Smart Recession Investing: Use Intellectual Property Metrics to Identify Sources of Return That Others Can't See

Unrecognized Value in "Intellectual Property" Could Be a Boon for Investors Looking for Long-Term Value in Bear Market; Investors Must Learn the True Value of Intangibles; Traditional Financial Statements Don't Show It


BOSTON, MA--(Marketwire - April 28, 2009) - The financial statements of publicly traded companies are increasingly misleading investors because balance sheets don't explicitly recognize and value what is a company's primary source of competitive advantage and value creation: Its IP.

However, the situation presents a significant recession-era wealth creation opportunity for those who understand the importance of IP and know how to value and use it to uncover hidden gems -- i.e., companies that are poised for future leadership and impressive returns, as well as specific IP "knowledge assets" that could fetch attractive sums on the open market.

That's according to Intellectual Property (IP) strategists and former Boston Consulting Group partners Mark Blaxill and Ralph Eckardt, co-authors of the new book "The Invisible Edge: Taking Your Strategy to the Next Level Using Intellectual Property" (Portfolio, March 2009).

All investors -- from venture capitalists and private equity investors, to institutional and even individual stock investors -- need to assess the IP position of their investment targets. Are these companies identifying valuable intellectual assets, converting them to intellectual property (e.g., patents and trademarks) and then leveraging that property to grow capital?

Unrecognized Value is the Name of the Game: Investors Must Look Deep into a Company's Intangibles to Find Potential Sources of Return

"American companies now invest more in intangible assets than tangible ones," said Eckardt. "However, because these assets often don't appear on a company's balance sheet, investors, and even the companies themselves, can't see these invisible assets."

"This situation presents a significant wealth creation opportunity for investors who understand and can apply the IP framework for analyzing investments," added Blaxill. "Investors who understand IP will have a clearer idea of what a business is truly worth, and just as important, where that value is located inside the company."

IP Is a Key Source of "Asymmetric" Payoff and Bargains in Bear Markets

"In bear markets, when prices are depressed, acquiring undervalued IP can lead to high potential returns for investors," said Blaxill. "For example, venture and private equity investors can sometimes acquire entire companies for less than the value of their IP on the open market. Likewise, the stock price of major corporations does not often reflect the total underlying value of their knowledge assets. These are the kinds of asymmetric payoffs that investors can find during sustained bear markets."

"The flip side of this equation is that selling IP assets can often generate revenue and see companies through difficult periods," said Eckardt. "Venture firms and private equity funds that have 'stranded assets' may be able to leverage the IP in those businesses to generate investment returns, either through licensing or outright sale. In a frozen IPO and M&A market, IP monetization may be the only way to generate returns for financial investors. In addition, in tough economic times, many companies are forced to narrow their operational focus. This may free up non-core IP assets that can be sold or licensed for cash which can be used to support the core business."

Investors Need New IP-Based Valuation Metrics

Blaxill and Eckardt believe that transparency -- including IP transparency -- is key to accurate valuations. They argue, "Lack of transparency in the mortgage backed securities market is largely to blame for the pain that investment markets are experiencing right now. This contrasts sharply with the major source of tradable IP patent portfolios. Despite the relative accessibility of patent information, however, current accounting standards don't know how to value patent portfolios properly. And because such 'intangibles' will be a chief driver of future growth, more transparency is required, if market recognition of IP value is to be credible and reliable."

They propose an IP-based set of metrics for investors to use in corporate valuations. During a conversation, they can elaborate on why...

  • R&D, advertising and other innovation and brand-building inputs should be recognized as the investments they are -- instead of purely as costs to be expensed.


  • Accounting methods for "cost of goods sold" should not overstate the profitability of production by grossly understating the value contribution of IP.


  • Company management should be loath to waste highly productive IP assets to subsidize low (and often negative) returns on physical assets.

Why IP Is Now the Most Important Dimension of Corporate Value

While IP may be undervalued today, as valuation methods improve and transparency increases, a company's IP position will become an essential measure of its strength and viability.

"IP ownership is, more and more, the best way for companies to fend off competitors and monetize ideas in the marketplace," said Blaxill. "Traditional advantages have evaporated: Scale can be bought or even rented. 'Best practices' are easily copied. IP ownership has become the primary source of sustainable competitive advantage for businesses of all kinds."

Added Eckardt, "Every company must recognize the centrality of IP, whether it makes razor blades, golf balls, cars, or computer software. And all investors should put IP at the center of their valuation methodology: what IP is, how it creates values, and why the leading companies of the future will be those with the most robust IP strategies and practices."

To receive a copy of the book The Invisible Edge: Taking Your Strategy to the Next Level Using Intellectual Property (Portfolio, March 2009) and the recent white paper, "The Innovation Imperative," or to schedule a conversation with one of the authors, please contact Adria Greenberg at Sommerfield Communications, Inc. (212) 255-8386 or adria@sommerfield.com.

Contact Information: Contact: Adria Greenberg Sommerfield Communications 212-255-8386