Intangible Assets Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth (2009) / Chapter Skim
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4 Intangibles in the Firm and in Financial Markets
4 Intangibles in the Firm and in Financial Markets
Pages 39-59
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From page 39... ...
" Laurie Bassi focused on human capital, a topic raised a number of times during the earlier sessions. Jim Malackowski shared the work that his company, Ocean Tomo, has been doing on emerging markets for intellectual property that involve understanding and estimating the value and discovering the prices of these assets.
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From page 40... ...
The most basic theme of his remarks was that, in capital markets (unlike life in general) , no news is bad news.
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From page 41... ...
0. 2 High 0.15 0.1 0.05 Medium 0 Rate of Return Grow th –0.05 –0.1 Low –0.15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Month FIGURE 4-1 The performance of companies with high, medium, and low R&D capital.
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From page 42... ...
As Bamford and Ernst point out, despite this ubiquity of alliances -- among manufacturing, marketing, R&D, and other firms -- and the considerable assets and revenue they often involve, very few companies systematically track their performance. Lev reported that the typical reaction of chief executive officers (CEOs)
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From page 43... ...
SOURCE: Workshop presentation by Baruch Lev. Reprinted with permission.
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From page 44... ...
CEOs have said, "We don't really have studies, but we think we know what is adequate in this area." He noted a study of his on a sample of biotech companies. Some of these companies disclose quite a bit of information in their initial public offering -- about the drugs they are developing, the target markets, the tests they perform, at what stage the drugs first face clinical tests, second-phase clinical tests, patent coverage, etc.
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From page 45... ...
Lev has recently examined companies with large differences between market value and book value -- companies that, in some cases, show balance sheet book values on the order of one-fourth of the market value. When he computed customer's lifetime value, which is the piece of the franchise missing from the balance sheet, it can account for 60-70 percent of the entire difference -- just this one intangible.
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From page 46... ...
Laurie Bassi's presentation focused on this intangible asset, noting that the uncertainty created by this characteristic adds a unique element of risk for firms. It also explains why human capital depreciates more rapidly, and, in some sense, firms may be prone to underinvest in it relative to other forms of intangibles.
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From page 47... ...
outperformance of publicly traded firms that (appear to) make the largest investment in human capital (education and training)
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From page 48... ...
. Fig4-3.eps SOURCE: Workshop presentation by Laurie Bassi.
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From page 49... ...
He made the point that assets related to proprietary innovation are, in some respects, the output of R&D spending and human capital development -- the topics of the previous two presentations. Malackowski discussed four markets: the historical market of patent maintenance, the episodic price discovery of public auctions, global micro markets, and macro markets (intellectual property traded exchange)
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From page 50... ...
FIGURE 4-5 Patent quality and licensing and commercialization rates. SOURCE: Workshop presentation by Jim Malackowski.
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From page 51... ...
One way to scale the selling of intellectual property is through micro markets and a voice brokerage platform. The fourth emerging marketplace Malackowski discussed was what he called a focused macro market.
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From page 52... ...
In 2006, Ocean Tomo began a series of public equity indexes based on the quality of a firm's patent portfolio. Malackowski presented data indicating that Ocean Tomo funds -- which focus on companies that generate significant licensing revenue or earnings, that have high intellectual property value to total book value ratios, and that have intellectual property valued by an independent third-party appraiser in excess of $1 billion -- have outperformed their traditional counterparts (e.g., S&P, NASDAQ, and Dow Jones)
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From page 53... ...
4.4. INSURING THE VALUE OF INTANGIBLES Nir Kossovsky provided insights about valuing intangible assets from a finance management perspective.
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From page 54... ...
Kossovsky reiterated that, if a company manages its intangibles well, the markets will reward them. Looking at some 2,800 companies over 28 months, Steel City Re researchers found that the companies that are superior managers of their corporate intangible assets -- their ethical reputation, their environmental sustainability, their quality, their integrity, perceived innovative and inventive, etc. -- tend to outperform the market substantially.
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From page 55... ...
Because safety is an intangible asset with tremendous value to companies like ConAgra, the firm remodeled its peanut butter manufacturing plant to much more rigorous standards. The effort appears to have paid off, as no ConAgra products were named in the more recent peanut butter safety crisis.
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From page 56... ...
Its mission is to "establish and improve standards of financial accounting and report ing for the guidance and education of the public, including issuers, auditors, and users of financial information." Furthermore, the organization seeks to "improve the usefulness of financial reporting by focusing on the primary characteristics of relevance and reliability and on the qualities of comparability and consistency." FASB also develops broad accounting concepts as well as standards for financial reporting and provides guidance on the implementation of standards. Ron Bossio described the organization's work on external financial reporting, its current projects and priorities, and made suggestions for ways to improve reporting of intangible assets.
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From page 57... ...
Management discussion and analysis affords opportunities for reporting softer information outside financial statements and SEC requirements. Bossio added that one of the problems with financial reporting is that so much emphasis is put on earnings and earnings-per-share metrics.
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From page 58... ...
, and inputs through the SEC advisory committee, the Financial Accounting Standards Advisory Council, and others. Managers and investors need to know what they are spending and what the payback is from that spending, and this kind of reporting has a place in a principles-based disclosure framework (such as that advocated by the Investors Technical Advisory Commit tee)
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From page 59... ...
Bossio followed up this point by noting that the chairman of the SEC has been pushing for the use of extensible business reporting language (XBRL) in an effort to get people to standardize data reporting electronically.
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