Comparables and Valuation: the role of intangibles in setting a market price

I  made the case earlier this month that corporate values are largely intangible today and that you can influence the value placed on your company by the market by sharing information on your intangibles.

What I haven’t discussed is the role of “comparables” in the valuation process.

Comparables are transactions for similar companies. The tell you the price and basic data from M&A for companies of similar size and business model in your industry. Seeing the price that other companies go for gives a good feeling for the overall market for businesses like yours.

But when you dig into the data, you’ll find a huge variation in results. There are often companies that have sold for as little as 2-3 times EBITDA. And others that have traded for numbers as high as 14-15 times EBITDA. The natural first inclination is to assume that your company is in the top category, Read more

The missing link in understanding IC

I did a quick project last week with a professional services firm that had been approached about an acquisition. I sat with the president of the company over the course of a couple days to create a powerful presentation for their initial meeting.

The reason I was asked to help is our expertise in intangible capital. A professional services firm consists almost completely of IC. But most professional service managers (like managers everywhere) don’t have the vocabulary or models to describe their organization’s IC effectively. Read more

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. Read more

Intangible Capital in M&A

I was thrilled to see this new report by the Hay Group The Silver Bullet of Success: Winners and Losers in the M&A Game. The report is about how intangible capital is critical to the success of M&A. Below are the major points of the paper (quotes in italics) with my comments on each one:

Companies underestimate intangible capital : Executives typically value intangible capital – including culture and customer relationships – at just 30 per cent of market capitalization, not the 75 per cent that analysts expect. Read more

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: Read more

The link between IT and innovation

I’m always on the look out for viewpoints on the links between and IT and innovation and I found some good thoughts here on the Synergize IT blog:

• One of the reasons for M&As is to harness the potential and intellectual capital in the other organisation
• Innovation at a departmental level will receive departmental results
• IT can enable innovation to happen smoothly across boundaries
• IT should make it really easy for people to get to where they would like to go and allow the ideas to flow

We know that technology has enabled the enormous burst of growth of intellectual capital in the knowledge economy. Good management and good IT management are getting harder and harder to separate.

The Role of Intellectual Property in M&A

It is clear in this very thoughtful article in Mergers and Acquisitions that there is a growing appreciation of the role of intangibles in business. The article features a discussion among eight figures from the world of Intellectual Property (IP). Some of the themes that I saw in this discussion include:

Role of patents as a protector of value in acquisitions – IP represents the legal right to specific inventions or know-how. This is becoming an important feature of mergers and acquisitions. Acquiring companies need to Read more