As you probably know, I was thrilled to be invited to speak at the Rutgers symposium, “Intangibles Come of Age” organized by Miklos Vasarhelyi. The final title also called it a discussion about “comprehensive firm valuation.” And it was a wonderful discussion even though it showed us that we have a long way to go. Most of the presentations are on line—and there will be video later.
Dean Yaw Mensah opened up and said that intangibles were very much on his mind when he heard about UCLA’s Anderson business school considering a plan to go private. Would the taxpayers get their share of the value of the school’s IP that they helped build?
Baruch Lev, who never gives up on intangibles, opened the day with some fresh case studies about work he has done around specific aspects of intangibles including ROI on R&D, IT investment and IP. Also described an interesting study for a software company as to whether internal growth or acquisitions gave a better return (the answer was internal growth).
Lev insisted that “everyone recognizes the importance of intangibles.” This was a theme repeated over and over during the day. When I spoke I opened by saying that intangibles may be old news to people at this type of conference but that in general, the average businessperson doesn’t know what we are talking about, why intangibles are important or what to do about it.
For this reason, it was great to hear Amy Pawlicki’s summary of all the reasons that businesspeople are hesitant to improve their intangibles reporting—including good answers as to why each reason should not be a barrier to taking on this important challenge.
Feng Gu presented a paper that he wrote with Baruch Lev on goodwill and write-offs that makes the case that large goodwill often results from companies making acquisitions during periods when their stock is “over-valued.” Earlier in the day, Lev had said that he advocated capitalization of intangibles but that his accounting brethren have been so resistant to this that he no longer talks about it. I brought the subject back up as did Janet Hao.
Janet Hao works with Corrado, Hulten et al at The Conference Board who have done so much of the valuable macroeconomic research that has now shown that intangible investment now exceeds tangible investment in the U.S. She presented a pro forma set of J&J financials which were adjusted (based on public information) to capitalize spending on intangibles. It was very enlightening—showing that increased assets, profits and equity (by capitalizing intangibles) paint a very different picture of a company in common ratios such as return on assets return on equity and leverage. This set up a conversation about valuation and value.
Right after Janet spoke, Benedetto Bongiorno presented based on his long experience in valuation of intangibles in the real estate sector. A lot of his themes were reflected in the practitioner panel after lunch with Steve Rivera, Kevin Tom, and Shawn Suttmiller. The valuation and accounting professions are focusing very heavily on fair value and have sophisticated approaches to value intangibles acquired in mergers. Listening to these professionals, I was struck by the complexity of their valuation models. I’m not totally convinced that this is the way balance sheets should be constructed…
The panel actually got caught in the middle of an energetic discussion of goodwill. Current practitioners believe that they are identifying all the intangibles that they can and that goodwill truly is excess value, synergies and the good will of stakeholders. Others (I’m in this camp) believe that we are missing a big portion of intangibles investment and that we can and should be able to explain the origin of almost all goodwill, even though some of the elements may not end up on the balance sheet. This is the logic behind what we call i-capex.
Marcus Spies presented a refreshing alternative to reporting, explaining a large project he worked on for the EU that extracted data of many kinds from corporate systems to create leading information on the performance of intangibles. This is very complex work—not surprising given the amount of data that exists within the average company. It is this kind of work that provides a clue how reporting and (assurance/auditing of that reporting) can become a continuous process.
Stefano Zambon closed the day with a sweeping summary of work being done around the world in the field of intangibles. Stefano brought me back to some of the work I have been doing lately. As some of you know from the IC Knowledge Center, I have been developing a table that details the sometimes starkly different perspectives on intangibles held by various professions (accountants and lawyers among them).
It is increasingly clear to me that we have to face these differences head on if we are to advance the cause of filling in the enormous (80% and counting) intangibles information gap. I continue to believe that this gap holds back our thinking and our collective action, limiting innovation and growth in a time when we desperately need both.
Thanks to Miklos, all the folks at Rutgers and all the attendees for keeping this important conversation going.