How much of enterprise value is brand?
Two days ago, I published a summary of the results of our analysis of the proportion of enterprise value that was intangible. My goal was to equip anyone interested in arguing for the economic importance of innovation/human capital/brands with robust data to back their argument. If you missed it, you can read the post here - but the punchline was that intangible value represents 59% of corporate value globally, and 74% of the value of companies in the S&P 500.
This post, and the graph above, is designed to provide the information for brand specifically.
Just as with the intangible value analysis, I also need to begin this post by highlighting the difference between accounting definitions and economic definitions. In this case, the issue is that "brand" per se is not recognized as an accounting asset. Accountants require assets to be "owned and controlled" by the corporation, so that means they need to take the form of legally-enforceable property rights - in the case of brands, this means the "trademark and associated goodwill".
This "trademark and associated goodwill" can only be shown on the balance sheet if it is the result of a transaction (a foundational rule of accounting). So the P&G balance sheet shows a value for Gillette but not Ivory or Pampers.
When you look at M&A transactions for the period 2013 to 2015, you will find that only 50% of companies chose to allocate any of the purchase price to "trademarks and trade names" and, among those that did, the average percentage of the purchase price was 4%.
So, as with the definition of Tangible Book Value before, we need to start by recognizing that the accounting definition of "brand" does not lead to a very helpful answer to the question posed in the headline of this post.
I will assume that the readers of this post really want a sense of the economic value of brands. That is, what is proportion of the value of the company reflects the differences in behavior by customers, employees and other key stakeholders (including investors) from the awareness and positive associations that the company enjoys.
To do this analysis, I merged the data from the annual brand value league tables published by Brand Finance, Eurobrand, Interbrand and Millward Brown for the 6 years 2010 to 2015. These provided close to 3,000 observations for nearly 400 brands. After consolidating the brands from multi-brand companies like P&G, Unilever and Yum Brands, and after setting aside the brands belonging to private companies such as Mars, this left a total of just under 300 companies for which I could compare the brand value to their enterprise value.
Based on these 300 companies, you would conclude that brand represents 20% of market value. I have quoted relative to market value so that financial companies can be included in the analysis. Readers of my previous post will know that I believe it is more accurate for non-financial companies to measure against enterprise value (their equity and debt). On this basis, brand value represents 17% of enterprise value.
Interestingly, you get to a similar figure from the M&A data by summing the allocation of the purchase price to both "Trademarks and trade names" and "Customer-related assets" - a reassuring finding that this represents the scale of the economic value that comes from "what we know about customers and what they feel about us".
As a rule of thumb, therefore, I think we can be confident in asserting that the value of the S&P 500 consists of tangible assets (26%), brands (20%), and other forms of intellectual property and intangible assets (54%).
As with the earlier analysis of intangible value, the interesting information is in how brand value varies by industry sector. The chart that forms the banner of this post shows that brand value ranges from a low of 6% for pharma and energy companies to over 30% for a range of consumer products and services.