Valuation for Intangibles

Good morning, all,

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Just witnessed people a lot of people talking about the role of intangibles in valuation. Companies driving more than 60% of the valuation from intangibles & rest from fundamentals.

Now the questions that arises, Is not intangibles a part of fundamentals?

Quite confusing right?

Here by fundamentals, I mean the free cash flows, Profitability, debt ratio, liquidity, management outlook, expansion & diversification, ROE & ROCE which the company might have & can justify its high growth with the potential/current share price.

What are intangibles?

• A technology/patent/trademark/copyright or simply a Brand name that a company has. E.g., COCA COLA, PEPSI.
• Great/popular management showcasing their ability to make the company achieve great heights over the years.
• Celebrities associated with the company.
• Government connections. Such connections also help companies win projects like the Russian Oligarchy model In Russia, but now prevalent in other countries as well.

I believe the value of the intangibles should not be separately accounted for in valuation or given a premium. There can be no legitimate value or a logical way to calculate the same or assign a premium to your target company. Some argue using an

• Intrinsic/DCF value for the intangibles & adding the same to the value of your company.
• Relative value method?
• In extreme cases a contingent claim/option value method.

But the question arises, how will you ascertain the cash flows which are specifically coming from intangibles only & not the tangibles or compare your intangibles with some other company which can be complex, time consuming & never-ending exercise. It leads to overvaluation of a company. Some analysts typically suggest a premium of 35%-45% over the valuation of a company if the company has solid listed intangibles as above. But does this random number with no logic make sense?

I believe in making the valuations simple & easy to understand.

• The value of the intangibles should have always been incorporated into the sales/volume, cash flows and discount rate of the firm, therefore no requirement to do double counting in valuation or assign unnecessary premiums having no logic. The fact is, the companies above numbers will automatically be good because of these intangibles.
• Intangible valuation might be useful in accounting but not in Intrinsic value calculation.
• A popular example being goodwill. It is just a plug variable to balance out the balance sheet, A price paid for acquisition above the book value of the company which most companies regret later and consider as sunk cost. Goodwill’s value should never be more than cash or other liquid assets the company has which is alarming is some cases. When your company gets into trouble, cash & liquid assets can help more than goodwill.
• Intangibles like goodwill and others is nothing but the difference in the market & book value of the company.
• Such a diff between market & book value is seen more in IT companies rather than banks & utilities.

Therefore, one must be careful in Intangibles valuations and not get swayed above my high or big intangible models of others which might not make sense since valuation is all about making a sense out of variables.

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