In recent years, financial analysts came to believe that intangible asset value forms an increasing aspect of overall corporate value. These experts generally agreed that intangible asset value made up at least 70 % of the total market cap of the average corporation, an increase of an estimated 20 % in 1975. Not surprisingly, however, the recent global economic downturn has resulted in a steep decline in the amount of market cap attributed to intangible assets. Experts now say that the current (market adjusted) corporate value attributable to intangible assets is “less than 50 %.”
To someone who has toiled in the trenches of intangible asset protection at both the law firm and corporate levels, the at least 70 % generalization always possessed a sense of being pulled out of the air, as does the new sub-50 % number. I now understand that these values emanated from nothing more than a “guesstimation” of total corporate value that analysts believe should be accorded to an asset class that they do not fully understand. Put simply, analysts understood that corporate intangible asset value should amount to “a whole bunch” and they assigned a suitably large figure to allow calculation of that unknown amount. It is now evident that this figure was wrong and, since the sub-50 % figure does not appear to have been calculated with any more precision, it would appear that this recently assigned multiplier is likely inaccurate, too.
However, just because the numbers proposed for corporate IP valuation were (and are) wrong in the aggregate does not mean they were not otherwise real for many corporations. And, corporate intangible asset value can only continue rising as we become a primarily knowledge-based economy. To capture the asset value of our less tangible economy, we must certainly develop more “reality-based” methodologies to accurately quantify–or more substantively qualify–that aspect of corporate value associated with intangibles.
The question is how to better distinguish those corporations possessing real intangible asset value from those that are just riding on the coattails of others. To this end, I believe that analysts must develop methodologies that will allow them to “separate the wheat from the chaff” in terms of corporate intangible asset valuation.
Some commentators have proposed that estimation of intangible asset value, namely in the form of patent rights, could be improved by creation of a transparent market for intangible assets, such as a stock exchange or other type of marketplace where buyers and sellers could be matched and prices paid subject to full disclosure to the public. For me, however, such so-called “transparency” is not the answer to improve the accuracy of corporate intangible asset valuation. From tulips in the 16th century to housing prices today, we have seen that transparent markets and pricing models may create confidence for a short time, but more often confidence in such markets turns out to be unfounded when the bubble bursts.
Valuation of intangible assets primarily by what a willing buyer would pay on the open market also pre-supposes that corporate intangibles derive value only from their transactional value. To the contrary, when properly created and managed, intangible assets allow a corporation to significantly magnify overall corporate value independently of whether the intangible asset owner desires at any time to sell the asset. Good examples of this are the increased profits obtainable from patented non-commodity products and the market share improvements associated with brand name recognition and high corporate reputation.
Moreover, the vast majority of valuable corporate intangible assets will never make it to the market for sale or trade and, as such, will never be priced. Attempts to extrapolate the value for all intangible assets in the same class (patents, trademarks etc) from the prices set for a small number of assets that actually appear on the market would likely wildly mis-value IP held by corporations for business reasons. Basing corporate intangible value on the market price of an IP asset that is not actually comparable to another would effectively short-change those companies that have strong intangible asset management programs, but which have nonetheless decided that their best business strategy is to hold onto their intangibles.
In truth, I do not think there is any currently applied methodology that allows one to accurately value corporate intangible assets, which would explain the precipitous fall of intangible asset value in the last several months to the current sub-50 % level now reported. My view is that the at least 70 % value was too high for some companies and too low for some highly idea-heavy companies, such as technology start-ups. Similarly, the sub-50% is likely too high for many corporations today, especially those that have neglected to appropriately manage their intangible assets in recent years.
But just because we do not know how to accurately value intangible assets does not mean this asset class does not form a significant aspect of the market cap of many corporations. We must then decide what intangible asset valuation methodology will provide an objective and reality-based assessment of a corporation’s intangible asset value. My view is that we need to start looking at the people managing a corporation’s intangible asset programs. Put simply, a corporation that manages its intangibles as business assets and that appears to be doing a good job at establishing processes and staffing signals its seriousness about capturing, protecting and maximizing intangible asset value. In contrast, when a corporation maintains a traditional model of intangible asset management, such as operating IP as a legal cost center, analysts should receive a strong signal that the corporate management does not “get” intangible assets. The latter corporation should therefore not be accorded a market cap “bump” in intangible asset value because its management clearly does not deserve the credit.
Of course, assessment of a management and staffing processes from the outside is only a proxy for whether a corporation should be given an increase in market valuation resulting from intangible asset ownership. Nonetheless, it is common to review a corporation’s internal management structure when analyzing a corporation’s market value–Apple under Steve Jobs’ management is a great example of this. I believe that looking for intangible asset management signals emanating from within a corporation’s infrastructure can allow financial analysts to better identify companies likely to be winners in the intangible asset maximization game and that deserve to be giving additional market cap for intangible assets.
Admittedly, analysts seeking quantifiable numbers to associate with corporate intangible assets may desire more precise methodologies to assess market attributable to intangibles. However, those with this mind-set will be well-served to remember that fixation on absolute numbers to assess value is arguably part of the reason that the current crisis occurred. And, I submit that accurate qualification is better than dubious quantifying methodologies any day.