Episode 13: Measuring the value of intellectual property

Synopsis

The final Intellectual Property show in the 13 part Summit TV series hosts Jeremy Sampson from Interbrand and Alan Lewis from Adams & Adams Attorneys on how to measure the value of intellectual property

Transcript

STEPHAN LAMPRECHT: Welcome to the Intellectual Property show on Summit TV. This last episode deals with the practical issue of extracting commercial value from intellectual property. In the studio is well-known brand guru Jeremy Sampson, and experienced intellectual property (IP) valuation expert Alan Lewis. Jeremy, from your point of view in the last few years there has been a marked change in the market cap of companies specifically with regard to intangibles - even here in South Africa - how do you see that rolling out?

JEREMY SAMPSON: You’re absolutely right. Back in the 1980s when companies were acquired perhaps 80% to 90% would be the tangible assets. That’s all changed now to the point that often you actually look around the world and major companies market capitalisation - in other words all the shares that are listed on the stock exchange - actually only perhaps 25% is hard assets in relation to the market cap. That’s a huge figure, and that’s changed over the last 20 to 25 years. People then turn around and say what is the other 75%? That’s a lot of things that were wrapped up in the past under the term “goodwill.” We tend to refer to it now as the intellectual property - the intellectual capital of an organisation - and of that a large portion is often brand. So depending on the type of company, the type of organisation, the type of area of expertise - brand will play a huge part of that.

STEPHAN LAMPRECHT: You mentioned that’s 75% - how do I build that if I am a business person? How do I develop that market cap on the intangible side?

JEREMY SAMPSON: You can take a telecommunications company - around the world telcos are big business. In our own country someone like MTN in 14 years has built a market cap of R240billion which is absolutely huge. We’ve just been working with them in their 21 countries. The global benchmark is that of the top companies their brands will often make up one third of the value of that market cap.

STEPHAN LAMPRECHT: We speak here about intellectual property and we mention a lot of brands - is the same true for patents Alan?

ALAN LEWIS: To a great extent yes. Technology-driven commerce is somewhat different in that there is normally something tangible that’s involved - whereas a trademark is more of an intangible asset. To an extent the technology space is based to a very large extent on tangible goods - you can be very lucky and you can hit a product that fills a long-felt need. One of the prime examples in South Africa is the Kreepy Krauly - that took off and just went like a Boeing.

STEPHAN LAMPRECHT: Jeremy, because we’re talking about intangibles here - a lot of times people express scepticism as to how these things are valued. Especially if you look at the stock market reports and a company says 90% of their value is in the tangible side - how can you measure the intangible value? How do you measure intellectual property value?

JEREMY SAMPSON: We at Interbrand have been valuing brands for over 20 years - that’s around the world - so globally it is accepted as global best practice. I think the best way to look at the whole thing is what the market is paying for brands - we’ve seen only last week Absolut Vodka being bought on a public auction - so anyone could go for it. Pernod Ricard paid R60billion for one vodka brand - that is quite amazing. Pernod Ricard are not stupid. A lot of other people wanted to buy it as well. So that is the reality now - people are realising that especially even in recessionary times as we’re repeatedly going into strong brands will perform better than people who don’t have brands, or if they have weak brands. That’s where branding now has become as crucial in business as it has in the last quarter century.

STEPHAN LAMPRECHT: In this quarter century I would imagine the business practices for valuation - the tools and methodologies - have also improved, and people are more comfortable with those figures. Do you see that maturity?

JEREMY SAMPSON: I think there is some uncertainty still. Someone says: “How can you put a specific financial price on a brand?” Of course when we value it we do a complete health check - we look at the totality of the brand. It’s not just a figure - it’s how is the brand performing in this country, who are the competitors? What is the competitive set, what are the trends? We like to go back five years and project five years - so you’re seeing a decade in the life of a brand. That way it’s much more accountable, and the marketing department is much more accountable. They joke that the marketing budget is “the big black hole” every year - that needs to be measured because companies like Reckitt & Benckiser are now spending 12% of sales on marketing. Again that’s a huge figure…

STEPHAN LAMPRECHT: Alan, from a patent point of view how do I attribute a value to a patent?

ALAN LEWIS: The patent brings added value. There is tremendous difficulty and also skill in trying to determine what the value is that’s been added by the underlying statutory intellectual property that is relevant to that. There are various methodologies that have been developed around the world - they are very common. Most countries use the same methodologies. As just mentioned one is the market approach - if you’re buying or selling a piece of ground or a house you go and look at similar properties, and what prices are being paid for that or similar properties recently…

STEPHAN LAMPRECHT: So it’s on a comparative basis…

ALAN LEWIS: It’s on a comparative benchmarking basis. That is somewhat difficult to do with patents and trade secrets and the like - because people don’t expose or disclose what they’ve paid or bought if there’s an assignment, or the licence fee if there’s a licence. One methodology is as I said is the market approach, there is the royalty or the punitive royalty income stream approach where you turn around and say “if I was a patentee, how much would I charge you as a prospective licensee, and how much would you be prepared to pay to use my rights?” You could base it on the cost approach - how much was invested to get that technology?

STEPHAN LAMPRECHT: Or the replacement cost - if I were to do it myself what would it cost me to do?

ALAN LEWIS: Quite right. There are more sophisticated techniques - there’s the so-called stochastic approaches, the Monte Carlo approach - but at the end of the day as far as technology is concerned in particular there is something called the “25 Percent Rule” which was proposed about 20 years ago by Bob Goldscheider in America. That says as a benchmark and his experience that if you analyse it 25% of the profit went to the owner of the intellectual property. That is a generalised accepted approach in most countries of the world - the 25 Percent Rule.

STEPHAN LAMPRECHT: Over the 20 year period I think statistics have proven that’s quite an accurate assumption. Jeremy, from your point of view what advice can you give South African businesses in terms of building this value and seeing more of our intangible assets becoming recognised as the intrinsic value in the companies?

JEREMY SAMPSON: I think the first thing is to make sure that when you’re trying to create a brand you really do own it - so registration of trademarks, the sort of things Alan is talking about, patents, etcetera - is crucial. That’s not something that you do and it’s finished - it’s ongoing all the time, and geographically you need to make sure that everywhere you are you make sure that’s in place. It’s war out there - other people will be coming along challenging you, trying to take your brands away - and that’s where if a brand becomes a major asset of an organisation you have to put the resources behind it to look after it. So it’s the team of people, their level of expertise - their financing. Everything has to be there to protect that brand as the major asset of your organisation.

STEPHAN LAMPRECHT: We trust this intellectual property show has convinced you to take a second look at the real value and opportunity in your intellectual assets - and that you feel more comfortable dealing in the world of intangibles.