Just how important have intangible assets become in business?
Ultimately, everyone knows there is only one true arbiter of how much a given set of assets is really worth: how much someone else is prepared to pay for them. This maxim is even more applicable to intangible assets, which don’t (yet) have the same ready market as the tangible commodities companies own.
However, that doesn’t mean it isn’t possible, and necessary, to understand the quantum of value now resting in businesses’ Intellectual Property (IP) and other intangibles – even if these assets (or companies) in question aren’t currently for sale.
To get a sense of the contribution they make, we can look at how much companies spend on intangibles; how these assets appear to influence share values; and what happens when firms sell stakes based on an intangibles-backed offering.
Helpfully, the 2011 UK IP review by Professor Ian Hargreaves provides some (fairly) recent data on investment in intangibles. The report quotes Government statistics from 2008, showing that UK businesses now spend about one-third more on intangible assets than they do on tangible ones – £137bn vs. £104bn. A key contributor within this asset class is IP, estimated to account for around £65bn of this investment.
What about share prices? One of the organisations looking regularly at intangible values is Ocean Tomo in the USA. Its analysis suggests that the “80/20” rule now provides a good shorthand when thinking about the level of value in intangibles (read more here).
Back in 1975, the implied intangible asset value of the S&P500 (derived by looking at book value as a proportion of market value) was 17%: in 2010 it came in at 80% when measured on the same basis. The company attributes this “total economic inversion” to the growth of the knowledge economy, and points out that these implied values are holding up, even during a period when total R&D spend is falling (though it is still increasing slightly if viewed as a % of revenues).
Similar exercises have been done in Europe. The introductory section of the 2006 Gowers Review draws the same conclusion from an assessment of top companies quoted on the London Stock Exchange. The European Commission said in 2010 that “intangible value has accounted for approximately three-quarters of corporate value as far back as 1995.”
None of their findings should surprise us. Rewind to the 1970s, and Western economies were still largely dependent on generating value from manufacturing capacity – multiplying the power of human effort. Now it’s much more about multiplying brainpower, not brawn.
It is also clear that the characteristics that make companies attractive purchases have changed. With so much production capacity offshore or subcontracted, it’s the brands, customer relationships, service formats and software code that buyers want. Recent flotations of technology and web-based companies have generated plenty of initial interest despite very challenging market conditions; and while the initial gloss has faded from some of these offerings, the fact that they got away at all is undoubtedly due to their shiny intangibles, not their shiny servers.
It seems the pendulum has swung decisively towards valuing assets that are unique, rather than types of property that are common across many businesses. Determining an appropriate value for them poses new challenges for investors, lenders, acquirers and licensees.
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