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CORPORATE FINANCE a Managerial Perspective

Chapter 9 – Intangible Assets (IA) p281-297 ...the first 5 ½


• IA are important
• Problem: corporate performance information provision + gaps
• Importance + challenges: Measuring HR value & Brand valuation (+ approaches)

9.1 Introduction
• 21st C. View: successful companies cannot rely on traditional value drivers / tangible
• Intellectual assets also need managing
• Focus on Intellectual property (patents & trademarks)
• Market to book (MTB) ratios growing in some companies.
• MTB = Business equity market capitalisation / balance sheet book value
• If BEMC > BSBV then => difference is “intellectual”
• Difference might be: accountancy approach, patents, morale, future plans,
opportunities, risks, pessimism, market psychology (all difficult to measure).

9.2 What are intangibles?

• Lev (2000): non-physical claim to future benefits <= innovation, org. Practices, HR.
• Less control is possible over intangibles (which are becoming major value driver in
developed economies
• Tension: value creation potential v. Difficulty of delivering on the promise
• Economic forces leading to increased interest in IA: Intensified business competition
(globalisation, deregulation) + information technology

9.3 Information gap

• Financial measures: earnings, cash flow, gross margins
• Internal data: strategic direction, quality/experience of management team, speed to
• “External”: competitive landscape, market (... size, ... growth, ... share)
• Companies not keen to share some information => reporting gap => Investors have
information gap.
• Analysts have a conflict: Investors v. Corporate Managers v. Investment banks
• If market can receive complete information, this renders analyst opinion unimportant
• Customers, shareholders and potential investors will talk even without complete
• If companies do not provide the information, someone else will sooner or later
• Eccles (2001): company reporting should focus on investment community needs:
1. Market overview (management view on competitive position / external environment)
2. Value strategy (how Co. expects to create value)
3. Managing for value (performance target summaries / assessment of achievement)
4. Value platform (people, innovation, supply chain, customers, brands, reputation)
+ hazard / opportunity risk and how these are managed.
• Wright & Keegan, PWC (1997):
1. Preliminary evaluation of financial drivers (levers of shareholder value)
2. Driver embodiment in corp. Objectives and how they shape operations
3. Understand how current strategy (S) developed for current objectives (O)
4. O & S Supported by performance measures? Quality of measurements?
5. Assess if management processes foster value creation
6. Summarise “big picture” from 1-5 above (value-creating S, processes, goals, results
7. Review major processes (capital planning & acquisitions, budgeting, strategic
planning, product/service planning, management forums, executive compensation )
periodically and fix “issues”

9.4 Human resource value

• Co. publicly thank employees (skill, dedication -> co. success); little evidence to link HR
to business performance.
• From a financial perspective, there is no generally accepted procedure for measuring
quality / effectiveness of human capital.
• Employees: emphasis on cost rather than value.
• Finance directors are frustrated by the inability to measure ROI in employees and want
a greater role in managing human capital (HC).
• CFO research services 2005: 2/3 see human capital as a major driver, businesses spend
36% of revenues on HC (pay, benefits, training). 16% of financial managers
understand/can measure the return they get. CFOs see HC as important but cannot
apply ordinary financial discipline to HC.
• No objective benchmarks exist to see whether people are “functioning” correctly.
• World pop. ageing
• UK: No. Of pensioners rising, young dependents falling, working age pop. Rising.
• Corporations need to measure productivity and “wellness”

9.5 A financial model for investing in people

• Employee care can give 4 benefits: reductions in medical expenditure, absence & staff
turnover + improved productivity.
• Some disease management programmes may have a positive NPV (Absenteeism may
have hidden knock-on costs).
• Nicholson et al propose an approach to measure heath investment effects on bottom
• Absence <> wage for the day. Might be team affected or lost revenue >> single
worker wage.
• Nicholson et al examined: likelihood of perfect substitution of absentee, team work
effects, & time-sensitivity of output.
• Multipliers calculated as the real cost v. Wage cost. Mean = 1.61; median = 1.28
• “Impaired presenteeism” also contributes to productivity losses.
• Measuring & monitoring these 3 drivers of health-related employer cost - direct
medical, absence and impaired presenteeism - gives a more complete picture of
financial impact of workforce health on company performance.

9.5 Brand Valuation

• Differentiation (increased shareholder value) will flow from intangible assets, like
• Internal concerns re: effective resource allocation; external concern: acquisition
• Note: Technical valuations (Bal Sheet, tax, litigation, M&A) v commercial valuations
(market strategy, budget allocation, scorecards).
• Problem to determine brand worth (cumul of risk-sensitive discounted cash flows).
Elusive and disputable (value might be excellence in managing business processes,
distribution rights or patents).
• Value “is in the eye of the beholder” <> objective concept.
• Valuation approaches:
1. Cost-based
2. Market-based
3. Economic use / income-based
4. Formula-based
5. Liquidation
• Management of drivers: vital role in identifying, developing and exploiting potential in
brand assets.
• In environments where innovation can quickly make competitive advantage obsolete,
brands can be durable sources of market power.