Brand valuation: art or science?

In an article for BrandChannel ("A How-To Guide to Assessing Brand Value"), Canadian evaluator Catherine Tremblay describes the cost approach, the income approach and the market approach, then concludes:

"In a nutshell, the valuation of a brand can be more of an art than a science—but it’s an exercise that can help management identify and develop the value drivers behind the brand. Professionals, such as Chartered Business Valuators and members of the American Society of Appraisers, can provide insight and assistance in the valuation of brands and other intangible assets".

There seems to be an inherent contradiction here: if it's an art, then why should we be concerned to adopt a scientific approach -- and if it's a science, why is there such a gulf between results of the application of competing methodologies? Comments, please!

Reporting Intellectual Property - Mapping What Drives Value: Second Part

by Roya Ghafele, Ph.D.
ghafele@haas.berkeley.edu

Current accounting regulations allow only to fully understand how the IP relates to business if revenue streams can be directly related to a discernible, seperately identifiable asset. The worth of internally generated IP or IP that relates indirectly to business performance does not get reflected in accounting. The consequences of this are far reaching:

Firstly, the cost of capital increases, meaning that IP-rich companies may find it difficult to pass the funding hurdle, confirming that little has changed since Arrow[1] published his findings some forty five years ago showing that competitive markets fail to provide socially optimal levels of technology investment. Since IP is literally absent from the accounting, reporting and managerial discourse, investors find it difficult to access information on how a firm’s IP portfolio relates to its income streams. For this reason, risk rates associated with investments in knowledge-intensive sectors may not be adequately assessed and a higher premium may be charged when funding is provided on the basis of IP.

Secondly, the management of a company becomes a much greater challenge since adequate information on all the assets and liabilities of a company are not available.

As Dr. Harvey Bale, Director General of the International Pharmaceutical Association (IFPMA) argues: “Today, IP underpins between 50-70% of a country’s private sector gross earnings, so it is often decisive for the commercial success or failure. This stands in strong contrast to IP management skills of top management. Many chairmen or CEOs do not grab the simple distinction between patentability and freedom to operate. It is like not knowing the difference between profit and cash flow.”[2]

The internal management of IP is seriously hampered since its value is not made explicit on the balance sheet. Since the bulk of the space of the balance sheet is devoted to tangibles, managing intellectual property becomes a very intangible undertaking. The efforts put into this may at best be indirectly reflected, but do not directly become visible.

Thirdly, ratios, such as the market to book value are largely distorted, making it difficult for regulatory authorities and market participants alike to capture the worth of a company. Gillette, for example, which wealth mainly relies within its trademark portfolio, had a book value of 3 million USD, but was bought by Procter and Gamble for 59 million USD which makes up for a gap in the market to book value of 56 million USD that had never been reported anywhere.[3]

The information provided in financial reports frames perceptions and ultimately determines business behaviour. The current information gap, expressed in hidden information on the value of internally generated intellectual property may therefore seriously distort markets for innovation and creativity.

From multinational to micro-enterprise, no business can afford to ignore these issues forever, even though they have to learn to navigate the current business environment challenges without waiting for a quick fix or overnight reform.

An alternative reporting system may be a valuable compass helping companies to ship through troubled waters. While most influential financial standard setting institutions (such as the FASB – Financial Accounting Standards Board) continue to explore various options to better reflect the value of internally generated intangible assets, there is a clear need for further research on how to overcome the existing intangible/tangible reporting asymmetry through reporting systems that are not bound to the current logic of accounting.

[1] This post was first made publicly available in Know IP – The Stockholm Network’s Monthly IPR Journal Volume 3: Issue 4. May 2007. The Stockholm Network has given its kind permission to reproduce this paper on the blog.
Arrow K.J.: Economic Welfare and the Allocation of Resources for Invention. In: Nelson R.R. (ed.) The Rate and Discretion of Innovative Activity: Economic and Social Factors. Princeton University Press. Princeton 1962
[2] In Ghafele, Roya, Wurzer, Alexander Reboul Yves and Hundertmark, Stephan; Rethinking IP Education; Intellectual Asset Management Magazine December/January 2007 Nr. 21, p.28-40
[3] example given by the FASB (Financial Accounting Standards Board) at the United Nations Department of Economic and Social Affairs Conference, July 12-13 2006

Meet the Bloggers

IP Finance is among the 15 blogs at the "Meet the Bloggers" reception in Berlin next Monday evening, which coincides with the International Trademark Association's Annual Meeting in the same city. For details of the reception at the top of Olswang's office at One Potsdamer Platz -- which you are welcome to attend -- click here. For blographies of all 15 intellectual property blogs, provided by Managing Intellectual Property magazine, click here.

Reporting Intellectual Property - Mapping What Drives Value: 1st Part

by Roya Ghafele, Ph.D.
ghafele@haas.berkeley.edu

Reporting systems that lie outside traditional accounting statements are needed so to overcome existing information gaps on intellectual property. IP can be a key driver of an innovative or creative firm, yet information necessary to understand and track what gets business going in markets for ideas is -due to current financial reporting standards- scarce and unsystematic.

The double entry accounting system that is used world wide underpins the notion that all business transactions constitute a unique and identifiable exchange of assets, which results in equal credits and debits.[1] This architecture may however impede borrowers and investors to fully grasp the relevance intellectual property has to a business.

Internally generated intellectual property can be of major relevance to a firm, even if it is not involved directly in a business transaction. This has led Guo and Lev argue that transaction based accounting may give a distorted picture of a creative or innovative company since their driving factors are not necessarily based on an arm’s length transaction between a willing buyer and seller.[2]

Therefore, the transaction-based value reported by accounting may have little to do with the economic value of a company in cases where internally generated IP is the main driver of a business.

Take the following three examples, where immaterial assets, such as patents, trademarks or trade secrets were a main driver of business:

· Texas Instruments leverages its patents through licenses and collected some 800 million USD in royalties between 1986 and 1992.
· The Austrian SME Tinnitronics built its business around the internally developed device Ti-Ex ™ that seeks to fight tinnitus. The firm’s business model is to rent and sell the IP (patents and trademark) protected device to patients. Without IP, Tinnitronics would not be in business.
· Coca Cola keeps its trade secret over its syrup since 1891. Paired with successful trademark management the company’s trade secret makes up for most of its success since the 19th century.

Current accounting regulations allow only to fully understand how the IP relates to business in the context of Texas Instruments, since revenue streams can be directly related to a discernible, seperately identifiable asset (key criteria for an intangible asset under International Accounting Standards - IAS 38). The worth of the patent and trade secret in the latter two cases can/need not be made explicit, which does not allow to understand the value IP has to the company. Thus, both the earnings and the book value of equity may be distorted.


... to be continued

This article was first released in "Know IP – The Stockholm Network’s Monthly IPR Journal
Volume 3: Issue 4. May 2007". The Stockholm Network has given its kind permission to reproduce this article on the website.

[1] Rodov I./Leliaert P. FIMIAM: Financial method of intangible assets measurement. Journal of Intellectual Capital. 2002. 3/3: 323-336.
[2] Guo R.J/Lev B./Zhou N. The Valuation of Biotech IPOs. Journal of Accounting, Auditing & Finance. 2005. 20/4: 423-459.

Keeping in STEP with intangible assets?

On 23 June 2008 the National Academies' Board on Science, Technology and Economic Policy (STEP), in cooperation with the Committee on National Statistics, holds a one-day conference in Washington DC on Intangible Assets: Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth (programme details here). According to information received together with the announcement of this event,

"Investment in intangibles, according to a 2006 Federal Reserve Board staff analysis, exceeds all investment in tangible property and, if properly accounted for, would raise US productivity growth by 20 percent for the period 1973-1995. These assets -- computer software, R&D, intellectual property, workforce training, brand equity and organizational capabilities -- now account for three quarters of economic activity. Increasingly, they are a principal driver of the competitiveness of US-based firms, economic growth, and opportunities for American workers. Some intangibles, like intellectual property, are being securitized, auctioned, and traded; a few years ago no one contemplated the existence, let alone the extent, of such "technology markets."

Yet despite these developments many intangible assets are not reported and are treated in the national economic accounts as expenses rather than investments. And there is no coordinated national strategy for promoting intangible investments apart, perhaps, from R&D.Sponsored by the Commerce Department's Bureau of Economic Analysis in response to a congressional directive, the agenda includes discussions of

* what are intangibles and how they work;
* how intangible investments compare and contribute to growth in the US, UK and Japan;
* how intangibles are created and used by firms;
* what new markets in intangibles are emerging;
* what government statistical agencies are doing to gather data on intangibles and
* what the government's role should be in supporting markets and promoting investment in intangibles.

Confirmed speakers include Commerce Under Secretary Cynthia Glassman; Irving Wladawsky-Berger, IBM; Jonathan Haskel, University of London and HM Treasury; Carol Corrado, Conference Board; Ken Flamm, University of Texas-Austin; Laurie Bassi, McBassi & Co; Baruch Lev, NYU Stern School; Ron Bossio, Financial Accounting Standards Board; Doug Lippoldt, OECD; Nir Kossovsky, Steel City Re; and Ken Jarboe, Athena Alliance".

Registration here.

IP Securitisation -- can you help?

My friend Julian Gyngell writes:

I am an IP lawyer in Australia and in my spare time I am enrolled in an LLM at Sydney Uni. My final semester (at last) is on the subject of Securitisation. I have written a paper on IP Securitisation (well, almost – it’s due in 9 days time!) and I have built my thesis around a hypothetical IT company that owns a bundle of IP rights and derives “receivables” from the commercialisation of its IP – the receivables are then “securitised” as in any other securitisation.
I know of numerous examples of IP-related securitisations and the Bowie bonds are obviously the starting point. However, although there are quite a number of case studies in the music/film/pharma/franchising space which I am using, by analogy, for my hypothetical IT company, I am not aware of an IT company (in real life) ever having securitised its receivables. If anyone knows of any IT companies that have securitised their IP receivables I’d be very grateful if you could let me know – subject to confidentiality, of course. Please email me here.

"Spurious precision" -- a reminder

As advertised earlier on this blog, Oliver Rivers has agreed to give a short talk on Tuesday 27 May at 5pm at the London office of Olswang, solicitors (map here). The talk is entitled "Spurious precision" -- a concept that will be familiar to anyone who has been involved in the debate between the need to place IP rights within a range of values and the requirement that it have one ascertainable value at the point at which something happens to it.

Oliver has extensive experience working on valuation issues for private equity and venture capital funds, and firms back by PE or VC funding. He has a particular interest in the valuation of creative intellectual property, and recent assignments have included the development of mergers and acquisitions strategy at Boosey and Hawkes, the world’s largest classical music publisher (owned until recently by Hg Capital), and at Chorion (currently owned by 3i), which controls the literary estates of Agatha Christie and Enid Blyton. Before completing his MBA at London Business School, Oliver worked for ten years in the music industry. Between 1993 and 1999 he was a freelance classical record producer, working for most of the major labels, including BMG, Virgin Classics, EMI, and Warner Classics, and some of the most important independents. In 1996 he won a Gramophone Award for Best Selling Classical Album of the Year. Between 1999 and 2003 he was Chief Executive of the chamber orchestra Sinfonia 21.

The meeting should finish by 6.30pm, inclusive of light refreshments: the talk will last around 20 minutes, following which there will be a chance for some light networking, Everyone is welcome. If you'd like to attend, email me here.