interesting exercise, and useful in a number of contexts, but the actual % still doesn’t change this fact.

{ 4 comments… read them below or add one }

John H 01.26.09 at 11:37 am

Interesting. IIRC, the “intangibles = stock price – tangibles” calculation is how accountants look at the question of intangibles.

If that’s the basis of calculation, it’s not surprising that intangibles have collapsed as a percentage of corporate valuations. Stock prices have dropped precipitously over the past few months, by an amount which far exceeds any fall in value of companies’ tangible assets over the same period. Hence the above equation will produce a big apparent drop in intangible asset values.

The basic problem may well be attempting to use stock price as a means of assessing the value of intangibles. You might as well try to value Coca-Cola’s headquarters by subtracting estimates for their brand value from their stock price. Stock price is driven by too many other factors rather than simply the “objective” value of the company and its assets, especially in the short term.

So it may be that this shows a “drop in the value of IP”; or it may be that the value of IP and other intangibles is being insufficiently reflected in bear market stock prices; or it may be that the value of IP remains appropriately priced-in (whatever that means) and it is other “intangibles” – in particular confidence about future business performance – that have fallen in value as a contributor to the stock price.

There is also (as some commenters point out on the linked thread) the distinction between the value of IP (or any other intangible) “in itself” and its value in the context of the company’s overall business. Branding is a good example: for most businesses, their brand will have considerable value for their business. However, most brands have little or no value in themselves, separate from the business to which they are attached (or my firm’s t-shirt sales would be a lot higher ;-) ).

I’m just thinking aloud here and am sure nothing I’m saying is particularly new or earth-shattering, but it is always interesting to be reminded of what a subtle and multi-faceted question the concept of “IP value” is.

sean andrews 01.29.09 at 4:16 pm

This is a very interesting question and I think that Pat Sullivan’s dividing the question of “value” is essential to thinking about it. There are at least three different dimensions of value; Pat talks about value as use value and exchange value, which are the only two that really seem to check out in mainstream economic discussions. But then there is value as such, which the abstract social value contained in the object.

Bracketing from the start the fact that the basic index of exchange value–whether the pound, Euro, dollar, or Yen–is also a saleable object with a shifting value. On the one hand, this value is a product of the investment made by the holder of tangible or intangible–thus, from within the company, there is a sense that these have a certain value relative to the perceived investment of resources and labor; however, this value can only be realized in exchange, so is based on the current value of the comparable set of inputs.

On the other hand, for the most part, intangibles like brand image or even copyrights or patents, have very little value if they can’t be realised in some material form that can be commodified and yield a surplus. It’s all potential energy; no kinetic. You make this point from to an extent by saying that the brand will have little value outside of the total business. But it is more fundamental than this.

Since many businesses own few tangible assets relative to their overall market capitalization, the intangible value and the stock price are almost synonymous. Investor confidence, company image, and intangible values are all tied up in the same circuit that eventually includes tangibles. If investors are skittish, the IP can’t be capitalized, the overall value drops, which makes investors skittish.

You rightly say that IP is an underutilized resource. I realize that you mean this as a specific recommendation that might be relevant to a particular business–”how can you capitalize on your IP!” But with the factories of the American auto companies shuttered and the employment lines in the US longer than they’ve been in a generation, we could also say that tangible values are being significantly underutilized.

The post-industrial business model has a twisted relationship with intangibles–On one side, thinking that it can be easily separated from the production of the tangible, such as in apparel or technology; or, as in the music industry, it assumes that the projected intangible value can be counted as an asset despite the fact that it is no longer fixed in a tangible form. I realize that this is basically a thread that is meant to be very pragmatic and specific to the accounting of these things, but I think the question is really more actuarial–there is a perceived risk involved in investing in anything. On this, Pat’s point about the “value to the company” as well as your sense that this is an underutilized resource get at the basic problem of relying on the market alone to sort all of these things out: relying on value alone, outside of a fixed form, without any way to realize that value, risks complete devalorization, making the resources themselves appear useless. It is, like the irrational exuberance of the 1990s, a self-fulfilling cycle. In this, we might find Keynes “animal spirits” the most important intangible value around–and one of which there is a significant dearth.

In any case, I’d be interested in knowing how one would index the value of IP or other intangibles relative to not only the entire business, but the entire environment of business. It is easier to figure what a shuttered factory is worth when the market collapses–scrap metal and machine parts still have a market value–but it seems like it would be more difficult to calculate what an underutilized patent or still viable brand image would be worth if they lost their capitalization simply because there wasn’t the injections of finance from outside to keep the firm afloat during the lean times. It seems like this kind of calculation may be increasingly relevant in the coming months and maybe even years.

Mary Adams 01.30.09 at 4:22 pm

I, too, have been following the discussion on IAM. I really like Sean Andrew’s comment that the question of intangible value is also “actuarial” (in the second to last paragraph) in that it is related to the risk of investing in anything. To answer this question, a different kind of measure is in order. It requires a deep understanding of the underlying business as a knowledge “factory.” What are the components of that factory (human, relationship and knowledge capital, the latter of which includes IP)? Are the components as strong as they should be? Where are the risks?

The need to understand fitness and risk of intangibles is also important to the other types of valuations Pat Sullivan outlined for internal and external uses. Reliance on income projections to “value” intangibles is a dangerous exercise without a careful examination of the underlying strength of those intangibles. It’s like creating an income statement without a balance sheet.

JS Hatcher 02.05.09 at 5:18 pm

Thank you all for the very interesting discussion.

I think it is interesting to note that lots of the hand wringing around NPEs (a/k/a patent trolls or PLLs) has been out of the separation of the intangibles / IP from the physical capital. Those that use IP intangibles to manipulate the tangible (i.e., being the one that uses the patented process to manufacture the widgets) are given a different status than those that just license or enforce patents against widget producers without producing widgets themselves. Further still even within the licensing space, you can separate out those that solely engage in purchasing and enforcing IP (the true trolls?) versus those that come up with the innovations themselves but only enforce / license / sell rather than actually engage in production.

Anywho, IAM has just made it to my desk yesterday and I will post more once I’ve had the chance to read it.

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