The Reputation and Intangible Asset Value Crash of 2008
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Crash of 2008 The reputation and intangible asset value crash of 2008 a number of efforts to standardise and Over the last 12 to 18 months the codify if not valuation methods, then at percentage of listed company least public disclosure obligations about values that can be attributed to that value. The latter found their broadest expression in the US in the Sarbox intangibles has fallen rapidly, to legislation, the Public Company Accounting stand at under 50%. Serious Reform and the Investor Protection Act of rebuilding work is needed 2002 which was promulgated after several major accounting scandals. By Nir Kossovsky Paralleling the efforts of bureaucrats and regulators, investors increasingly evolved Reputation is the impression formed by into consumers of intangible asset financial stakeholders of how a company manages its information and created a demand for intangible assets. The median value of those market-driven indicators of value. An early assets among traded US companies has respondent was The Patent & License hovered around 70% for the past few years. Exchange, which in 1999 released the first At the end of the fourth quarter of 2008, the commercially available algorithmically median value was below 50%. This article driven indicator of intangible asset value reviews market phenomena that accompanied that used current market data to reprice the historic growth in intangible asset value, indicated IP value and technology sector explores factors associated with the recent beta (β) values daily. In 2000, the collapse in value and considers the future reinsurance giant Swiss Re set aside implications for reputation management and primary risk capital for previously the world of intangible assets. uncovered/uncoverable intangible asset Since the end of World War II, Western (patent title) risk. In the same year, Inspire economies have been decreasing their Invest, an investment advisory, began dependence upon manufacturing and providing investment advice based on target increasing their reliance upon the creation valuations drawn from extra-financial data. This article is sponsored by the Intangible and manipulation of information, knowledge CHI Research, a valuation firm, launched an Asset Finance Society’s Secretariat. The and technology as the means by which IP investment pool called the Patent Quality objectives of the Society (www.iafinance.org) companies generate profits. The resulting Select Trust in cooperation with Nike are to increase the visibility, transparency, disposal or at least de-emphasis of physical Securities, and The Patent & License and value of intangible assets through assets and the increasing development of Exchange released the Intangible Asset education, advocacy and the promulgation technology-based innovations in business Market Index in cooperation with The Deal, of standards. The Secretariat of the Society processes transformed intangible assets a leading mainstream financial publication. is concerned with broad market and collectively into 70% of (median) corporate In 2001, investment advisers increasingly managerial issues that have an impact on value. In 2008, this decades-long trend turned to extra-financial data for indicators intangible asset value at an operational level. abruptly reversed course. of intangible asset value. Institutional IAM magazine, a Globe White Page Ltd Shareholder Services, a large investment publication, is the media partner of the Market events accompanying the rise in advisory firm, launched an extra-financial Society. IAM magazine publishes in each intangible asset value data index on intangible assets and corporate issue a contribution from the Society on a The rise in median intangible asset value governance; meanwhile, Vigeo Group, noteworthy intangible asset finance matter. shown in Figure 2 from 20% to a maximum another investment advisory, began Visit the Society at www.iafinance.org. of about 70% of traded companies triggered providing investment advice based on target 38 Intellectual Asset Management March/April 2009 www.iam-magazine.com Crash of 2008 Intangible assets and brand, reputation and value Notwithstanding ongoing efforts by the employees, suppliers, customers, Intangible Asset Finance Society, competitors and investors. The first four cast nomenclature in the field of intangible finance their votes through wages, cost of goods and is not standardised. In this article, three pricing; investors cast their votes through phrases are defined as follows: earnings multiples and price volatility. Intangible assets. Assets with no formal Value. In the absence of an arm’s-length home on the corporate balance sheet. market transaction for an asset such as a Except for certain circumstances, their value patent, trademark or business process, the is neither recorded nor reported according to value of intangible assets cannot be Generally Accepted Accounting Principles determined according to GAAP. There are (GAAP). They comprise the intellectual many proprietary non-GAAP methods that products, including patents and trademarks, provide indications of value. Financially, the that enable companies to provide goods and values of most intangible assets are closely services; the customer promises embedded linked to one another like the stones in a in brand; and the ability to deliver on those Roman arch, so that collectively the intangible promises through the business processes assets comprise an enterprise’s reputation that govern quality, safety, security, integrity, value – the difference between market sustainability, risk management etc. capitalisation and book value. To continue the Reputation. The impression formed by analogy, like a Roman arch, the loss of any stakeholders of how a company manages its one key intangible asset may destroy a intangible assets. Stakeholders comprise disproportionate amount of reputation value. Reputations take shape from perceptions valuations drawn from extra-financial data. its ratings and corporate value. Also that stakeholders have about an enterprise’s Intangible asset finance activity year, the Vigeo Group was retained by ABP intangible assets. Intangible assets comprise increasingly involved larger institutions. In Fund with €200 billion worth of assets business processes governing ethics and 2005, Thomson Extel reported that 6% of under management and Munich Re set aside integrity; quality, safety, sustainability, security buy-side brokerages were devoting material US$200 million in primary risk capital for and innovation; patents, trademarks. Each resources to extra-financial data to previously uncovered/uncoverable risks. asset supports the enterprise’s value, but determine intangible asset value. PwC Last, the Enhanced Analytics Initiative, an neglect or removal of one stone weakens – reported a controlled experiment showing international extra-financial investment and may topple – the organisation. that extra-financial data, and intangible asset information cooperative, reported value calculations arising, swayed 40% of membership had a total of US$2.4 trillion of analysts to change their target valuations of assets under management. public companies. That year, Inspire Invest was retained as an investment adviser by The crash of 2008 Credit Agricole Asset Management Group. As the investment community produced In 2006, Thomson Extel reported that and consumed an increasing amount of 32% of buy-side brokerages were devoting extra-financial data, cracks began to appear material resources to extra-financial data to in the Roman arch of intangible asset value. determine intangible asset value, a year-on- After peaking in June 2007, the accelerated year growth of more than 500%. Also that decline became a noticeable trend by year, Goldman Sachs invested in, and December 2007 and moved into a full became a distributor for, Asset4, a major collapse by mid-summer 2008 (Figure 3). provider of extra-financial data and Our ongoing analysis of the tangible and algorithmically driven indications of intangible drivers of market value suggests intangible asset value. On the American that two parallel events can explain the Stock Exchange, replicating the structure of relative decrease in intangible asset value the Patent Quality Select Trust, the OT300 and the concomitant relative rise in tangible was created in cooperation with Ocean asset value. Turning first to the intangible Tomo. Last, the sponsor of this series of assets, the most likely proximate cause of articles in IAM magazine, the Intangible this drop was a growing lack of confidence in Asset Finance Society, was founded. their value. Confidence, a perception held by As intangible asset value neared its peak a stakeholder that is a cousin to reputation, in 2007, Institutional Shareholder Services is the friction between and among the launched a new extra-financial data index stones in the Roman arch that hold them in on the sustainability intangible and place. Confidence is reflected in stock price suggested there was a correlation between volatility. Confidence took an acute turn for www.iam-magazine.com Intellectual Asset Management March/April 2009 39 Crash of 2008 Figure 2. Growth in intangible assets as % of market capitalisation 1975-2008 20 30 60 70 45 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Growth in intangible asset regulatory guidelines 1972-2004 2008 SARBOX 302 FAS 141 SARBOX 404 IAS 36 SFAS 2 FAS 142 SARBOX