In the race for distinction by dysfunction, scoring an own-goal is helpful. But from time to time, it does not hurt to have an assist. We're referring, of course, to the lack of love between Oracle and Hewlett Packard. Here's the latest installment, a press release from Oracle 28 September, reproduced without edits or comments.

"After HP agreed to acquire Autonomy for over $11.7 billion dollars, Oracle commented that Autonomy had been ‘shopped’ to Oracle as well, but Oracle wasn’t interested because the price was way too high. Mike Lynch, Autonomy CEO, then publically denied that his company had been shopped to Oracle. Specifically, Mr. Lynch said, “If some bank happened to come with us on a list, that is nothing to do with us.” Mr. Lynch then accused of Oracle of being ‘inaccurate’. Either Mr. Lynch has a very poor memory or he’s lying. ‘Some bank’ did not just happen to come to Oracle with Autonomy ‘on a list.’ The truth is that Mr. Lynch came to Oracle, along with his investment banker, Frank Quattrone, and met with Oracle’s head of M&A, Douglas Kehring and Oracle President Mark Hurd at 11 am on April 1, 2011. After listening to Mr. Lynch’s PowerPoint slide sales pitch to sell Autonomy to Oracle, Mr. Kehring and Mr. Hurd told Mr. Lynch that with a current market value of $6 billion, Autonomy was already extremely over-priced. The Lynch shopping visit to Oracle is easy to verify. We still have his PowerPoint slides.”

The latest reputation numbers from Steel City Re show no material change from last week, if you consider another 4% relative under performance immaterial. The alleged overpayment by HP for Autonomy by nearly $6B is impressing no one that hasn't already formed an opinion on Hewlett Packard's (NYSE:HPQ) reputation. At the close of trading 29 September, HP was ranked in the 47th percentile relative to the 17 companies in the Computer Processing Hardware sector. This is up a notch from the 41st percentile last week. Its exponentially weighted reputational ranking volatility is up from last week's 460% to 512%, while both the reputational vector and velocity are negative at 19.6% and 41% respectively compared to -15% and -46% last week, respectively.


 Economically, the performance is poor with a trailing twelve month return on equity that is under performing the median of the peer group by 33.05% down approximately 4% from last week's 29.28% under performance leading us to affirm that the expectations set by a board -- its reputation -- are material.

Leo Apothekar is out and Meg Whitman is in as Yahoo! and HP continue their odd competition for the most interesting performance by a governing board this past decade. Here's a quick recap of HP's ongoing  saga, courtesy of The Economist (22 Sep): "Whatever happens, the saga is another blow for a company that has lurched from one boardroom crisis to another. Mr Apotheker took the wheel at HP in November 2010 following the departure of Mark Hurd, who left abruptly amid stories of sexual indiscretions and problematic expense-reporting. Mr Hurd had taken over from Carly Fiorina, who was binned in 2005 after the firm’s profits plunged. A year later Patricia Dunn, HP’s then chairman, also departed after a scandal involving an investigation into suspected press leaks from HP directors."

This Board-level soap opera has left its mark.This week, HP ranked in the 41st percentile among the 17 companies comprising the Computer Processing Hardware sector. This ranking represents a 35 percentile drop from a ranking of 76 twelve months ago. Its exponentially weighted reputational ranking volatility is hovering around 460% while both the reputational vector and velocity are negative at 15% and 46% respectively.

Over the past few weeks, the median reputational metric of the Computer Processing Hardware sector has been stable at a relative ranking of 40%.  Meanwhile, the intangible asset fraction of the company continues to climb to more than 110% suggesting either major book asset write downs or additional leverage. The median for the sector is around 80%.

Economically, the performance is poor with a trailing twelve month return on equity that is underperforming the median of the peer group by 29.28% leading us to conclude that the expectations set by a board -- its reputation -- are material.

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.

In the classroom, teachers signal their expectations of high-achieving students through their own behaviors, and in doing so, further motivate the students. The behaviors showing the most substantial effects are affective behavior, including warmth, supportiveness, negative affect, and so forth, physical distance, off-task behavior, input (i.e., amount and level of teaching), and duration of interaction. Students benefiting from such attention are at times jealously derided as “teacher’s pets.”

Analogously, in the capital markets, stakeholders signal their expectations of high-achieving companies through their own behaviors. They create demand for product and pay a price premium, provide labor and inventory on better terms, provide credit on better terms, and pay higher multiples for equity. Companies benefitting from such attention are “admired,” “respected,” and are “most reputable.” Competitors jealously watch as these “market pets” outperform.

Consider Apple, Inc. (NASDAQ:AAPL), as reflected in the Steel City Re Corporate Reputation Index™. Over the trailing twelve months, the company has been ranked  in the 100th percentile among its 51 peers in the Electronic Data Processing Equipment sector for nearly the entire period. The exponentially weighted moving average of its reputation ranking volatility is 1%, and its twelve-week velocity is 0. The company is outperforming its peers over this period by 37%.

There is little to add to the Silicon Valley soap opera that hasn’t been posted somewhere else recently. Here is a summary  of the more relevant facts relating to Oracle (NASDAQ:ORCL) and Hewlett Packard (NYSE:HPQ).

1. After a quarter century of working together closely, Oracle started competing with HP by selling computer servers with Oracle's $7.4 billion purchase of Sun Microsystems last year.

2. HP sued Hurd in a California court on Tuesday, a day after he joined Oracle. HP argues that Hurd won't be able to do his job at Oracle without spilling HP's trade secrets.

There is no shortage of colorful figures. At the top, though is Oracle CEO Larry Ellison, who recently shared his opinion of the HP board with this memorable letter sent to the New York Times 

The H-P Board just made the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago. That decision nearly destroyed Apple and would have if Steve hadn’t come back and saved them. H-P had a long list of failed CEOs until they hired Mark who has spent the last five years doing a brilliant job reviving H-P to its former greatness. In losing Mark Hurd, the H-P board failed to act in the best interest of H-P’s employees, shareholders, customers and partners.

Mistakes are in the eye of the beholder, and in business, the overall impression is called “reputation.” We turn to the reputation metrics, courtesy of Steel City Re.

One month out from when HP dismissed Mr. Hurd, HP’s reputation metrics are sliding, and enterprise value is disappearing. After riding steadily at the 95th percentile in the Reputation Index ranking of its peer group, Computer Processing Hardware, HP is now in the 84th percentile. The exponentially weighted moving average volatility is climbing and both the trailing twelve week vector and velocity are materially negative. Not surprisingly, the company is underperforming its peers by 28%.



Oracle's reputation is not unblemished either. Rather than an uptick, Hurd’s arrival was associated with a material drop in the Reputation Index ranking and an uptick in volatility. But the equity markets appear to be tolerating the move, at least in the short term, with Oracle currently outperforming the median of its 110-member Packaged Software peer group by 2.4%. So Oracle is winning the reputation derby -- so far. But this is a soap opera, so stay tuned.

It would be difficult to top the language of the Silicon Valley Mercury News. “In a stunning plot twist in the long-running Silicon Valley soap opera that is Hewlett-Packard (NYSE:HPQ), Mark Hurd resigned as CEO of the Palo Alto tech giant after an investigation into a sexual-harassment claim.” While a company "investigation determined there was no violation of HP's sexual harassment policy, the probe concluded Hurd filed false expense reports to conceal his relationship with the woman. Blame it on whatever is in the water cooler servicing the C-suite.

The Steel City Re Corporate Reputation Index indicates the event was material. To quote an HP employee website, “The performance of a leader must be measured -- and rewarded -- based on more than the numbers. Integrity matters. Trust matters. We're talking about "violations of HP's Standards of Business Conduct" by the man who held ultimate responsibility for corporate conduct.”

HP began the period with a reputation ranking in the 95th percentile and exhibited little volatility (EWMA=0.014) until the events of the recent past. At this writing, the company’s reputation index has drifted down to the 84th percentile to the benefit of both Fugitsu Ltd (OTC:FJTSY) and Lenovo Group Ltd. (OTC:LNVGY), and further distancing itself from the 22-company Computer Processing Hardware sector leader, Apple Inc. (NASDAQ:AAPL).



Economically, HP is currently underperforming the median of this sector by 27.53%, but this is largely legacy effect from having both outperformed most of the sector, and having shown material resilience over the past five years. However, the future is not promising. The sector, as a whole, is in decline with the median reputation ranking relative to the whole market drifting from the low 40th percentile to the high teens over the trailing twelve months. Thus HP’s reputation slippage at this juncture does not bode well for teh company's future economic returns.

Palm, Inc. (NASDAQ:PALM) is on the block. E & Y reported that in 2007, only 30% of the value realized in M&A deals was tangible. While a smart phone is a discrete, countable, physical asset, its value is mainly intangible With the above in mind, what are the prospects for Palm?

Using the 3-element accounting-like framework favored by Society member and Member News Committee chair Mary Adams of Intellectual Capital Advisors, those intangibles are as follows:
1. Human capital – the founders, who left the company in 1998 to start Handspring, maker of the Treo, which Palm then purchased for $240 million in 2003
2. Relationship capital – agreements with cellular carriers (Sprint/Nextel initially) through which most cell phones are sold.
3. Structural capital – the business processes, patents, and methods comprising the innovation activities and marketing activities behind the solution

Using the six-element Roman arch model of reputation value as defined in the Society’s book, Mission: Intangible, the two key intangible asset drivers of reputation value for Palm are innovation and quality. Palm’s reputation is abysmal. According to the Steel City Re Corporate Reputation Index, Palm’s reputation ranking in the Computer Hardware and Peripherals sector has not been above the 33rd percentile for the past 16 months. This ~60-member sector, which includes the monotonously #1 ranked Apple, Inc., recently saw Palm drop to the 4th percentile.



Reputation is important because among other things, it confers pricing power. It is not surprising, therefore, that Palm’s two current carriers, Sprint and Verizon, heavily discount Palm’s phones. And even in the face of these discounts, Palm’s global share of smart phones has declined from a peak of 4% in 2004 to only 1.5% in 2009.

Cutting to the chase, Shaw Wu of the Kaufman Brother’s equity research firm opines, according to the Wall Street Journal, that “the company should be worth at least the $600 million to $700 million it has spent on research and marketing…” Valuing a company based on expenses related to innovation and building a brand? That’s intangible asset finance at its best!

Act on your intellectual curiosity!

If the above discussion piques your interest, here are several things you can do right now:

1. Register free of charge for the next IAFS Mission Intangible Monthly Briefing set for Friday 7 May. The conversation will feature Scott Childers from Walt Disney and Bob Rittereiser from Zhi Verden on “Process-driven reputation risk in supply chains”
2. Purchase the book, Mission: Intangible. Managing risk and reputation to create enterprise value, at the IAFS Store (or any online book retailer) 
3. Become a member of the Intangible Asset Finance Society.
4. Join our community on Linked-In.

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.