The many values of intangible assets

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Permalink Reply by Thomas Mathiasen on February 15, 2011 at 3:00pm

I have no comments to the 4 values; however, I do not understand why a high degree of intangibility could be compared to a low control of the asset? I guess that on could argue that a bunch of highly skilled employees could be difficult to keep incontrol. On the other hand, keep control of a crate of solid gold could also be highly difficult.

 

So, again, I do not get the point. Sorry.

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Permalink Reply by Mauro Gatti on February 16, 2011 at 3:14am

Hi Thomas,

 

this was discussed in another post on this web site Intangibles scaling See also

 Intangibles Overview for further details on intangibles scaling.

 

Control is one of the fundamental dimensions according to which we may scale assets;  and many intangible assets have a lower degree of ‘controllability’ than tangible assets. I point out that you can own gold, but you cannot own employees. You can control employees through employment contracts, incentives, etc.; but all of them are much less effective than ownership. In that sense you have a lower degree of control. See Intangible Assets Control for further details.

 

This is an extremely important point that needs an in-depth analysis.

 

Thank you very much for your comments.

 

Mauro

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Permalink Reply by Thomas Mathiasen on February 16, 2011 at 4:04am

Hi Mauro

 

I agree, that this topic alone could lead to a long and detailed discussion, leading away from your original 4 points in your post, so I´ll let it be. Just with my last remark, that ownership alone of a tangible does not necessarily in itself gives more control.

Thomas

Mauro Gatti said:

Hi Thomas,

 

this was discussed in another post on this web site Intangibles scaling See also

 Intangibles Overview for further details on intangibles scaling.

 

Control is one of the fundamental dimensions according to which we may scale assets;  and many intangible assets have a lower degree of ‘controllability’ than tangible assets. I point out that you can own gold, but you cannot own employees. You can control employees through employment contracts, incentives, etc.; but all of them are much less effective than ownership. In that sense you have a lower degree of control. See Intangible Assets Control for further details.

 

This is an extremely important point that needs an in-depth analysis.

 

Thank you very much for your comments.

 

Mauro

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Permalink Reply by Gordon McConnachie on February 16, 2011 at 5:48am

The concept of assessing the value of intangibles is not new: in fact it has its roots in Japan in the 1960s. In 2005 the VMRC (Value Measurement and Reporting Collaborative) identified over 80 methods for placing a value on intangibles. In most business related cases the "use value in context" was found the most  appropriate. For more information please see http://npi.valuemeasurement.net/Rediscover/Section8.shtml VMRC was created under the auspices of several national accounting standards boards. The key researchers are Rob McLean and Patrick Sullivan.

 

Gordon  

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Permalink Reply by Matt Evans on February 17, 2011 at 2:56pm

Value to people in finance (such as myself) usually equates to Fair Market Value – how much can you realize by selling something. So the question that finance asks over and over again is how much is something worth? The goal is to maximize the value for the investor and realize a return. 

 

For example, publicly traded companies are valued in terms of their stock price and these stock prices do take into account things like Intellectual Capital. Just compare General Motors vs. Google. One company is primarily driven by hard physical assets – things like inventories of automobiles, manufacturing facilities and distribution centers. Google on the other hand is driven primarily by its intellectual capital (ability to innovate, brand name, etc.). If you compare the Balance Sheets of these two companies, General Motors has ten times more assets then Google. However, Google has a market value ten times greater then General Motors. How can this be? It’s due to the fact that the marketplace perceives higher valuations from intellectual capital (innovation, leadership, talent, etc.). Hard assets depreciate in value whereas intellectual assets can appreciate in value.  

 

It’s nice to have academic discussions about value, but it becomes very real when you go through a liquidation event – you sell what you own and deposit a check in your bank account. To entrepreneurs this is almost like a right of passage - how they build their own personal wealth. In the world of finance, you get measured by the marketplace – what is the market value? And intellectual capital can play a big part of how the marketplace perceives value.   

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Permalink Reply by Mauro Gatti on February 18, 2011 at 5:34am

Hi Matt,

 

thank you very much for highlighting the importance of fair market value. You have explained effectively the relevance of exchange value in various contexts (e.g., liquidation).

 

There are two main comments I want to make to further clarify the meaning of questions I have raised:

 

Valuation of an intangible asset vs. valuation of the intangible capital

 

There is huge difference between valuing a single intangible asset and valuing the overall intangible capital of a firm. You may consider the market capitalization of a firm as an approximate measure of the value of the intangible capital of a firm, and please note that I have some doubts about the correctness of this approach, but this gives us no hints on how to value specific intangible assets.

 

Let consider for instance the case of a firm looking for people skilled in specific areas. In selecting the people to hire and deciding the appropriate salary to offer, the firm is basically assessing the value of a few intangible assets, like the knowledge that the person will bring to the firm.

 

Exchange value vs. use value

 

Let consider a well known intangible with a relatively low degree of intangibility: patents. Patents are a good example of the very few intangible assets that may have an exchange value. Firms with large patent portfolios are typically not interested in selling their patents but on the contrary to use their patents capital to negotiate cross licensing with other firms.  

 

Firms may get revenue out of selling the right to exploit inventions for which they own patents, but the ultimate goal may actually be to gain the rights to use inventions patented by other firms. That means that we may be able to assign an exchange value to the patent but this number gives little indication of the use value of the patent, notably the value of the freedom to develop new products. Moreover, cross-licensing negotiations are typically done for patent thickets, namely for set of related patents.

 

If this is the case, the exchange value should be assigned to the patent thicket not to single patents, but it may be absolutely impossible to sell the whole patent thicket. So in summary:

• the exchange value of single patent may be weakly related to the exchange value of the patent thicket to which it belongs;
• the exchange value of the patent thicket may be purely theoretical because there may actually be no possibility to sell the thicket; and
• the use value of the patent may be much larger (e.g., in terms of revenue generated by products that leverage this patent) than the exchange value.

 

I hope this helps to clarify further my questions. Thank you very much for your contribution.

 

Mauro

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