Intangible Assets - An yardstick to measure company's value

Introduction:

Measurement or Valuation process aims at estimating the value of asset, liability or a firm, based on risk and return factors. Valuation may be of company as a whole or it may be in regard to tangible assets, intangible assets, liabilities. Common misconception in regard to valuation is that, valuation is performed only when there is capital inflow or outflow in other words during purchase or sale of a company. But in current scenario valuation as become an ongoing process where in it is used as a tool by management in the decision-making process.

As we are aware of product life cycle which speaks about four stages of a products life

a. Introduction

b. Growth

c. Maturity

d. Decline

In each stage the valuation of company differs which enables the management in strategic decision making process. In contrast investors make most of this situation by investing in between growth and maturity stage to earn more profits.

Valuation Concept:

Valuation objectives differ based on the asset or liability which is valued. Generally following valuations help in decision making process

a. Valuation of Tangible Fixed Assets

b. Valuation of Intangible Assets (Goodwill, Brand)

c. Valuation of Shares

d. Valuation of Business

e. Valuation of Liabilities

Definition of Intangibles:

Intangible Assets are defined as identifiable non monetary assets that cannot be seen, touched or physically measured, which are created through time and/ or effort and that are identifiable as a separate asset.

There are two forms of Intangibles:

1. Legal Intangibles: Patents, Trademark, Copyrights and Brand

Ex: Pepsi co. has secret formula of the syrup concentrate used in the carbonated beverages which is patented in its name.

2. Competitive Intangibles: Human Resource

Infosys ltd. Human capital is their USP; it is because of the efficient human resource they are able to gain competitive edge in the market.

Human resource accounting has gained lots of importance in the recent years. Many companies are showing the value of human capital in their annual financial reports. Lev Schwartz model is used to calculate the value of human resource.

Goodwill is of two forms:

a. Acquired Goodwill: Kingfisher acquired Deccan Airlines, Captain Gopinath had created goodwill for his airlines by serving at economy rates and this goodwill was acquired by Kingfisher in the event of acquisition.

b. Inherent Goodwill: MTR in Bangalore has the goodwill which is inherent or created through years with consistent efforts by serving delicious and hygienic food.

Intangible Asset: As a measure of company’s value:

In this backdrop let’s evaluate how intangibles are useful in measuring company’s worth. In the current dynamic and globalized world competition has crossed boundaries. Today competition is not limited to within country but has extended to whole world. In these situations a company which has continuous strategic evaluation policies will survive. This has resulted in Mergers and Acquisitions which in turn results in flow of intangibles into the company in the name of goodwill, brand etc. But for the going concerns intangibles are created over a period of time with continuous effort and customer focus. Companies adopt various cost reduction techniques to benefit the customer which in turn leads to developing of brand and goodwill.

Hence every company strives to build up its reputation in the market in order to grow, survive and sustain through following ways:

1. Total Quality Management: TQM is an excellent tool to gain the competitive edge. TQM can be described with its 6 C’s,

a. Commitment

b. Culture

c. Customer Focus

d. Co-operation

e. Continuous Improvement

f. Control

2. Just in Time and Vendor Managed Inventory: JIT and VMI may sound operational but this is the route utilized by Maruti Udyog Ltd to gain the competitive advantage. As discussed earlier adding value to company through intangibles is an ongoing process. Hence Maruti has designed its process in such a way so as to reduce cost, increase customer service and meanwhile earn profits and also maintain market share.

Few points worth noting of Maruti Udyog Ltd in regard to VMI and JIT are,

a. Maruti keeps only four hours of stock in the factory.

b. All spare parts vendors pack the materials in the form where components are put in specified bins, labeled and sent to Maruti. This will be carried out by vendors who are within 200 kms radius.

c. E-nagara is a virtual delivery system created by Maruti for its vendors.

d. Class ‘A’ category of inventory at auto companies down from 7-10 days to few hours, maximum one day.

e. Substantial reduction in working capital.

(Source: ‘Vendor Managed Inventory- A reality auto component vendors are grappling with’ Fast track journal, Dec-2003-Feb-2004, p5)

Brand Name – A value creator for company:

Acquisition of Hutch by Vodafone:

This was a classic example where nearly 30% of the value paid for acquisition was attributable to Brand. Vodafone acquired Hutch by paying the value at $18.8 billion out of which $6.8 billion was for Brand Name.

Brand name - in many companies has contributed to the shareholders value such as,

a. Coca Cola brand accounts for 69% of the shareholders value

b. Mc Donald’s brand contributes nearly 70% of the shareholders value

c. In telecommunication industry Nokia brand contributes about 30% of the shareholders value.

Conclusion: From the above discussion it is clear that not only the Tangible Assets add value to business but Intangible Assets are also of equal importance. In many companies there are dedicated teams to build brand name. Vodafone case clearly shows the importance of brand during acquisitions. Maruti Udyog Ltd case shows the building of brand through continuous improvement, cost reduction and customer focus. Hence we can conclude by saying that ‘Intangible Assets are the yardstick to measure company’s value’.