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1、INTANGIBLE ASSETS AND PRINCIPLES FOR THEIR VALUATION_Farok J. ContractorRutgers UniversityINTANGIBLE ASSETS AND PRINCIPLES FOR THEIR VALUATION_AbstractThis paper provides a general set of principles, organized into a useable framework, for the valuation of intangible assets as well as corporate know
2、ledge, in the act of transferring, sharing, selling, or licensing it from one company to another. It provides benchmarks for valuation to both seller and acquirer, to licensor and licensee, and to both partners in a corporate alliance. The paper begins by classifying the nature and attributes of dif
3、ferent kinds of corporate knowledge. It then focuses on the valuation framework.Intangible assets, whether registered intellectual property such as brands, patents, copyrights, or whether they be “knowhow”, or general corporate expertise, are increasingly separable from their organizational context,
4、 and can be sold or shared with another firm for compensation. As such activity increases - as part of a general trend towards outsourcing and modularization of business functions, aided by codification of previously tacit or intuitive knowledge - placing a money value on a “knowledge package” is a
5、crucial managerial function. Many of the principles presented in this paper can also be used when the same firm makes its own investments in other markets, by transferring corporate knowledge to its own subsidiary. The various benchmarks and criteria found in the literature are here, for the first t
6、ime, presented in a comprehensive valuation framework, eminently usable by managers and negotiators.INTANGIBLE ASSETS AND PRINCIPLES FOR THEIR VALUATION_“When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you
7、 cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind: it may be the beginning of knowledge, but you have scarcely, in your thoughts, advanced to the stage of science.” - Lord KelvinThe last two decades of the twentieth century saw a dramatic increase in corporate merg
8、ers, acquisitions and alliances. These are now a permanent part of the economic landscape. In a majority of cases what is being sought in such deals is the intangible assets held by the acquisition target or the potential ally firm. Alliances involve acquiring, not the whole company, but only a port
9、ion of its assets, capability or knowledge, which will be used in combination with the other firm. As such activity increases - as part of a general trend towards outsourcing and modularization of business functions, aided by codification of previously tacit or intuitive knowledge - placing a money
10、value on a “knowledge package” is a crucial managerial function. Whether in the context of a merger, acquisition, alliance, R&D project, or the sale of patents, copyrights, brands, software, designs, etc. calculating a value for the intangible assets is a key issue in the practice of management, fro
11、m the point of view of both acquirer and seller of the intangible asset. . However, a commonly accepted set of principles for such valuation has yet to be finalized (Economist, 1999; Sveiby, 1998).This paper aims to develop a set of principles or benchmarks that can be broadly applied in a variety o
12、f situations. It begins with outlining the many situations in which valuation of intangible assets needs to be performed. Next, the paper describes different types of corporate knowledge and their attributes. It then proposes valuation criteria for the transfer or sale of corporate knowledge, and th
13、e negotiating perspectives of knowledge seller and acquirer. An example of a licensing negotiation illustrates the principles.When Do Intangible Assets Need to be Valued?Besides the important issue of stockmarket valuation, there are several principal business circumstances in which intangible value
14、 needs to be measured (1) A company sale, merger or acquisition: The acquiring company will appropriate the physical assets or the purchased firm, but what is the injection of new knowledge worth? Accounting measures do not coincide with economic or market-based values (Reilly, 1995). Many mergers a
15、nd acquisitions are justified on the grounds of combinatorial synergy between the knowledge base of the two companies. However, there could also be combinatorial incompatibilities, knowledge transfer costs over many years, and cultural compatibility problems between the merging organizations. (2) Sa
16、le, purchase or licensing of separable assets such as brands, patents, copyrights, data bases, or technology. “Separable assets” are those that can be detached from the company which possesses them and transferred, sold or licensed to another firm. This could include any transferable knowledge, codi
17、fied or teachable, and rights to intellectual property or markets. Here, only a portion of the intangible assets of a company are spun off to another firm, by a legal transfer agreement and/or by training the other firm in the use of the transferred knowledge. But how much should the company licensi
18、ng or acquiring these assets pay? (3) Lawsuits involving intellectual property infringement. Here courts need to determine infringement costs and penalties.(4) Tax liability calculations in the context of transfer of intangible assets and technology to affiliated firms, possibly in another nation.(5
19、) Corporate alliances: During negotiations over the formation of a joint venture (JV) or the many other forms of strategic alliances such as management service contracts, franchising, co-marketing, etc. the valuation of the knowledge contributions of each partner is a key issue. This decides the equ
20、ity share of JV partners, royalty rates and other fees.(6) R&D management: Putting a value on prospective future knowledge generated by R&D investments is key to selecting between competing R&D projects. Valuing each partners contribution in co-development projects, is another crucial measurement ar
21、ea.The measurement problem has now become a global one, as firm-specific expertise and intellectual property are increasingly shared across borders between joint venture partners and strategic allies, and multinational firms spread the scope of their operations worldwide. Government authorities in e
22、ach country are concerned about the tax consequences of intangibles in international joint venture arrangements (Parnes, 1993). Monitoring of royalty rates and international transfer pricing has grown dramatically in the last five years (Halperin and Srinidhi, 1994). Differences in effective tax rat
23、es across nations continue to distort transfer prices. Tax authorities also wrestle with international firms over the allocation of global R&D overheads and determination of “fair” license fees, with little theoretical grounding or empirical justification. Gravelle and Taylor (1992) state that “. wi
24、th the current chaos in the industry, the economic issues associated with the treatment of purchased intangibles have been largely misunderstood.” (Page 81;emphasis added)To help firms and tax authorities value intangibles, some consulting companies are attempting to develop proprietary data bases o
25、f licensing and joint venture agreement terms. (For example, see Anson, 1993 or Smith and Parr, 1993) Factor analysis of industry and market variables are claimed to yield useable comparative benchmarks. But the information is private, and even if useful, merely supplies statistical averages for ind
26、ustries and product groups. None have country or international variables. Moreover, these analyses are not grounded in theory.Marketing managers have evolved the notion of brand equity (Farquhar, 1990), and researchers have also developed field measures such as “unit price premia” and “market share
27、increments” to put a monetary value on brand equity (Simon and Sulivan, 1993; Park and Srinivasan, 1994). But the extent to which these measures correspond to the selling price of brandnames is not known, since, unlike patents or copyrights, brandnames are only infrequently sold separately from the
28、firm as a whole.Stronger protection of intellectual property has been a centerpiece of negotiations at the World Trade Organization (WTO) and a foundation stone of US foreign commercial policy since the 1980s. Formally registered intellectual property is, of course, but the visible tip of a much lar
29、ger iceberg of corporate expertise, but is nevertheless crucial to economic growth and national competitiveness (Kravis and Lipsey, 1992;Conner and Rumelt, 1991).A Texas Instruments annual report to shareholders in 1991 said,“We believe that appropriate valuation and compensation for the use of the
30、companys intellectual property is essential to global competitiveness because it protects, rewards and encourages investment in research and development”In the 1990s Texas Instruments negotiated enormous sums of hundreds of millions of dollars in compensation from overseas infringers of its patents.
31、Since Arrows (1962) work on appropriability of returns on R&D, scholars and policy makers have been concerned with how companies can better protect the fruits of their research and increase their return. In recent years there has been greater use of international strategic partners and licensing as
32、a means of capturing incremental returns on R&D and accessing foreign markets (Levin, 1988). In the midst of rapid technological change and easy imitation, Teece (1988) proposes that companies are better equipped to capture the rent stream on their innovations if they consciously develop “complement
33、ary capacities” in marketing, after-sales service, and manufacturing. These complementary capacities are often developed in partnerships and contractual relationships outside the firm, rather than in-house, because of heightened risks and the global spread of markets (Contractor and Lorange, 1988).
34、Indeed, the majority of joint ventures, alliances and licenses appear to be in complementary capacities, and/or are intended to access foreign markets, rather than in the core business of the firm. Securities and Data Exchange Corp., a company that tracks commercial news announcements, reported a tw
35、elvefold increase in acquisitions and alliances between 1989 and 1995. The measurement of the value of an acquisition - or in the case of an alliance, what each partner brings to their joint operation - are key questions affecting purchase price, in structuring and maintaining the subsequent relatio
36、nship, as well as in the division of the profit stream that accrues from the joint or merged activity. Two salient points emerge from the foregoing discussion:(1) We are today in a commercial world where each year, hundreds of thousands of mergers, acquisitions, licenses, franchises, equity joint ve
37、ntures, brand sales, co-marketing alliances, joint R&D projects involving more than one firm, patent sales, technology transfer agreements, and other knowledge transfers, take place. A key issue in all such transactions or agreements is putting a value on intangible assets or corporate knowledge. (2
38、) No one is yet satisfied with techniques used for valuation of intangibles.PART I: THE NATURE AND ATTRIBUTES OF INTANGIBLE CORPORATE ASSETSThere are various types of corporate knowledge. Figure 1 distinguishes between three types. These comprise (I) formally registered Intellectual Property Rights,
39、 such as patents or brand names. More broadly, we can define (II) Intellectual Assets which comprise both the above registered property rights as well as codified but unregistered corporate knowledge. Examples of the latter are drawings, software, databases, blueprints, formulae, manuals, and trade
40、secrets, all of which are likely to be in written form, but deliberately not registered with government authorities. Instead, they are kept as proprietary information or trade secrets within the firm. Finally, category (III) comprises uncodified Human and Organizational Capital, or expertise that re
41、sides in the thinking of employees and in organizational routines.The first category is exemplified by a bio-technology startup company whose principal asset may be a set of patents. Its key strategy consists of quickly registering, and then fiercely defending this intellectual property (Kogut and Z
42、ander, 1992). As an example of the second type of corporate intangible asset, consider a firm called Precision Feeder, Inc. (not its real name) headquartered in New Jersey. Unlike the bio-technology company, Precision Feeder has no patents or copyrights whatsoever. In fact, its expertise lies in wha
43、t may be superficially described as a low-technology area, namely designing vibrating hoppers which feed powders and liquids on to assembly lines at a precise rate. Pulsing a feeder or hopper to precisely dispense materials would not appear to be a very sophisticated, or complex operation. In fact i
44、t is fiendishly difficult. Because powders and liquids exist in many granule shapes, sizes, angles of repose, surface friction, viscosity, moisture contents, and so on, there is no standard hopper design. Too many different laws of physics apply to use a deterministic model. When a client brings a n
45、ew powder or liquid to Precision Feeder and asks them to design an assembly line feeder at a particular output rate, one approach would be repeated trial and error experimentation. A better alternative, used by the firm, was to put its entire history of say 75,000 jobs, covering 5,000 materials, don
46、e over a quarter century, into a data base. “Expert systems” algorithms can be performed on this data base in order to mimic analogous examples from the past. This greatly cuts down on the design time for a new material, by reducing design parameters. What is the companys intangible asset? Merely it
47、s collective knowledge, codified and encapsulated in a referencable data base. Incidentally, once codified, this enabled this small New Jersey firm to “go global” by setting up licensees in several nation. This would, on first blush appear suicidal by giving away company secrets in the data base to
48、foreign licensees. There is no patent protection. What prevents the licensees from competing with each other, or ultimately with Precision Feeder itself, in the US? Each licensee has a strict territory. See Contractor (1985) for international licensing enforcement. In any case, was little prospect for this small firm to make its own investments to serve clients abroad directly. Hence t
