The role of IP in corporate transactions
Balance sheet reporting of corporate acquisitions showcases highly valuable IP. For instance, Google’s 2011 acquisition of Motorola resulted in US$5.5billion being attributed to patents - 44% of the total purchase price. In contrast, Kraft’s 2010 acquisition of Cadbury was largely driven by brands. US$10.3 billion, which was 41% of Cadbury’s enterprise value, was attributed to the trade mark portfolio. Similarly, when Foster’s was acquired by SABMiller, approximately 40% of the US$11.8 billion price was attributed to brands, principally Carlton and Victoria Bitter.
Against this backdrop you might be surprised to learn that only 1.5% of the value of the ASX100 is represented by IP that appears on balance sheets. How does this correspond with IP contributions of over 40% in Motorola and Google? The reason is not an absence of valuable Australian IP, but restrictive accounting standards. In the main, only acquired IP can be reflected on balance sheets.
We live in an age of intellectual capital – net tangible assets only represent 44% of ASX value – so the lack of disclosure is nonsensical. It compromises the ability of investors to evaluate corporate risk and growth prospects. However, a rant about accounting standards is not the purpose of this article. We are more concerned about whether the directors of IP owning companies have an accurate grasp of the current and potential value of their IP.
Estimating the value of Australian IP
Griffith Hack has estimated that ASX100 companies own brands and technology worth $280 billion. In the Health Care sector technology contributes 20% of enterprise value and in Consumer sectors brands drive 18% of value.
Click here to view table.
Only 10% of the IP value appears on balance sheets, and despite the materiality of these assets the narrative sections of the annual reports barely mention the existence of patent and trade mark portfolios.
It is incorrect to attribute the silence to the protection of competitive intelligence. Details of registered IP are publicly available in the records of IP Australia and similar bodies in other jurisdictions. The unfortunate truth is that the poor disclosure of IP is symptomatic of weak management information.
Is a dollar of IP less worthy than a dollar of plant & equipment? Should the executive team and board bother to review metrics of IP performance and value?
Benefits of better IP management
Viewing trade marks and patents as B-grade assets is foolish. Intellectual property rights are strategically important as they enjoy robust legal protection and can generate secure earnings. Brands and technology are the crown jewels of many organisations and their commercial strength is reflected by the fact that they are regularly licensed and sold on a standalone basis.
Understanding the current and potential value of technology and brands helps companies increase corporate earnings and mitigate value at risk.
- IP metrics enable organisations to develop value maximising strategies, set appropriate budgets and track the return on investment. For instance:
- The level of investment in R&D and marketing should be optimised by return on investment analysis.
- The economic impact of changes in brand strategy ought to be quantified.
- Picking the winners amongst R&D initiatives should be based on the expected value added rather than subjective criteria.
- When considering corporate acquisitions, the economic and risk profiles of targeted IP should be quantified.
What questions should company Boards be asking?
In order to determine whether they have sufficient information to manage risk and assess growth strategies, Boards can ask a few simple questions.
Managing intangible value at risk:
- How valuable are key technology and brand assets?
- Are they supported by adequate legal protection?
- What measures are used to track the commercial strength of IP?
- In the last financial period, what are the reasons for any changes in IP value?
Developing strategies that maximise IP value:
- How are opportunities to increase IP value identified and quantified?
- How much IP value is forecast to be added by the strategic plan?
- How has the level of IP investment been determined and what is the expected ROI?