Joff Wild

Both IP Finance and IP Think Tank picked up on a great post by Pat Sullivan on his blog way before I did. But even though it was written a couple of weeks back, it is still worth reading. Basically, what Sullivan says is that the very common claim that the value of intellectual capital (including IP, of course) in companies is what is left after you subtract fixed assets from market capitalisation is absolutely wrong

He writes:

Let’s do a brief examination of this formula:

Market Cap = Tangible Assets + Intellectual Capital

OK class, sharpen your pencils:

Market Capitalization (the current share price multiplied by the number of shares outstanding) is determined by negotiations between the current buyers and sellers of the company’s stock in the open market. Dollar values here are current and are based on market information about the company and expectations of its future performance.

Tangible Assets: The value of the firm’s tangible assets (found on the balance sheet) is based on the asset prices negotiated by a different set of buyers and sellers from those involved in the stock market, in a different set of asset markets, at a different point in time, and with transaction prices that occurred in the past.

In other words, market cap and tangible asset base are calculated in two completely different ways. Therefore, it is not possible to compare them; which means it is not possible to subtract one from the other to get a meaningful number.

If we are honest, very few of us would claim never to have referred to the IP value = Market Cap – Tangible assets formula in the past. I know that I have. But now Sullivan has demonstrated just how wrong it is, it would be very unwise to carry on doing so.

IP Finance notes: “The truth is that myth is so widely held that it will take generations to eradicate. Like all enduring myths, it is simple to understand, has a superficially comprehensible logic and provides a basis for decision-making without the need to engage in clear-headed thinking.” However, it is more serious than that in my opinion.

As with all demonstrably false claims, those that continue to use the magic formula for IC/IP value will end up harming their own case. In IP we have seen this with anti-counterfeiting and piracy figures. The totals that have been banded around for so many years have been shown to be false, which means that many are suspicious of the motives of the trademark and copyright owners who have used them. The same thing must not be allowed to happen to the nascent IP business field. It might now be a little harder to explain why IP is a vital business asset, but it should not be beyond the wit of those who believe it to be the case. Maybe we should focus on what Andrew Watson of ipVA says in a comment on IP Think Tank:

... I used to slip into the same rhetoric myself in the early days of ipVA. What changed for me were two things, firstly access to a more sophisticated audience who quickly slaughtered the notion, second listening to many of the speakers at the IPBC in Amsterdam stating that "IP represented 80% of the value of the worlds capital markets". Almost as if by saying it as many times as possible it would become so and hoping that by clicking their heels and saying it more of the people that matter would pay attention.

To take the debate forward, isn't it better to say that of the 70%-80% not represented by tangible assets, it is safe to assume that a good part is made up of "intangibles". Not of IP, but of the combination of human and intellectual capital.

Even if the number is 20% it is still an area that boards should pay attention to. Isn't it?