Lost Intangible Value in M&A

Here’s a question from Richard E. on SlideShare about my recent presentation on Intangible Asset Performance and Financial Results.

Richard E: From your experience when you have visited organisations and they value Goodwill. Can you relate intangible elements that are common across various companies? Same too if an organisation has Intellectual Property and then a merger occurs I suggest for the new combined organisation a loss occurs in respect of the intangibles capital. Perhaps in such instances there may be merit for the lessons learnt of optimizing intangibles before and after a merger to mitigate the potential loss. It’s just an idea, hope it appeals

Here’s my response: The only time that intangibles are put on the balance sheet is when there is a merger or acquisition. Data from a study of 709 deals in 2007 by Ernst & Young showed that, on average, 23% was booked to identifiable intangibles such as brands, customer contracts and technology. 47% was goodwill. Goodwill means, basically, that the accountants have no idea where the value came from. (By the way, if you do the math, only 30% of the deal was tangible)

The fact that the accountants call it intangible does not mean that there is no value there. In fact, I make the case that accountants should keep track of investments in different intangibles so that they can speak in an informed manner about them even if these investments cannot be specifically capitalized on the balance sheet.

And you are right–if a merger involves intangibles, your chance of success will go up if you evaluate the intangibles of each entity prior to the deal and use this information during the post-merger integration.

Most studies show that at least half of all mergers fail to deliver the expected return. If 70% of deals is intangible, it seems that we are past the time where it makes sense to get smarter about managing intangibles.

Let’s keep the conversation going!