The Hindu Business Line : Intangibles are the tangible assets now

TODAY, `INTELLECTUAL property' has become the most important resource for companies. Tangile fixed assets such as land, buildings and machinery are no longer held to be of great value by many American companies; the trend is visible elsewhere in the West as also in Japan. In the 1980s, the intangible assets covered by `intellectual property' accounted for about 40 per cent of the value of listed US companies. Today, they have almost doubled, to 75 per cent of the value.

`Intellectual property' is all about copyrights, trademarks, patents and so-called trade secrets (confidential practices). `Brands' owned by companies form the bulk of `intellectual property' coming under the broad description of trademarks.

Most Mergers and Acquisitions are about buying `brands' which directly translate to hundreds of satisfied customers. So much so that valuing brands today has become very esoteric and getting refined by the day. BusinessWeek undertakes a study every year to publish the value of the top 100 brands — mostly of the Western world — and has tried to use a methodology evolved by Interbrand.

Shakespeare may have written about the irrelevance of name in the description of a very familiar flower with a very familiar smell, but the focus on brands, their valuation and their relevance to companies, especially in today's emphasis on globalisation, runs counter to the Bard's famous lines. It is more appropriate to say even one moment's glory is worth an age without a name!

So what is so great about valuing brands? The BusinessWeek survey for 2005 records a total of hundred brands at a total value of a little over one trillion dollars. The top 15 account for almost half the value and only two (Nokia and Toyota) are from outside the US.

The Interbrand methodology is broadly the same as that used for valuing tangible assets — estimate the earnings stream for the future. Each brand is isolated (for a multi-brand company) and its revenue and earnings projected for the next five years. The operating costs, taxes and a capital charge for that part of the capital employed for the brand's revenue stream are calculated. The net is the earnings stream for the brand. An adjustment is then made for management strength, patents, etc., to more accurately arrive at the core of earnings that can be attributed to the brand.

Thus reduced, the earnings are finally tested out for the element of risk attached to the future earning stream. Other parameters such as the ability of the brand to be truly global and market share movement are used to arrive at a discount rate to generate the net present value of the future earnings profile.

The valuation methodology may have some imperfections — certain assumptions can be questioned — but it does give an approximation of the intrinsic value of a company. The market capitalisation value factors in the earnings of a company and gives some weightage to the industry earnings trend as well.

Ultimately, the true operating earnings boil down to the earning streams generated by each brand owned by the company.

Brand valuation, thus, becomes important to assess the future wealth potential of a company. This also becomes the initial reference point for takeover negotiations.

The scramble for patents and trademarks, especially by technology companies, underlines the new emphasis on intangibles.

(The author is President, Telekonnectors Limited, Chennai)