MISSION INTANGIBLE

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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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IBM: Buffet buys intangibles; pays premium for reputation

C. HUYGENS - Saturday, November 19, 2011
On 14 November, Warren Buffett said his Berkshire Hathaway Inc had accumulated a 5.5 percent stake in IBM since March, the billionaire investor's biggest bet in the technology field he has historically shunned.

The Christian Science Monitor (November 14, Berkowitz) noted that "the move puts Buffett's money squarely in the heart of the technology industry, a sector he has steadfastly avoided on the grounds he simply did not understand it." The Wall Street Journal's Marketwatch (November 14, Hinton) observed that "In building up his $10.7 billion stake in International Business Machines Corp., billionaire Warren Buffett apparently turned a blind eye to one of the most basic rules of investing: Buy low. "

Leave it to the Hollywood Reporter (November 14, O'Connell ) to get to the heart of the matter: Buffet is buying reputation. "'I don't think there's any company that I can think of... that's done a better job of laying out where they're going to go and then having gone there,' Buffet told the Reporter. 'They have laid out a road map and I should have paid more attention to it five years ago where they were going to go in five years ending in 2010. Now they've laid out another road map for 2015.'"

IBM's reputation is at the top of the charts. The Steel City Re Corporate Reputation Index places IBM at the 100th percentile among the 145 companies in the Information Technology Services sector as of 17 November 2011 - exactly where it was 12 months ago. It's exponentially weighted reputational volatility is 0.1%, its trailing twelve week velocity is 1%, and its vector is .1%. Those are the metrics of a highly stable reputation. Meanwhile return on equity has outpaced the median of this sector by 42%.

In the current environment when fear dominates equity markets, there is much to be said for a stellar reputation. Even it it means buying dearly a company whose intangible asset fraction is much greater than the median of the peer group - but then again, what does reputation rest on if not the intangibles?

Nokia vs. Apple: Yearning for a bite

C. HUYGENS - Thursday, February 17, 2011
On Monday 14 February, Barron’s released its list of the world’s most respected companies. Apple (NASDAQ:APPL) tops the list at #1 yet again. And lest your curiosity be left hanging, finishing off the top 5 are Amazon (NASDAQ:AMZN), Berkshire Hathaway (NYSE:BRK), IBM (NYSE:IBM) and McDonald’s (NYSE:MCD).

And then there is Nokia (NYSE:NOK), the world’s biggest telephone handset-maker. Quotes the Economist, “We are standing on a burning [oil] platform,” Nokia’s CEO, Stephen Elop, wrote in a memo to all 132,000 employees. If Nokia did not want to be consumed by the flames, it had no choice but to plunge into the “icy waters” below. In plainer words, the company had to innovate -- quickly.

The value of Apple’s reputation for innovation, earned by actually being innovative, is that while the most respected company in the world only commands 4% of the telephone handset market, it commands 50% of the profits. That's pricing power, a benefit of a superior reputation, in the extreme.

Turning to the reputation metrics, Apple’s popular standing is reflected in its stable top ranking in the Steel City Re Corporate Reputation Index. Over the trailing twelve months, it has made the jump from the 97th percentile to the 100th percentile among the 51 companies in the Electronic Data Processing Equipment sector, and over the past six months, it hasn’t budged from that spot. Its corresponding trailing twelve month return on equity is 58.63% greater than the median of its peer group, its EWMA volatility is 1%, its trailing twelve week reputation velocity is 0.0, and its trailing twelve week reputation vector is undefined.

Its peer group shows a U-shaped drop and recovery in reputation standing relative to the market as a whole, and the intra-sector volatility is at the upper end of average. Significantly, the intangible asset fraction of the group has been progressively rising these past 12 months.

Nokia should wish for such metrics. Over the trailing twelve months, it has dropped from the 36th percentile to the 19th percentile among the 30 companies in the Diversified Electronics sector. Its corresponding trailing twelve month return on equity is 52.22% below than the median of its peer group, its EWMA volatility is 2%, its trailing twelve week reputation velocity is -10%, and its trailing twelve week reputation vector is -.8% which is a material level.

Its peer group shows a slight rise is reputation standing relative to the market as a whole, and the intra-sector volatility is at the low end of average. Last, its intangible asset fraction has dropped from 86% to 78% of market capitalization while the median of its peer group now stands at 88% of market cap.

Mr. Elop believes that one advantage Apple has over Nokia that he believes he can overcome is its access to the innovative genius that is resident in Silicon Valley. Stay tuned, as Finland comes to California.

Apple: What stakeholders want

Nir Kossovsky - Wednesday, March 10, 2010
Stakeholders own a company’s reputation, and their behaviors are outward expressions of their true feelings.

The behaviors that are relevant to this Society are those that create enterprise value. Among them are acceptance of higher price points, extension of superior credit and labor terms, lower operating friction, higher earnings multiples, and lower credit costs. For readers of this blog or the recently published book, Mission: Intangible, this is old news.

More to the point, in Mission: Intangible, we noted that mutual funds comprising companies with reputations for advancing social values tended to underperform their benchmarks. Among the six major intangible assets that underpin reputation (ethics, innovation, quality, safety, sustainability and security), only excellence in sustainability seemed not to correlate with superior economic performance.

So from time to time, we revisit the issue of the value of green. The triggers for our current revisit are three:

First, a blog note from a friend of the Society, author, and marketing consultant Jon Baskin in which he noted that shareholders at Apple (NASDAQ:AAPL)  recently defeated a new corporate social responsibility initiative.

Second, is the growing movement to create a third class of corporate structure – the “beneficial corporation.” Vermont currently leads this movement with legislation that would allow companies to both (a) return gains to investors and (b) provide social good for the community. The law would give “for profit” companies legal cover to pursue societal goals that may yield less profit. The Vermont initiative is driven by the remorse of socially-conscious shareholders who supported Ben & Jerry’s acceptance of Unilever NV’s (NYSE:UN) buyout offer under threat of litigation from financially-motivated shareholders.

Third is an advertisement of comparative derision that caught our eye in the Wall Street Journal. In the ad run by Oracle (NASDAQ:ORCL), they contrast the following under the headline of “IQ Test”: (their) Sun SPARC computer that run 7x faster versus IBM’s (NYSE:IBM) fastest computer that consumes 6x energy. They ask the consumer tongue in cheek to choose: Faster Computers or Smarter Planets.

We believe that the question of being green or being profitable is a false choice. At the same time, it is self evident that the transfer of corporate profits into social benefits both within and outside the company will at some point reduce cash flows available to shareholders. We will continue to observe and share what we see.

Heads Up - Date Change

The Mission: Intangible Monthly Briefing for April 2010 will be held one week later than usual in deference to those who celebrate Good Friday. On 9 April 2010 at 12h00 EDT, the second Friday of the month, we will host a conversation featuring incoming Integrity and Corporate Responsibility Committee Chairman Paul Liebman from Dell  (NASDAQ:DELL) and IA Value Signaling Committee Chairman Jon Low from Predictiv. The title for the one hour moderated discussion is: Ethics - A valuable intangible asset? Mary Adams from Intellectual Capital Advisors hosts.

As always, registration for this popular series is complimentary and slides will be available for download in advance of the event. To register now, click here.

Join Us

If the above intrigues you or challenges you to learn more, look no further. The Intangible Asset Finance Society wants to be your business resource. Join us and be part of an organization that provides a wealth of educational materials, including a new book, to further your executive career, and exciting monthly conferences such as the upcoming one on ethics mentioned above.

Headline risk reprieve

Nir Kossovsky - Thursday, December 03, 2009
Six weeks have passed since the Chairman of the Galleon Group, the hedge fund at the center of a suspected insider trading ring, and several executives, have been charged. Three of the companies caught in this scandal are going concerns. Their executives are accused of divulging confidential non-public information. Those companies are McKinsey & Company, IBM (NYSE:IBM), and Intel Corporation (NASDAQ:INTC).

Of the three, McKinsey & Company has a widely held reputation for discretion – an intangible asset that is essential to their operational effectiveness. Last month, we hypothesized that this reputation would help mitigate McKinsey’s headline risk. Evidence of this mitigation would be fewer articles in the business and legal press relative to the other two firms.

Once again, Society member Jim Singer of the Pepper Hamilton law firm and author of the blog IP Spotlight, helped us with the analysis. Lexis Nexis searches were conducted combining 2 comprehensive databases - Business News Publications and Legal News Publications for the dates 9/3/2009-11/22/2009. The first search was for the pairing of “Galleon OR Rajaratnam.” Jim then searched the resulting articles for the additional terms of McKinsey, IBM, or Intel. 

There were no citations meeting the search criteria prior to the government announcement of allegations. Following the announcement, the data show that McKinsey’s name is less frequently associated than the other two firms with the disgraced hedge fund. This observation is statistically significant for the first three weeks of the alleged scandal.



While the findings are not conclusive—McKinsey is privately-held whereas the other two are public—these data are consistent with our general observation that companies with strong reputations based on rigorous business processes make for sympathetic actors that are treated as victims rather than culpable agents when adverse events occur. In short, reputations arising from superior intangible asset stewardship help mitigate headline risk.

NB: Statistical analysis using the Chi Square test for the five weeks of data yields a p<.03, p<.001, p<.01, for the first three weeks, respectively, and then not statistically significant differences thereafter.

Galleon's wake

Nir Kossovsky - Friday, October 30, 2009
Thirteen days have now passed since the Chairman of the Galleon Group, the hedge fund at the center of a suspected insider trading ring, and several executives, have been charged. The fund has liquidated about 90 percent of its nearly $3.7 billion portfolio of technology stocks and other securities and will be consigned to history, shortly. 

Three of the companies caught in this scandal are going concerns. Their executives are accused of divulging confidential non-public information. Those companies are McKinsey & Company, IBM (NYSE:IBM), and Intel Corporation (NASDAQ:INTC). Of the three, McKinsey & Company has a widely held reputation for discretion – an intangible asset that is essential to their operational effectiveness.

We hypothesized that this reputation would help mitigate McKinsey’s headline risk. Evidence of this mitigation would be fewer articles in the business and legal press relative to the other two firms.

Society member Jim Singer of the Pepper Hamilton law firm, and author of the blog IP Spotlight, helped us with the analysis. Lexis Nexis searches were conducted combining 2 comprehensive databases - Business News Publications and Legal News Publications for the dates 10/1/2009-10/29/2009. The first search was for the pairing of “Galleon and Rajaratnam.” Jim then searched the resulting 112 articles for the additional terms of McKinsey, IBM, or Intel.



The data show that McKinsey’s name is less frequently associated than the other two firms with the disgraced hedge fund. This observation is statistically significant. It is consistent with our general contention that companies with strong reputations based on rigorous business processes make for sympathetic actors that are treated as victims rather than culpable agents when adverse events occur. In short, reputations arising from superior intangible asset stewardship help mitigate headline risk.

NB: Statistical analysis using the Chi Square test yields a p<.03 (statistically significant).

Hedge fund homily

Nir Kossovsky - Tuesday, October 20, 2009
Former Fed Chairman Greenspan noted last year that in a market system based upon the intangible asset of trust, reputation has significant value. Madoff aside, trust is having a hard time on Wall Street. We share two recent stories of reputation malignment (vilification?) in the Financial services sector.
 
The first, reported by the Financial Times last Thursday, is that one in five hedge fund managers misrepresents their fund or its performance to investors during formal due diligence investigations, according to research from New York University's Stern School of Business. Researchers found that the most common misrepresentations by hedge fund managers was the amount of money they had entrusted to their funds; Performance and regulatory and legal histories are also often misrepresented.
 
The second, which broke widely on Friday, involves allegations of trading on insider information at the hedge fund, Galleon Group. According to prosecutors, co-conspirators of fund founder Raj Rajaratnam include a McKinsey & Co. consultant, an IBM (NYSE:IBM) senior vice president, an Intel Corp. (NASDAQ:INTC) treasury manager and two executives from the New Castle hedge fund group of the defunct Bear Stearns.

The reputation angle obviously interests the Society. But there is more. What really interests us is how McKinsey, IBM, and Intel will manage the headline risk. Will their intangible asset risk management systems allow them to characterize the malfeasance as the product of rogue actors? Or will they be held culpable for the non-compliance of their employees?

Stay tuned.

Eclipse of the sun

Nir Kossovsky - Monday, April 13, 2009
Last Monday, 6 April, the world learned that IBM (NYSE:IBM) was no longer interested in acquiring Sun Microsystems (NASDAQ:JAVA). Speculation as to the reasons for the collapsed deal include price, intellectual property and hubris. Let's look at the intangibles of this deal from the perspective of the Steel City Re  Intangible Asset Finance (corporate reputation) (IA) index.

The charts below shows IBM. As seen in the upper chart, among the 48 companies comprising the Computers and Peripherals sector, IBM has ranked in the top 99th or 100th percentile this past year. In terms of return on equity, it outperforms the median of its peers by 33%. As seen in the lower chart, the volatility of its index score is only two orders of magnitude and is decreasing. This is a company with an exceedingly strong reputation that stakeholders believe they understand, and clearly like.



The charts below shows Sun Microsystems. As seen in the upper chart, among the same 48 companies comprising the Computers and Peripherals Group, Sun (JAVA) has ranked no higher than the 50th percentile a year ago and is now ranking below the 20th percentile. In terms of return on equity, notwithstanding the surge in anticipation of a potential deal, it has underperformed its peers by nearly 20%. As seen in the lower chart, the volatility of its index score is three orders of magnitude and is now increasing. This is a company with a rapidly deteriorating reputation that stakeholders are liking less, and are concerned they no longer know.



The data indicate that since Sun Microsystem's reputation is not going to help IBM, the latter can afford to wait until hubris is humbled and the price stabilizes.



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