Exit Planners Guide to Building Corporate Value through Intangible Capital
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This document discusses how corporate value is increasingly intangible, consisting of things like intellectual property, customer relationships, and organizational processes rather than physical assets. It notes that over half of S&P 500 market capitalization and mergers and acquisitions value comes from intangible assets. The document outlines approaches to identifying, measuring, and improving key intangible assets to increase a company's value. These include developing visualizations of intangible assets, using multiple metrics to assess performance, and addressing gaps between a company's intangible capital and its valuation multiples.
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Exit Planners Guide to Building Corporate Value through Intangible Capital
- 1. The Exit Planner’s Guide to Building Corporate Value How to become an intangible capitalist Mary Adams I-Capital Advisors Download slides: slideshare.com/maryadamsicaICA-1
- 2. Corporate value is increasingly intangible Components of S&P 500® Market Capitalization 14,000 Market Premium 12,000 Intangible Book Value Tangible Book Value 10,000 8,000 S&P 500 Market Cap ($ billions) 6,000 4,000 2,000 - 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Research: Ned Davis ICA-2
- 3. This change touches all sectors Intangible Value as a % of Total Market Capitalization by Sector 100% 90% 80% 70% 60% 1975 50% 2005 40% 30% 20% 10% 0% ner gy als ials ary ap l es ar e cia ls ice s o gy tie s teri st r tion er St th C in an er v tili E M a I nd u cr e al S chn ol U Dis o ns u m He F ion s Te er ca t tion um C u ni ma C o ns o mm Inf or lec Te ICA-3
- 4. A similar breakdown in mergers Tangible, 30% Goodwill, 47% Intangible, 23% E&Y: Acquisition Accounting – What’s Next for You? Global sample of 700+ mergers in 2007 ICA-4
- 5. The gap is not “goodwill” • This large amount of intangibles in business is not the result of some abstract market “feeling” • It is the result of 30+ years of investment in the knowledge infrastructure of American corporations (people, processes, info tech, networks) • Annual investment in knowledge intangibles now exceeds tangible investment…. ICA-5
- 6. U.S. corporate investments - 2007 Tangible $1.2 trillion, 43% Intangible $1.6 trillion, 57% (includes software, R&D, advertising and training) Business Week, October 29, 2009 (using unpublished data from Corrado, Hulten and Sichel) ICA-6
- 7. Knowledge Assets ICA-7
- 8. IC approaches to increasing value 1. Identify key intangibles one day 2. Describe/measure them one week to two months 3. Improve performance and value six months to six years ICA-8
- 9. 1. Identify • Take inventory for each category • Pay special attention to structural capital • Create visualization of how they fit together from “you can grow like Google” on YouTube ICA-9
- 10. …more Reverse Chinese visualizations Global customers Manuf Skills Engineering motorcycle industry Modular designs PRES Japanese Motorcycle manufacturers Just-in-time sourcing STRATEGY HIRING Entrepreneurial culture Financing TACTICAL BIZ DEV VP OP Laissez faire policy Enterprise Wireless FORECAST PROCESS E-Learning E-Business FINANCE End User Consulting Portals Knowledge Management Intranets Events Process Modeling Business Process Reengineering Vendor Workflow Consulting Document Management Imaging Text Retrieval Research Emerging Introduction Maturity Decline Technology Product Life Cycle ICA-10
- 11. 2. Measure (why bother?) PwC provided different reports to two groups of analysts: 1. Financial statements, narrative, a few key metrics and extensive quantified nonfinancial data [full Coloplast annual report] 2. Stripped out quantified nonfinancial data [resulting report still similar to/better than market norm] Very different results: 1. 60% of analysts recommended “buy” earnings estimate lower but more consistent 2. 80% recommended “sell” earnings estimate higher Source: http://corporatereporting.com/benefits-reporting.html ICA-11
- 12. Triangulating intangibles • Earnings Assessment • Capacity (qualitative) • Innovation • Valuation • Reputation Investment Corporate Intangibles (financial) Performance Management (quantitative) ICA-12
- 13. What to measure in private co’s • Human Capital employees, management, succession • Relationship Capital customer base, sales and marketing, non- customer relationships, brand(s) • Structural Capital processes, systems, intellectual property • Strategic Capital business model, external conditions ICA-13
- 14. 3. Value challenge Companies in my industry trade at 2-8 times EBITDA… that means my company is worth 8 times EBITDA ICA-14
- 15. Value map 1. Assess how the company compares with its peers for each IC factor (below, average, above) ideally using stakeholder interviews 2. Look at expected value ranges in peer group (below, average, above) 3. Highlight the gaps and opportunities 4. Develop and execute value building plan ICA-15
- 16. Map multiples against IC Best 8x Average 4x Low 2x Human Structural Relationship Strategic ICA-16
- 17. Examples of increased value • Increased growth and innovation High-end consulting firm doubled in size • Optimized performance Healthcare product revenues grew with lower headcount investment • Higher valuations Tech firm sold at a premium to market • Great reputation Engineering firm doubled key hourly rates ICA-17
- 18. Resources Slides at slideshare.com/maryadamsica Newsletter: Management 2.0 last Tues of month Book: www.intangiblecapitalbook.com Community: www.icknowledgecenter.com Blog: www.smartercompaniesblog.com Mary Adams, 781-729-9650 adams@i-capitaladvisors.com Twitter: maryadamsica ICA-18