BOSTON, MA--(Marketwire - July 22, 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 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 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
adria@sommerfield.com