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80% of the value of the average company is intangible. So if you want to build value in a company, this is the place to focus. Presentation made to Exit Planning Exchange in Boston in September, 2010.
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The Exit Planner’s Guide to Building Corporate Value
Mary AdamsI-Capital Advisors
Download slides: slideshare.com/maryadamsica
How to become an intangible
capitalist
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Corporate value is increasingly intangible
Research: Ned Davis
Components of
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Market Premium
Intangible Book Value
Tangible Book Value
Components of S&P 500® Market Capitalization
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
S&P 500 Market Cap ($ billions)
Market Premium
Intangible Book Value
Tangible Book Value
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This change touches all sectors
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Telecommunications Services
Information Technology
Utilities
Intangible Value as a % of Total Market Capitalization by Sector
1975
2005
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Tangible, 30%
Intangible, 23%
Goodwill, 47%
A similar breakdown in mergers
E&Y: Acquisition Accounting – What’s Next for You? Global sample of 700+ mergers in 2007
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The gap is not “goodwill”
• This large amount of intangibles in business is not the result of some abstract market “feeling”
• It is the result of 30+ years of investment in the knowledge infrastructure of American corporations (people, processes, info tech, networks)
• Annual investment in knowledge intangibles now exceeds tangible investment….
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Tangible $1.2 trillion, 43%
Intangible $1.6 trillion, 57%
U.S. corporate investments - 2007
Business Week, October 29, 2009 (using unpublished data from Corrado, Hulten and Sichel)
(includes software, R&D, advertising and training)
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KnowledgeAssets
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IC approaches to increasing value
1. Identify key intangibles � one day
2. Describe/measure them� one week to two months
3. Improve performance and value� six months to six years
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1. Identify
• Take inventory for each category
• Pay special attention to structural capital
• Create visualization of how they fit together from “you can
grow like Google”on YouTube
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Emerging � Introduction � Maturity � Decline
Technology Product Life Cycle
Research
Vendor
Consulting
Events
End User Consulting
…more visualizations
Text Retrieval
Imaging
Document Management
Workflow
Business Process Reengineering
Process Modeling Intranets
Knowledge Management Portals E-Business
E-Learning Enterprise Wireless
ManufSkills
JapaneseMotorcycle
manufacturers
ReverseEngineering
Laissez faire policy
Just-in-time sourcing
Entrepreneurial culture
Modular designs
Chinesemotorcycle
industry
Financing
Global customers
TACTICAL
STRATEGY HIRING
PROCESSFORECAST
PRES
FINANCE
VP OPBIZ DEV
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2. Measure (why bother?)
PwC provided different reports to two groups of analysts:
1. Financial statements, narrative, a few key metrics and extensive quantified nonfinancial data [full Coloplast annual report]
2. Stripped out quantified nonfinancial data [resulting report still similar to/better than market norm]
Very different results:
1. 60% of analysts recommended “buy”� earnings estimate lower but more consistent
2. 80% recommended “sell”� earnings estimate higher
Source: http://corporatereporting.com/benefits-reporting.html
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Triangulating intangibles
Investment (financial)
Assessment (qualitative)
Performance Management (quantitative)
Corporate Intangibles
• Earnings• Capacity• Innovation• Valuation• Reputation
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What to measure in private co’s
• Human Capital� employees, management, succession
• Relationship Capital� customer base, sales and marketing, non-
customer relationships, brand(s)
• Structural Capital� processes, systems, intellectual property
• Strategic Capital� business model, external conditions
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3. Value challenge
Companies in my industry trade at 2-8 times EBITDA…that means my company is worth 8 times EBITDA
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Value map
1. Assess how the company compares with its peers for each IC factor (below, average, above) ideally using stakeholder interviews
2. Look at expected value ranges in peer group (below, average, above)
3. Highlight the gaps and opportunities4. Develop and execute value building plan
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Human Structural Relationship Strategic
Map multiples against IC
Low
Average
Best 8x
4x
2x
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Examples of increased value
• Increased growth and innovationHigh-end consulting firm doubled in size
• Optimized performanceHealthcare product revenues grew with lower headcount investment
• Higher valuationsTech firm sold at a premium to market
• Great reputationEngineering firm doubled key hourly rates
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Resources
Slides at slideshare.com/maryadamsicaNewsletter: Management 2.0 last Tues of month Book: www.intangiblecapitalbook.comCommunity: www.icknowledgecenter.comBlog: www.smartercompaniesblog.com
Mary Adams, [email protected]: maryadamsica
