Joff Wild

One subject area that always seems to generate a large number of reader comments is valuation. Witness, for example, the fantastic thread tha developed following a post I wrote back in January entitled Intangible values collapse - the old 70% to 80% claim is now officially dead and buried.

Among those taking part in that conversation - indeed the man who indirectly inspired it - was Nir Kossovsky, executive secretary of the Intangible Asset Finance Society and CEO of Steel City Re. Now Nir has written in to question some of the points made by Pat Sullivan and Alexander Wurzer in their IAM article on IP/intangible valuation myths, which I recently previewed on the blog. In doing so, Nir also touches on Oracle's purchase of Sun Microsystems, the subject of another brief piece posted on here. This is what he has to say:

I have long respected Pat Sullivan’s thesis that intellectual property value is contextual; e.g., that to an owner, buyer, or coveter, its present value depends on both the magnitude and success probability of present and future monetization. And reasonable parties may disagree, which is why valuation, pricing, worth, and other synonyms can vary.

Indeed, Oracle saw a level of value in Sun’s IP that exceeded IBM’s assessment; the word on the street is that Oracle bought Sun for its JAVA language. It turns out that Oracle Fusion Middleware, Oracle's fastest growing business, is built on top of Sun's Java language and software.

But a deal was made, and the Heisenbergian uncertainty involving price was resolved. Money changed hands. So if I have to choose between believing Mythbuster Sullivan’s pronouncements for busted myths #1, 2, 4, 6, and 8, that an expert can better price the deal based on an ephemeral notion of “worth”, or believe the value established by Sun and Oracle at arm’s length and under no duress other than fear of competition, I’ll go with the latter. And if any expert honestly and transparently suggested a “worth” other than the value discovered by the market, they’d be wrong. Not for lack of an earnest or credible effort, for sure, but still wrong. (I'll bet they're performing autopsies on their Excel spreadsheets in Armonk this week.)

I’ll leave unresurrected the myth of cost as a proxy for value (myth 3). Also, balance sheets reflect the value of intangibles only briefly after an acquisition, so I’m happy to leave myth 6 mortally wounded.

But let’s turn to the alleged issues with myth 10. Book value is set and adjusted according to rules periodically through both amortization and marking to market. Market value is set and adjusted minute to minute through gut and forecasting. The difference, usually expressed as a ratio, is a plug. Between 2002 and 2008, the ratio between the two averaged (median, actually) a remarkably stable 0.42:1.00 among public companies.

What is that plug? It is the additional present value of all cash flows above the reasonably expected cash flows that could be generated from the monetization of the book assets. And what were those assets that between 2002 and 2008 produced such expectations? Assets not on the books – generally, the intangibles!

So, given the five year stability of the magnitude of the plug, notwithstanding all the rules-based adjustments to book value taking place in parallel, as a reasonable first pass indication of the collective value of the intangibles, 70% of market cap is credible. Myth 9, debunked as it were, with its dying breath, agrees.

One last thought. Our current markets are volatile because value is uncertain. International accounting standards suggest that all assets be valued at market. There is considerable push back in the US because the market is damaged and price discovery is not efficient. The international school argues that while prices may be the result of inefficient markets, an asset sold in such a market would likely fetch no more than market price, so it is a reasonable valuation. The US school argues that if one held the asset for some unspecified time, the markets will eventually be more efficient and the price will be higher. Better let the asset owners establish their best estimate of what that value should be, argues the US.

Pat Sullivan is arguing the US position. Except that outside of the short life of a few IP auction markets, there has never been an efficient reliable mechanism for price discovery. Only proxies. And there won’t be except in these periodic major market events such as the Sun-Oracle deal. I respect experts. I respect the opinions of experts more where there is a market basis to a valuation. Last, when the market speaks, I accept markets.

At the IP Business Congress in June (more news about that very soon), Nir is moderating a session during the afternoon of 22nd June entitled "IP as an asset class". One of the speakers in that session is Pat Sullivan. It should be interesting!