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2. Brand Valuation

2. Brand Valuation

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Published by: Tarun Gupta on Feb 13, 2011
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BRAND VALUATION

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MEASURES OF RETURN? 

WHAT ARE THE TRADITIONAL MEASURES OF MEASURING RETURNS IN BUSINESS?

2

TANGIBILITY ISSUES 

TRADITIONAL MEASURES OF RETURN ALWAYS HAVE TANGIBLES IN THE DENOMINATOR (ROI, ROE, ROA).

3

TANGIBILITY ISSUES  EXAMPLES OF INTANGIBLE ASSETS? 4 .

MANPOWER. 5 . MEASURED. PATENTS.TANGIBILITY ISSUES  HISTORICALLY. BRANDS) BUT RARELY MEASURED. INTANGIBLE ASSETS WERE RECOGNISED AS IMPORTANT (TECHNOLOGY.

THE NEED  WHY AND WHEN DID THIS NEED TO MEASURE THE INTANGIBLE ASSETS GATHER MOMENTUM? 6 .

ALSO SHOWED AN UPWARD TREND IN GAPS BETWEEN MARKET CAP AND PRICE PAID IN M&A DEALS.THE NEED   THE 1980s SHOWED AN UPWARD TREND IN GAPS BETWEEN BOOK VALUE AND MARKET CAP. 7 .

8 . YEARS. AVERAGE LIFE SPAN OF A CORPORATION IS 25 YEARS.THE NEED   MANY OF THE MOST VALUABLE BRANDS HAVE BEEN IN EXISTENCE FOR MORE THAN 60 YEARS. YEARS. COCA COLA: 123 YEARS.

THE CONTRIBUTION  A STUDY BY INTERBRAND AND JP MORGAN TRACKED THE SHARE OF VALUE OF THE ORGANISATION CONTRIBUTED BY THE BRAND VALUE. 2002 SHOW THE PICTURE CLEARLY. 9 . THE FIGURES IN VALUE.

MERCEDES BENZ (47%). GE (14%). COCA COLA (51%). NOKIA (51%). 10 . DISNEY (68%). IBM (39%).THE CONTRIBUTION  McDONALD S (71%).

11 .THE RESULT?  INCREASED SPENDING ON R&D. TALENT ACQUISITION AND BRAND BUILDING.

THE FINAL SPAMP?  WHAT IS THE FINAL STAMP OF APPROVAL NEEDED FOR THE CONCEPT OF BRAND VALUATION? 12 .

13 .THE BALANCE SHEET  APPEARANCE ON THE BALANCE SHEET OF THE COMPANY.

THE BALANCE SHEET  THE SEEDS WERE SOWN IN THE M&A SPREE OF THE 1980s. NESTLE PURCHASED ROWNTREE. 14 . DANONE PURCHASED NABISCO S EUROPE BUSINESS.

THE BALANCE SHEET  VALUATION AND ACCOUNTING METHODS TO TACKLE THESE LARGE PREMIA PAID DID NOT EXIST. 15 .

THE BALANCE SHEET  THE RESULT? 16 .

EITHER THEY HAD TO AMORTISE LOSSES OVER PROTRACTED PERIODS. 17 . SOME HAD TO WRITE OFF RESERVES.THE BALANCE SHEET   ACQUIRERS WERE PUNISHED. RESERVES. THUS DEPLETING THE ASSET BASE.

18 .THE BALANCE SHEET  IN THE MIDDLE 1980 S RECKITT & COLMAN PUT A VALUE ON AN ACQUIRED BRAND AND PLACED IT ON THE BALANCE SHEET.

VALUE.THE TURNING POINT   THE TURNING POINT WAS IN 1988 WHEN RANK HOVIS McDOUGALL DEFENDED A HOSTILE TAKEOVER BY USING THE METHOD OF BRAND VALUE. THIS WAS THE FIRST CASE OF AN INDEPENDENT BRAND VALUATION. 19 .

THE TURNING POINT   IN 1989. 20 . THIS STARTED OFF A WAVE OF SIMILAR VALUATIONS AND PLACEMENT IN THE BALANCE SHEET. THE LSE ENDORSED THIS APPROACH.

THE TURNING POINT  TODAY. MANY COMPANIES SHOW THE VALUES OF BRANDS ACQUIRED IN THE BALANCE SHEET. 21 .

22 . ACQUIRED GOODWILL HAS A PRESCRIBED METHOD FOR TREATMENT IN THE US GAAP.THE TURNING POINT  TODAY.

THE EXISTING METHOD  WHAT IS THE NORMAL PROCESS TO BE FOLLOWED WHEN YOU ACQUIRE AN INTANGIBLE ASSET? 23 .

24 .THE EXISTING METHOD  YOU CAPITALISE IT AND ARE REQUIRED TO AMORTISE IT OVER A FINITE TIME PERIOD.

25 .THE NEW METHOD  ACQUIRED GOODWILL IS SHOWN AS AN ASSET IN THE BALANCE SHEET AND NEED NOT BE AMORTISED OVER A FINITE TIME PERIOD.

THE METHOD 

INSTEAD, ANNUAL IMPAIRMENT TESTS ARE REQUIRED TO BE PERFORMED. IF ASSET VALUE HAS INCREASED, NO CHANGE. CHANGE. IF REDUCTION, REDUCED VALUE IS SHOWN.
26

THE DRAWBACK 

THIS GUIDELINE EXISTS ONLY FOR ACQUIRED BRANDS.

27

THE DRAWBACK 

HENCE, THE McDONALD S BALANCE SHEET DOES NOT SHOW ITS VALUE. BURGER KING APPEARS IN THE BALANCE SHEET OF THE COMPANY WHICH BOUGHT IT.
28

29 .THE DRAWBACK  THE QUEST FOR A UNIVERSALLY ACCEPTED MODEL FOR VALUATION IS CURRENTLY IN PROGRESS.

ACCURACY  HOW CAN WE HAVE A TRULY OBJECTIVE MEASURE OF BRAND VALUE? 30 .

AND TRADED. EACH BRAND IS A COMPANY AND IS LISTED. 31 . PEPSICO NEEDS TO BE HIVED OFF INTO SEVERAL COMPANIES. ONE HOLDING COMPANY CONTROLLING ALL ASSETS MINUS THE BRANDS.ACCURACY  TO BE TRULY ACCURATE.

ADVANTAGES?  WHAT ARE THE ADVANTAGES OF HAVING BRAND VALUES ON THE BALANCE SHEET? 32 .

BORROWING. 33 . POSSIBILITY OF NEGATIVE NET WORTH FOR THE ACQUIRING COMPANY! IMPROVES LEVERAGE FOR BORROWING.ADVANTAGES?    RETURN ON ASSETS WILL GIVE A MORE REALISTIC PICTURE.

IN CASE OF INSOLVENCY. AMORTISATION. REMOVES THE PROBLEMS EMERGING FROM AMORTISATION. 34 .ADVANTAGES?    DETERS HOSTILE TAKEOVER BIDS. THE BRAND COULD BE THE MOST SALEABLE ASSET.

(TOP B-SCHOOLS!) B- 35 . VERY SUITABLE FOR SERVICE INDUSTRY WHICH HAS LOW ASSET BASE BUT CONSISTENT CASH FLOW AND STRONG CUSTOMER BASE.ADVANTAGES?   REPORT CARD FOR BRAND MANAGERS.

GOODWILL IS TO BE WRITTEN OFF AS A MATTER OF FINANCIAL PRUDENCE BUT IS NOT MANDATORY. 36 .INDIAN STANDARDS?  ACCOUNTING STANDARDS 10 OF ICAI DEALS WITH FIXED ASSETS.

INDIAN STANDARDS?  ACCOUNTING STANDARDS 26 OF ICAI DEALS WITH INTANGIBLE ASSETS. BRANDS CAN BE VALUED IF ACQUIRED NOT HOME GROWN. 37 .

WHY NOT HOME GROWN?  WHY IS IT THAT GAAP AND OTHER ACCOUNTING STANDARDS RECOGNISE ACQUIRED BRANDS AND NOT HOME GROWN BRANDS? 38 .

WHY NOT HOME GROWN?  BECAUSE OF THE LEVEL OF ACCURACY REQUIRED FOR BRAND VALUATION AND THE ELEMENT OF SUBJECTIVITY. 39 . SUBJECTIVITY.

THE IDEAL METHOD TO DEPLOY WILL DEPEND ON THE LEVEL OF ACCURACY DESIRED. THE GREATER THE ASSUMPTIONS!! 40 . THE HIGHER THE DEGREE OF ACCURACY.VALUATION APPROACHES  WE WILL BE DISCUSSING 6 APPROACHES TO VALUING BRANDS.

APPROACH 1  THE COST BASED APPROACH. 41 . THE VALUE OF A BRAND IS THE SUM TOTAL OF ALL EXPENDITURE INCURRED IN CREATING THE BRAND.

APPROACH 1  SOME VARIANTS OF THIS MODEL ADJUST THE EXPENSES WITH THE INDEX OF INFLATION TO COMPUTE CURRENT VALUE. 42 .

APPROACH 1  WHAT IS THE BIGGEST DEMERIT OF THIS MODEL? 43 .

APPROACH 1  COSTS INCURRED ARE NO GUARANTEE OF MARKET SHARE OR BRAND EQUITY SHARE. 44 .

APPROACH 1  ADVANTAGE OF THIS METHOD? 45 .

APPROACH 1  GIVES YOU AN IDEA OF THE COST OF REPLACEMENT OF THIS ASSET OR THE CURRENT COSTS OF CREATING THIS ASSET. 46 .

47 .APPROACH 2  BOOK TO MARKET IDEAL FOR SINGLE BRAND COMPANIES (LIKE McDONALD S) WITH NO OTHER INTANGIBLE ASSET.

APPROACH 2  HOW DO YOU COMPUTE THE BOOK VALUE OF A COMPANY? 48 .

49 .APPROACH 2  (RESERVES AND SURPLUS + EQUITY) / EQUITY.

APPROACH 2  WHAT IS THE MARKET VALUE? VALUE? 50 .

APPROACH 2  MARKET CAP OF THE COMPANY. 51 .

52 . BRAND.APPROACH 2  MARKET CAP OF THE COMPANY BOOK VALUE OF THE COMPANY = VALUE OF INTANGIBLE ASSET = VALUE OF BRAND.

A VARIANT OF THE FIRST MODEL. 53 .APPROACH 3  COST OF CERTAINTY MODEL.

54 . WE COMPUTED THE CURRENT COST OF CREATING THIS BRAND (ASSET).APPROACH 3  IN APPROACH 1.

APPROACH 3  LET US ASSUME THAT WE ARE LOOKING AT LAUNCHING A BRAND WITH 10% MARKET SHARE AND 15% EQUITY SHARE. 55 .

COMPUTE THE REPLACEMENT COST OF THE ASSET AS DONE IN APPROACH 1. 56 . THEN.APPROACH 3  IDENTIFY AN EXISTING BRAND.

OR BUY IT. WE HAVE TWO OPTIONS: CREATE THE BRAND OURSELF. WE KNOW THE COST OF CREATION. 57 .APPROACH 3  NOW.

APPROACH 3  WHAT ELSE DO WE NEED TO KNOW TO ASCERTAIN WHETHER WE SHOULD BUY OR CREATE? 58 .

OR THE PERCENTAGE OF BRAND LAUNCHES WHICH SUCCEED IN THIS CATEGORY. 59 .APPROACH 3  THE COST OF CERTAINTY.

67%. 60 . WE SHOULD BE WILLING TO PAY SIX TIMES THE COST OF CREATION OF THE BRAND TO BUY CERTAINTY. CERTAINTY.APPROACH 3  IF THE FIGURE IS 16.

APPROACH 4  THE NO-BRAINER: DISCOUNTED CASH NOFLOW. 61 . FLOW. MOST WIDELY USED AS IT CAN BE USED ACROSS THE BOARD.

FLOWS.APPROACH 4  BRAND = ASSET = FUTURE GENERATOR OF CASH FLOWS. 62 .

WE NEED TO PLOT THE FUTURE STREAM OF CASH FLOWS. AND THIS IS WHERE THE ASSUMPTIONS COME IN. 63 .APPROACH 4  HENCE.

APPROACH 4  WHAT ARE THE TWO AREAS WHERE ASSUMPTIONS ARE REQUIRED? 64 .

65 .APPROACH 4   THE TENURE OF THE CASH FLOWS. THE RISK ASSOCIATED WITH THE CASH FLOWS.

RISK. THIS MODEL TENDS TO HAVE WEAK PREDICTIVE POWERS IN THE INTRODUCTION/EARLY GROWTH STAGES AND FOR PRODUCTS AFFECTED BY DESIGN/OBSOLESCENCE RISK. 66 .APPROACH 4  THE PRODUCT LIFE CYCLE STAGE HAS A BEARING ON THIS.

67 . COMMODITIES.APPROACH 5  PRICE PREMIA MODEL. THIS WORKS BEST FOR PRODUCTS BEING CONVERTED TO BRANDS FROM COMMODITIES.

68 .APPROACH 5  AN EXAMPLE FOR CANDLES. CANDLES.

69 .APPROACH 6  THE INTERBRAND MODEL.

70 .APPROACH 6  BASICALLY A DCF APPROACH. WITH THE ADDITION OF TWO VARIABLES.

APPROACH 6  BRANDING INDEX WHICH MEASURES THE ROLE OF THE BRAND IN ATTAINING CASH FLOWS. 71 .

INTERNATIONALITY.APPROACH 6  BRAND STRENGTH A FUNCTION OF LEADERSHIP. TREND. STABILITY. 72 . SUPPORT AND PROTECTION. MARKET CONDITION.

APPROACH 6  BRAND STRENGTH DECIDES THE DISCOUNTING RATE. 73 .

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