Intangible values collapse - the old 70% to 80% claim is now officially dead and buried 24 Jan 09
Back in November on this blog there was a fascinating debate about that old IP chestnut - that by subtracting the value of tangible assets from a company's market capitalisation you could get to the value of its intangble assets. This followed-on from a blog written by Pat Sullivan which explained (very persuasively in my view) why he thought this approach actually makes no sense at all.
It is very easy to see why the equation was a favourite of IP professionals. Over the last 25 years or so the gap between tangible assets, such as plant and machinery, and market capitalisation has grown, leaving a very big space in the middle that not infrequently accounted for over 80% of listed companies' values. By putting IP in that space and saying it explained a large part of the gap, then you had an instant, attention-grabbing calling card when you went to speak with corporate executives and investors. People who, in the usual course of things, may not have had much interest in discussing patents, trademarks or copyrights.
But, as the old saying goes, those who live by the sword will die by the sword. In the next issue of IAM, which publishes at the end of next week, Nir Kossovsky of the Intangible Asset Finance Society reveals that corporate intangible values in the US (if you accept the calculation that Sullivan rejects) have collapsed over the last 12 to 18 months, from a median of 70% of market capitalisation to under 50% now. To put it starkly: nobody can now claim that the majority of American corporate value is composed of intangibles or IP, it is not (remember as well that IP rights are types of intangible, but they are not the only ones). And although I am not aware that anyone has done similar research that looks at stock markets in other parts of the world, my guess is that the same would apply to these as well.
Now, I am not an expert in accountancy, law or finance. I am merely an observer of the IP monetisation, commercialisation and value generation scenes. However, what all this says to me is that we need to get a lot more sophisticated about how we look at intangible value in companies. It seems self-evident that IP and other intangibles, and how they are managed, are vitally important to company performance, but I have never really bought into the idea that stock markets deliberately factor this into stock price (as we found out in the very first issue of IAM, most market makers have only the very vaguest notions of what IP is all about). Instead, my guess is that, in addition to straight financial factors, shares rise and fall on the kinds of thing that Nir talks about in his article: confidence and perceptions of reputation. Of course, these are intangibles themselves, but they are far less defined or definable than, say, a patent portfolio or a brand.
And that takes me to another article we are publishing in the next issue of IAM: one about the feasability of developing standards for IP valuation - which is written by none other than Pat Sullivan. I don't think there are many of us that are naïve enough to believe that it will be possible to create mandatory standards at any time (even if that were desirable, which it is probably not), or voluntary standards any time soon. But maybe the latter do have to be embraced at some level. As Pat points out in his article, there are currently more than 50 IP valuation methodologies in use. That just seems far too many to me if IP is to be regarded by the business world in general as anything more than a vaguely interesting niche area.
What is lacking in the IP market place is any kind of value transparency, unless a sale takes place at auction or a private sale is publicly announced. Without that, especially given what has happened over recent months, you are never going to create confidence. And without confidence, it is going to be impossible to get the majority of CEOs and investors to give IP and other intangibles the attention we all believe they deserve. In other words, the current IP narrative needs to change so that it becomes not only more accessible, but also more credible to those who have not spent years inside the IP bubble.
Or have I got this all wrong? If I have, please let me know.
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