Intangible Capital in Mergers

In follow-up to my posts last week about the importance of structural capital and process, I would like to address a story from the press earlier this year (in the Boston Globe, IT Business Edge and IT Knowledge Exchange)

It involves an IT consulting firm that was acquired by EMC. The founders of the firm worked for EMC for awhile and then started up a new firm that EMC says does the same thing as the original company. I won’t comment directly on the case because I don’t have enough information but I would like to comment as background to the issues around buying intangible capital as part of corporate acquisitions.

In our own practice, we spend a lot of time getting people to do two things: create inventories of their key intangibles and then create models of how these intangibles fit together. This isn’t because it is an interesting intellectual exercise. It’s about creating an understanding and a set of sharable presentations that make the unique intangibles of an organization visible to its stakeholders.

I can’t help but think that this approach would have been a big help here–because part of the problem appears to be confusion over what EMC bought and what remains personal intangible capital of the principals involved.

Questions that seem very relevant to me include:

• What are the core processes of the company being acquired?
• What are the core knowledge assets that support these processes (databases, knowledge management etc.)?
• What are the key relationships and how are they tracked?
• What are the competencies and experience of the people?

Essentially, only the final bullet is personal property of the principals of the selling company. The rest would normally be sold and become property of the acquiring company. And this is a great example of where identifying and documenting process is critical. The essence of what a company does is in its processes. What are the unique aspects of the process being bought and/or sold?

Most deals involve non-compete agreements with key principals. These have limited value. Based on my understanding of the law, no court is going to allow an agreement that prevents the principals from earning a living in the future. But this case illustrates that all knowledge does not remain the personal “property” of the people involved. It is critical to ask what is their personal intangible capital and what it the intangible capital that they are selling? And, unless they lay claim to other specific knowledge assets, then the selling principals would have to be careful to come up with a new approach when they start another business.

An awful lot of businesspeople continue to ignore the 70-80% of corporate value that is defined as “intangible” by the accountants. This case is a great example of why that is a dangerous oversight. Our economy has definitively moved into the knowledge economy. It’s past time to get disciplined about defining what this really means inside of every company.