Intangible Valuation Continues to Fuel Controversy

There is a great discussion here on the blog of IAM Magazine (IAM stands for Intellectual Asset Management) on the question of intangible value. Editor Joff Wild put out the question whether the declining stock market implies that the value of intangibles has disappeared. A spirited debate has followed with 12 comments to date. Here are some of the ideas that I included in my comments.

The stock market intangible gap: The gap between the stock market capitalization of companies and their tangible book value has narrowed due to the severe downturn in equity prices. I have defended this metric–but principally as an indication that the stock market sees more value in companies than one can find on balance sheets. This has arisen because our shift to a knowledge economy has lead to greater and greater earnings using fewer and fewer physical inputs. Earnings fueled by knowledge have fueled higher stock prices. The stock price vs. book value gap is an indicator of the growing importance of intangibles but not much more.

It’s not just about IP: There are many of us that have used this shortcut to educate the uninitiated of the growth in the “intangible” sector. What’s funny is that some in the IP space used to attribute all 80% (or whatever number you wanted to use) to IP, marketing and advertising folks attribute it to brand, and human resources folks attribute the value to human capital. The truth is that it is all of those things: human, relationship and structural capital, to use the vocabulary of the intellectual capital movement. But it is very hard to separate each component.

The highest and best use of most assets is in place: When I was a high risk lender, appraisals of factory and production equipment were always valued under three scenarios: in place, orderly liquidation and forced liquidation. Our borrowers were always shocked by the low valuation their assets would have if you broke up the factory. IP is really not that different-the most successful exploitation of the technology will usually be in a company that had the skills and network to develop the technology in the first place. You take it out of that context and the value will go down.

Successful corporate use of IP will not focus on value: To return to the factory analogy, managers do not expand a factory because it will have good resale value. They invest in the expansion because they can make a good return on their money. The same is the case with IP (and really all intellectual capital)-managers invest because the investment is expected to yield a good return.

Cost is actually a good metric: The irony is that so many people are looking for the right “valuation” method they are failing to start with the basic, easiest and verifiable metric: cost. Because most intangible investments are hidden on the income statement, companies fail to add them up and analyze their full “intellectual capital expenditure.” There are a few in the accounting industry that are beginning to address this (see my recent blog posts on this here.