Exploding the Intangible Asset Market Cap myth

  Posted on October 27, 2008 By

 8 Comments

Last week, Pat Sullivan posted a great comment on the (ongoing) myth clung to by many in the Intellectual Asset and Intellectual Property fields – that you can calculate the value of a publicly traded firm’s intangible assets by simply subtracting the value of the tangible assets from the current market capitalisation.

This is the line of thinking that generated the often quoted figure that 70% or more of a companies assets are intangibles.

I’ve always qualified that by saying here ‘intangibles’ must include a fudge factor for market perception – which overules everything in the publicly traded stocks.

As Pat points out, the current economic crisis and the large market cap losses on stock markets underscore the proposition that the difference in value is not simply attributable to intangible assets.

 

 Category: Pursue Excellence

8 Comments on “Exploding the Intangible Asset Market Cap myth”

  1. I must start by saying I know nothing about this topic but my initial thought is – ‘why’. One of Pat’s comments ‘….it would suggest that the recent decline in stock prices must be due to a spontaneous worldwide precipitous drop in the value of intangibles to business’ seems entirely plausible.  Intangible assets, like all assets, are only worth what people (companies or individuals) can pay for them either from licensing in perspective or as a end user (e.g. in the health system or as a car buyer etc) and all these parties have less money to spend – so the intangibles are worth less and this is reflected by the falling stock.

  2. Thanks TJI agree that tangibles and intangibles would both be affected by a devaluation.Though, are you saying that there should be no further discount for perception amongst publicly traded stocks?

  3. Hi<pclass=msonormal

    I think there are a couple of different terms and concepts being mixed up here. 
    –          “Intangible assets” is an accounting term, which is defined as the cost of acquisition minus other assets.
    –          The value of a company’s “intangible assets” (on the balance sheet) generally doesn’t recognise internally developed IP, but would include IP it acquired.  Don’t think about it too hard – its accounting and doesn’t need to make sense!
    –          Market Cap is just your share price multiplied by the number of shares on issue and often has more to do with press releases rather than balance sheet valuation!  There is no direct link between a company’s balance sheet and its market cap (if there was, the share market would be an easy game!).  But if you acquire a company (public or private), the value of “intangible assets” is indeed the cost of acquisition minus other assets.
    –          Mr Sullivan is talking about “intellectual capital”, which is a management term rather than an accounting term, so you can’t compare or equate the two.  I’ve never heard anyone value a company on “intellectual capital” … so I’m not sure where the “myth” comes from…

    Ben

  4. Hey BenGreat comments – thanks.Totally agree about the way accounting vs management terms are mixed up!

  5. Duncan
    This is a good debate and one that is good to air.
    With the IP market still nascent it’s become commonplace and, I think, self serving, to quote these sort of figures. I don’t believe that the IP service providers do themselves any favours by doing so to a sophisticated audience.
    I used to slip into the same rhetoric myself in the early days of ipVA. What changed for me were two things, firstly access to a more sophisticated audience who quickly slaughtered the notion, second listening to many of the speakers at the IPBC in Amsterdam stating that “IP represented 80% of the value of the worlds capital markets”. Almost as if by saying it as many times as possible it would become so and hoping that by clicking their heels and saying it more of the people that matter would pay attention.
    To take the debate forward, isn’t it better to say that of the 70%-80% not represented by  tangible assets, it is safe to assume that a good part is made up of “intangibles”. Not of IP, but of the combination of human and intellectual capital.
    Even if the number is 20% it is still an area that boards should pay attention to. Isn’t it?
    Great blog by the way.
     
    Andrew
    ipVA

  6. Hi AndrewGreat points, and thank you.I agree (a) we should get away from the hyperbole and (b) the bottom line is that clearly intellectual capital (and IP as a component) is a significant part of the value of an entity.And now we get to the point where just about everyone is in heated agreement.

Legal Notices

Duncan Bucknell

%d bloggers like this: