Intangible Assets Hold Tangible Value
An Intangible Marketplace
As we enter the 21st century the industrial economy is quickly being replaced by the knowledge economy. Globalisation, rapid technological change and innovation now play a significant role in the new environment.
This new environment has contributed to elevating the importance of intangible assets in the marketplace –– reducing the historical correlation between market value and tangible assets for many corporations.
Intangible assets such as a company’s intellectual capital, management skills, knowledge base, business modules, good-will, brand value and future company strategy are now becoming more important than their traditional ‘tangible’ counterparts.
Conventional management has historically focused attention on ensuring the best return on tangible assets and financial capital. Assets traditionally valued on the Balance Sheet including property, equipment, inventory, cash and investments have all contributed to the book value of many corporations. The world’s most successful companies have become very adept in managing these assets.
However, in the new economy an increased premium has now been placed on intangible assets. Mergers & Acquisitions, the amortisation of company assets and brand value have highlighted the importance of intangible assets.
Excerpt from IBM’s® 1999 Annual Report
For the seventh consecutive year, IBM’s technical community led the world in U.S. patent awards, with 2,756 – 900 more than the second-place finisher. Our intellectual property portfolio earns IBM more than $1 billion in licensing royalties, in addition to securing our technical leadership now and for years to come.
Unlike many physical assets which depreciate over time, a company’s intangible assets may appreciate quickly in the marketplace. Within today’s environment, many companies fail to link the intangible value of a company with the tangible when assessing company value. CEO’s, CFO’s and executives need to recognise and assess this value throughout the company’s financial statements.
Professional investors, financial institutions, venture capitalists, analysts and stakeholders now look further into company performance other than the Balance Sheet, Profit & Loss statements or other financial information traditionally presented in an Annual Report or company Prospectus.
In 1999 the market capitalisation of Coca-Cola® was US$112.5 billion. The intangible assets of Coca-Cola® consisted of 91 percent, or US$102 billion, attributed largely to management, brand value and Intellectual Property
Research & Development, company processes and resources, trade alliances, management skills, human capital, intellectual property, market opportunity and leadership, branding activities, brand value, corporate vision & mission and future company strategy are a number of growing non-financial attributes investors now analyse over traditional ‘tangible’ values.
The value within these attributes are capable of directly effecting company performance, stock value, brand equity and ultimately core company value.
The emerging gap between book and market value illustrates the importance of intangible value. Research indicates that up to 70 to 80 percent of a company’s market value can be attributed to a company’s intangible value.
In many cases, a company’s intangible assets actually far outweighs tangible assets.
The valuation of intangible assets is now increasingly becoming recognised as a crucial aspect of corporate growth strategies.
Yet, as we enter the new ‘intangible’ environment established business practices and metrics are not readily responsive, adaptable and/or fail to understand the importance of ‘intangible’ asset management and its leveragable capabilities.
Valuating intangible assets is extremely important when building company value. In today’s environment companies must develop reliable business models that better reflect the dynamics of a corporations wealth creation and acquirement as an essential investment for future growth.
Now more than ever, corporations must ensure they communicate intangible value to appropriate audiences. Financial institutions and professional investors purchase stock in the belief of the company’s ability to deliver a positive return in the future. Corporate communications and investor relations are crucial to informing audiences of a company’s intangible assets and its utilisation of these assets. Annual / Quarterly Reports, Company Prospectus’, Press Releases and a corporations website are a few mediums in which corporations are able to inform audiences of these assets.
The increased premium on ‘Intangible Assets’ has now become a formidable challenge for business. ‘Intangible Assets’ are now an integral aspect of business strategy. Corporations must ensure they have knowledge of what they have; know how to protect it; know how to manage what they have; and know how to leverage ‘Intangible Assets’ for company value.
What You Need To Know
Intangible asset management can be extremely complex. The growing relevance of intangible assets can be seen throughout their commercialisation, Intellectual Property (IP) licensing for instance is becoming increasingly common across a range of commercial transactions. However, transacting with ‘intangible’ assets such as IP can expose a corporation to significant risk. Within today’s environment companies need to be knowledgeable of how to introduce commercial and strategic acumen into ‘Intangible Asset’ management.
Intangible assets have now captured the attention of the financial and corporate worlds. Investors, financial institutions, analysts and stakeholders are now increasingly analysing companies based on non-financial criteria. Knowing your asset base and communicating this value to stakeholders for further investment and growth strategies will leverage your corporation for greater market position and future company value
Why Is This Important?
The value of a company can be built and sustained on it’s Intangible Assets. ‘Intangibles’ such as a company’s intellectual capital, management skills, market opportunity and leadership, brand value, corporate vision & mission and future company strategy are becoming more important than ‘traditional’ Balance Sheet values such as property, equipment, inventory, cash and other investments.
The following points outline a few reasons why intangible assets are important to your corporation.
– A professional investors decision to invest is based on non-financial criteria;
– Company’s that fail to communicate the value of their intangibles will seriously jeopardise investor confidence, future financial performance and ultimately share price;
– Annual Reports and company Prospectus’ are an ideal opportunity to tell the story of your intangibles.
– Intangible assets operate within a company on a daily basis, whilst intangible value perpetually builds wealth for a corporation.
– When dealing with ‘intangibles’ some of the issues needed for the development and management of ‘intangible assets’ include;
– Intangible Asset protection strategies and options;
– Conduct an Intangible Asset inventory and periodical Intangible Asset audits;
– Intangible Asset monitoring and infringement;
– Knowing how to extract value from Intangible Assets;
– Commercialisation of Intangible Assets.
‘Intangibles’ are a company’s most important asset –– ensure your company effectively develops, manages and maintains these assets throughout their life.
In 1998 IBM Global Services introduced its own knowledge management program for the 52,000 Europe-based employees. Designed to recognise innovative employees and to ensure productivity, IBM rewarded employees as a part of its knowledge-for-compensation program by offering $5,000 for personnel whom created and shared ‘new’ knowledge which was later utilised by other employees.
Key Considerations
Contrasting the management of intangible assets with that of conventional physical assets demonstrates the challenges involved in managing Intangible Assets. The monopolistic benefits conferred to companies through Intangible Assets can yield substantial dividends. Total tangible and intangible asset assessment, valuation and management should play a significant role in a corporations strategy.
- Measuring Intangible Assets
Measuring intangible value by traditional valuations has little application when valuing intangible assets. The business value and relevance of intangible assets is crucial when assessing intangible value. The economic value of intangible assets is only defined by the company’s proficiency’s, capabilities, resources, market value and the performance of these assets.
- Intangible Asset Management
Unlike tangible assets, intangible assets – such as Intellectual Property (IP) for instance – are closely aligned with a company’s people resources, or its ‘Intellectual Capital’. Companies will be exposed to significant risk if they do not systematically document and record value creation and intangible assets throughout the corporation. If a company fails to adequately share skills, knowledge and experience within the corporation then the ‘Intangible Assets’ and the management of these will be irrevocably jeopardised; ROI will be weakened; the value of the assets will be inconclusive; and external factors such as market and investor confidence will be eroded.
- Be Prepared
The value of intangible assets can be easily lost through mismanagement. Confidential information, trade secrets and market know-how only remain valuable whilst they are kept confidential. Inadvertent public disclosure of confidential information, the lapsing of Intellectual Property registration or committing to market without the correct strategy may destroy an entire investment by voiding any competitive advantage.
- Assess Intangible Value Periodically
Similarly to tangible assets, the value of intangible assets changes over time. Tangible assets depreciate over time, however intangible assets are capable of appreciating rapidly. Intangible assets must be continually protected, managed and maintained –– inventories are invaluable in periodically recording and documenting a company’s value. If intangible assets are not managed correctly value will disperse; be lost through normal business processes; transfer to competitors, hinder management of other assets; become inactive and/or irrelevant; and will expose company’s to significant risk.
This article was originally written in 2000 and has been republished.