QUERY Valuation of intangible assets

[Richard Stevenson <rstevenson]

Posted by Richard Stevenson <rstevenson@valculus.com>

I have raised the issue of SD in corporate finance before on this forum.
I am moved to do so again because things are now really starting to motor in the world of ""valuation"" and I think SD has a significant role to play.

Put simply, scandals such as Enron and Worldcom kicked off a revolution in financial regulation. The move to new international accounting standards
(IAS/IFRS) has been widely commentated in the business press. One key change from a valuation perspective has been the introduction of IFRS3 - which requires the valuation of the separable ""intangible assets"" of a business.

One of the issues arising from IFRS3 is a new distinction between valuations of intangible assets(IA) and ""goodwill"" . IA are identifiable resources such as patents, trade marks etc. Goodwill, on the other hand, is simply a balancing number on a transaction. The distinction is important - not least because it is preferable for an acquirer to demonstrate to the investment community that they have paid for a valuable brand or other intangibles, rather than that they have overpaid for goodwill. But also because IFRS3 requires them to be treated differently in annual reporting. The resulting overload on corporate finance is extreme - as are the personal penalties on directors for misreporting!

Thus there is a booming new valuation industry. Not only in M&A but also across the strategy spectrum. For example many companies seek to raise new finance on their intangible assets - which now typically represent well over 50% of average market capitalisation. The identification and valuation of intangibles is now a ""hot topic"" in corporate finance.

So where does SD come in? It's not hard to conceptualise. Because in most cases, intangible resources can only be valued in the context of a complete business model. A pharmaceutical patent is of little value to a utility
company. An electricity distribution network has little value without the
skills required to maintain it. The patent, and the skills, only make sense in context of a complete business model.

Now, the finance profession in general, and valuation professionals in particular, are really struggling to make sense of this new environment.
There is a surge of interest in methods and tools that can contribute to the valuation process - and lots of money to be made from methods and tools that can make a real difference.

Is there anybody out there in the SD community who is interested to participate in this fascinating new opportunity? Because I would really like to coordinate an SD initiative to the valuation community.


Richard Stevenson
Valculus Ltd
Posted by Richard Stevenson <rstevenson@valculus.com> posting date Wed, 26 Sep 2007 14:43:51 +0100 _______________________________________________

[Jean-Jacques Laublé <jean-jac]

Posted by Jean-Jacques Laublé <jean-jacques.lauble@wanadoo.fr>

Hi Richard.

If it was possible to include SD in the process of this obligatory method, it would give the method a new recognition.

I have always been interested by the problem of valuating a business.
I have more than 20 years ago, built a program that calculated automatically results calculated by a double entry book keeping into a triple entry system that takes into account the depreciation of the money and calculate results in current currency instead of valuating with historical values represented by an aggregate of multiple different values.

I took a quick look at IFRS3 definition because I was really curious how book keepers could valuate intangible assets which is conceptually at the opposite of the traditional book keeping method.
It seems that one of the main feature of the system, is that the only intangible assets that are considered must be separable: it must be possible to sell them, to rent them, to licence them etc.
It is then easier for accountants to value them, eventually on the basis of precedent transactions etc.
And I still wonder how they will do that precisely.

Having frequented accountants for more than 30 years, I know their mentality and I know that what they hate is imprecision. There is no confidence interval and probability in book keeping and the method is strictly based on historical data.
The good will has nothing to do with book keeping.

This being considered, SD is supposed to include it its models, all the intangible assets separable or not.
Kim Warren a specialist of intangible resources mentions for instance in competitive strategy dynamics the intangible resources for a retail bank pages 21; quality of retail branches, staff skills, customer-base quality, product features, information systems quality.

All these resources cannot be sold, rented, licensed or franchised.
Eventually the product features and information systems, but not the staff skills or the quality of retail branches and with difficulty the customer-base quality (eventually through a franchising system).
> From an SD point of view all the intangible assets must be included in
> the
modelling process, separable or not. The ISFR3 considering only the separable assets, will credit them the totality of the added value, ignoring the other intangibles. How is it possible?
Regards.
Jean-Jacques Laublé Eurli Allocar
Posted by Jean-Jacques Laublé <jean-jacques.lauble@wanadoo.fr> posting date Thu, 27 Sep 2007 15:05:41 +0200 _______________________________________________

[Rogelio Oliva <roliva@tamu.ed]

Posted by Rogelio Oliva <roliva@tamu.edu>

Richard,

You might be interested in the formulation we used to estimate the valuation of Amazon.com during the bubble years. The formulation is described in

Oliva R, Sterman JD, Giese M. 2003. Limits to growth in the new economy:
Exploring the 'get-big-fast' strategy in e-commerce. System Dynamics Review 19(2):83-117.

Technical documentation of the model used in the paper, the model itself (vensim), and the historical data we used to estimate the valuation formulation are available at:

http://iops.tamu.edu/faculty/roliva/research/dotcom/

I hope this is useful,

Rogelio Oliva
---
Rogelio Oliva
Associate Professor | Ford Supply Chain Fellow Mays Business School | Wehner 301F - 4217 TAMU | College Station, TX 77843 Posted by Rogelio Oliva <roliva@tamu.edu> posting date Thu, 27 Sep 2007 09:32:35 -0500 _______________________________________________

[""Kim Warren"" <Kim@strategyd]

Posted by ""Kim Warren"" <Kim@strategydynamics.com>

Your key point that 'value' is generated by the whole system implies, as you say, that it is meaningless to value any individual element - intangible or tangible - in isolation from the system of which it is a part. The exceptions would seem to be where there exists a realistically functioning market in the asset, which exists for many tangible assets and some intangibles .. but that value too would presumably reflect the view that potential buyers of the asset take regarding how much it would add to the value of their system.
I can provide a short article slightly related to this issue if anyone wishes - 'Invisible Ink: Reporting Intangibles', Business Strategy Review, 15(4), 2004, pp.57-65.

Kim Warren
Posted by ""Kim Warren"" <Kim@strategydynamics.com> posting date Fri, 28 Sep 2007 07:50:09 +0100 _______________________________________________

[Jean-Jacques Laublé <jean-jac]

Posted by Jean-Jacques Laublé <jean-jacques.lauble@wanadoo.fr>

Hi Kim

You write:
<Your key point that 'value' is generated by the whole system implies, as <you say, that it is meaningless to value any individual element - <intangible or tangible - in isolation from the system of which it is a <part.

This is more a principle of good will, the price that somebody is ready to pay for something.
But accountants want to value every part of the whole and this is where there is a contradiction with the SD point of view that would value the whole thing.

Regards.
Jean-Jacques Laublé Eurli Allocar
Strasbourg France
Posted by Jean-Jacques Laublé <jean-jacques.lauble@wanadoo.fr> posting date Fri, 28 Sep 2007 16:09:13 +0200 _______________________________________________

[""Keith Linard"" <klin4960@bi]

Posted by ""Keith Linard"" <klin4960@bigpond.net.au>

A few years back one of my SDM Masters students, Kin Yam, wrote a comprehensive 'annotated bibliography' of some of the key writers in the field of intangible assets (Paul Strassmann, Karl-Erik Sveiby, Patrick Sullivan, Annie Broking, Thomas Stewart, Baruch Lev & Daniel Andriessen), including

* summarising the key features of their respective methodologies,
* defining the variables which were implicit or explicit in those
methodologies and
* identifying the stocks and flows which might be used in a system dynamics
implementation of their methodologies.

I am happy to send, by return email, a 'zipped' file of the document (about 700K). Send an email entitled 'Intangible Assets' to my personal email address linard.keith@gmail.com .

Posted by ""Keith Linard"" <klin4960@bigpond.net.au> posting date Sun, 30 Sep 2007 15:07:32 +1000

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