Managing Value in an intangible environment

Did you know that a company like GE which is so capital intensive has a brand value of nearly $47 billion? Did you know that TATA brand value is $5.5 billion making it the 57th most valuable brand in the world? P&G recently acquired Gillette for a whopping $57 billion, out of which 45% was paid for Gillette’s brands alone. The total value of the top ten global brands is $390 billion, three times the GDP of Thailand.

If you acquired a business before the early eighties, chances are you would have paid as much as 75% for the balance sheet. Today only a fifth is paid for the same assets. So what are you paying the balance for? If you can't explain where 80% of your business' value originates, someone is going to come along pretty soon and eat your lunch.

If you think it is just pure common accounting sense: what would happen to the cash flows of any of these three businesses, if just the name were to be removed. There are lots of intangibles that have the potential to create value, including intellectual property, business processes, specialized training, skilled employees, customer intimacy, corporate culture, and many others that don't show up on most balance sheets.

Businesses and investors have to figure out how to identify all of the assets that contribute to the creation of value; how to measure them to understand the nature of the value they create; and how to improve their value to measurably grow the bottom line.

The prevalent belief that the growing pressure on marketing performance is all about accountability is dangerous for marketers. Accountability is a major concern, but simply embracing financial terms like "customer lifetime value" and "marketing return on investment (ROI)" won't cut it. Businesses are under pressure not only to improve efficiency, but to model, measure, and maximize the intangibles that create real market value.

Do accounting standards recognise these assets?

One of the fundamental stumbling blocks to better value management has been the recognition of these as business assets by the accounting principles in vogue. The International Financial Reporting System (IFRS) will bring some consistency in the overall requirement to value the brands of the companies listed. This includes valuing all brands bought and sold and a requirement for an ongoing annual re­assessment of the value of acquired brands known as an impairment review where the brand does not have a specified useful economic life.

IFRS as implemented in Europe mandates all listed companies to report the value of all acquired intangible assets, such as brands, on their balance sheets. Complying with this mandatory legislation, the IFRS will have significant long term strategic implications for brands and those responsible for them, so it is essential that the CEO, CFO and marketers get involved in the brand valuation process from the outset.

The CEO and CFO would want to be in charge of the company’s most valuable asset as well as the allocation of resource that fuels it. Previously, intangible assets were lumped together on the balance sheet under goodwill. This goodwill is now being separated out into measurable and identifiable intangible assets, such as brands, copyrights and patents.

One of the primary benefits of applying the financial accounting standards for brands is the opportunity to construct a value contribution model for on­going brand management. It is indeed possible today to identify the value contribution of a brand by geography, demographics, product line, retail formats etc. This would be an invaluable tool in the hands of any management that wants to influence and monitor value creation by design.

The ‘globalisation’ of Indian Brands

Recent trends show the increasing number of Indian companies already flexing their muscles and investing overseas from deals like Corus, General Chemicals, and Jaguar­-Landrover. It doesn’t take a PhD in finance to figure out what assets these companies were bought for. If indeed these companies’ former owners were paid such large amounts (borrowed) for their intangibles, it stands to reason that shareholders would like to know how these assets are being managed for value by their managements. Otherwise it might end up like the businessman who bought his million dollar beach house for the sunsets, but stayed indoors most of the time.

The CEO and Brand Value Creation

If the board’s mandate to the CEO is to create value, it would be ironical if there were no means for him to know where value resides. Enlightened firms like Apple, BMW, Nokia, McDonald’s and Disney have clear mandates for the CEO to manage and protect their most valuable assets.

As such, in these companies, the CEO is actually the CBO or the Chief Brand Officer. Think of the number of legendary brand names which are so closely linked to the leadership of the firm. Only yesterday, the stocks of Apple fell to USD 146 on rumours that Steve Jobs may have had a relapse of his pancreatic cancer.

In the end the difference between performers and the rest would be just three

  1. A management that can identify what creates value in their firms

  2. An organisation structure that is built around these assets

  3. A strong leadership that can drive these assets

Find these three and you will find real and rapid value creation.


What's in a name?

At a senior management workshop on “Value Creating Assets” I asked one of the participants to sell me his name for a consideration. Even with the rest of his colleagues egging him on in the negotiations he refused to relent for a crore of rupees. When I stopped and asked the onlookers whether any of them were game, the room suddenly went silent.

Rewind when P&G bought over Gillette for a sum of $57 billion, a company which was capitalised at $54 billion and whose book value was a mere $6.5 billion. Why did the bean counters at P&G pay18 times the book value and Rupees 13,000 crores more than the market value for this firm?

The answer to both situations essentially lies in the intrinsic value of the names they owned:

The manager believed that without his name, his family, friends and colleagues just would not associate him with his unique character traits and so he would have to hard-sell those traits each time he met anyone. P&G believed that with names like Gillette, Duracell, Braun and Oral-B in their portfolio business would be more predictable and profitable. In fact the Gillette name alone was considered to be worth over $17 billion (~Rs.71,000 crores )

But this is not an isolated example. Last year companies taking over other companies paid a little over 72% of the takeover consideration for the intangibles (more than half of that being for the names)

And its not just companies. Increasingly even countries and individuals are realising that
in the current environment in which we live, very little value lies in our physical assets..

India is a case in point: Did you know that Madame Tussauds wax museum in London attracts more visitors a year than India!! Compare this with a small country like Greece which welcomed 12 million visitors last year four times what India did. Guess what the difference is?

All of us cricket lovers know that there is little to choose in terms of performance metrics between Tendulkar and Dravid. But who gets the big sponsorships? The reason lies in another question. If you go to engage any foreigner in a pow-wow on Indian cricket whose do you think would be the first name in his mind?

But what is it that makes these names so valuable?

Think about it in purely practical terms: in a world where choosing a car is difficult enough, you are unlikely to say my decision is “4 lacs, fuel efficient, easy to park in Mumbai, wife can drive it easily, high manufacturing standards, light on maintenance, good service back up etc..” you just say Santro. Because that one word sums up all that you are looking for.

What owners (and managers) of valuable brands do is to ensure that they “own” certain characteristics that are valuable to their customers (not unlike our manager in the workshop!). Easier said than done you might say. Yes and no. Yes, because it requires a fairly large commitment to the name on the part of the brand owner. Not merely in terms of advertising budgets as many might believe, but ensuring that the entire organisation reflects these characteristics in their attitude and behaviour. And this can be quite an ask. No, because all it requires is top management’s understanding and commitment to their most valuable asset.

Irrespective of the kind of business or activity you are in, your “good name” plays a significant role in your chances of success. Coke (value of name: Rs. 312,000 crores), IBM (Rs.225, 000 crores), Nokia (Rs.127, 000 crores) Disney (123,000 crores) Mercedes (92,000 crores) are among the 10 most valuable names in the world. What is interesting is that that all belong to very different industries.

Back home in India Bombay House announced the value of the TATA brands at US $6
Billion. Arguably the most valuable brand portfolio in the country today, it has primarily been built around a single set of characteristics: for my money these are Integrity and Compassion. If you study of the history of this exemplary group you will notice that most of the businesses were incubated by the TATA name. Which means that although many of these businesses have strong , independent brands in their own right today( TCS, Voltas, Taj, Titan,) all of them leaned on the TATA values to nurture their businesses. This consistency of character is essentially what underpins the enviable value of the brand.

Which brings us to the big question that I am asked at practically every forum “... but how do you actually put a value to brands?”

Brand valuation is a relatively young field. Not more than two decades old. That is essentially because it is only over this period that brands began asserting their independent role as creators of wealth. Many methods have been devised to provide a fair value to the brand asset. The popular ones are Historic and replacement costing, Premium multiples, Market value and Relief from royalty. And they were almost entirely conducted for a brand transaction viz. buying and selling brands, M&As, franchising or internal licensing. It is only since the end of the 90s that owners were valuing brands as strategic assets.

Each of these encountered “defendability” problems because they were either historical or relative measures. It was only towards the end of the ‘80s that large firms began using the Economic Use Principle. Which is to separate out the impact of the brand on long term economic earnings. This is essentially done by arriving at the current value of the forecast free cash flows derived from the brand alone. In plain English, if you had only owned the brand(s) and no other asset what would your company be worth?

What does this mean for Indian firms today? As our industry attempts to integrate into a global market place, our brands will play an increasing role in the succe sses or even survival of our businesses (why is amchi JET Airways valued higher than any airline in the US?) Valuing their brands can help CEOs to assess the long term impact of these assets, understand the drivers of brand value and help them to focus their investments into the most capital efficient drivers of value creation. T his should be a huge support to any board at a time when businesses are looking increasingly attractive but at the same time very expensive and risky.( SAMSUNG is more valuable than SONY today because of a very carefully scripted business strategy built around the value of the brand name)

Given this scenario, I don’t think the day is very far away when companies will be bought and sold primarily around their names. Other assets will only be bundled along only for the quality of support they can provide to the name in the quest to multiply shareholder value. If Indian industry is to claim its rightful share of the Fortune 500 this is something we might want to think about.