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.

The Intangible Asset Finance Society is absorbed with issues at the interface of finance, risk, and the six major business processes that drive reputation: ethics, innovation, quality, safety, sustainability, and security. Today's note, courtesy of Society member Bruce Berman, CEO of Brody Berman Associates, Inc., a specialized management consulting and communications firm, is exemplary of core Society interests. Bruce writes,

In a story that received surprisingly scant media coverage, an appeals court has decided that two insurance companies must provide defense coverage to Hyundai against patent infringement claims by a non-practicing entity (NPE), also known as a patent troll, because the company’s policy covers advertising injury. As reported by the Courthouse News Service and IP Law 360 on April 7, the federal appeals court reversed a lower court decision when it ruled that Hyundai Motor America (SEO:011760) is entitled to defense coverage by National Union Fire Insurance Co. of Pittsburgh, Pa.,  a unit of AIG.

The case involved a patent infringement suit over an advertising method that ended with a $34 million verdict against the automaker. The U.S. Court of Appeals for the Ninth Circuit ruled Monday that Judge James Selna of the U.S. District Court for the Central District of California erred when he granted summary judgment to National Union and American Home Assurance Co. on the grounds that patent infringement does not constitute “advertising injury” for the purposes of an insurance policy.

As reported in IPL360 “ Gene Schaerr, a partner at Winston & Strawn LLP who represented Hyundai, called the ruling a ‘tremendous victory.’ Schaerr stated that the ruling is significant not only for Hyundai, but for a large number of other companies with similar policies that cover advertising injury. "The insurance industry has been taking the position that such policies don’t apply to patent infringement and other alleged wrongs involving Web sites,” he noted. The case began in 2005, when Hyundai was one of 20 automakers sued by patent-holding company Orion IP LLC, now known as Clear with Computers LLC, in the Eastern District of Texas over a patent for a method of generating customized product proposals.

Bruce adds, "I wonder how many companies are aware that some of their existing insurance coverages may fund IP defense if not liability?"

Ken Jarboe, President of Society partner Athena Alliance and Chair of the Society's Public Policy Committee has given us permission to share the following post from the blog, Intangible Economy.

As the U.S. economy evolves, intangible asset investments are becoming vital to economic growth and sustainability. But, as our new paper "Intangible Assets: Innovative Financing for Innovation" outlines, intangible assets can also be the source of financial capital. As industry has invested capital in research and development (R&D) to create new technology and advance other creative activities, a niche market of firms specializing in intangibles-based financing is springing up. Some intangible assets--traditional IP consisting of patents, trademarks, and copyrights--have been used in sale, leasing, equity, equity-debt, debt, and sale-leaseback transactions to finance the next round of innovation.

The paper outlines a number of public policy actions that can be taken to foster the use of intangible asset financing. These include streamlining the technology transfer process, developing underwriting standards to cover the use of intangible assets as collateral and making financial statements more transparent with respect to intangible assets.

The deals that have been done demonstrate that IP and other intangibles are viable assets to secure capital. Unlike other "exotic" financing vehicles, however, intangible-asset financial products are built on some of the most basic financing mechanisms. Far from exotic, they use traditional techniques in new ways to help companies innovate and grow. As the paper shows, there is plenty of opportunity to harness the power of intangibles.

The paper is a summary of our two reports: Intangible Asset Monetization: The Promise and the Reality and Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance. Published in the Winter issue of Issues in Science and Technology, the paper is also available on the Issues website.

Among the educational resources offered by the Society are the Mission:Intangible® Monthly Briefings. These one hour events, moderated by Mary Adams who chairs our Member News Committee, comprise about 45 minutes of prepared remarks backed up by presentation materials, and 15 minutes of responses to questions submitted by listeners. Often, because of time constraints, there are questions leftover.

The 8 January 2010 Mission: Intangible Monthly Briefing comprising a robust panel of Society committee chairs evoked many questions. As promised, here is the third and final potion of leftovers.

QUESTION TO JUDY GIORDAN: You talked about capturing the value from open innovation. When companies do this, do they see it in terms of the relationship with IA management? Does the question matter?

ANSWER: The concept behind Open Innovation (a term promoted by Henry Chesbrough, a professor and executive director at the Center for Open Innovation at UC Berkeley) is that companies can and should use external ideas as well as internal ideas and paths to market. As described by Chesborough and others, central to open innovation is that in a world of widely distributed and ever increasing information and knowledge, companies cannot afford to rely entirely on their own internal research, but should instead buy or license processes or inventions (e.g. patents) from other companies as well as find opportunities for internal inventions not being used in a firm's business to be commercialized outside the company (e.g., through licensing, joint ventures, spin-offs).

Explicit to all of this is the IP question – who owns the rights to the IP of the technology – and this is the aspect being focused on by companies. What is implicit and is an opportunity that is not being capitalized upon is for reputation enhancement from the standpoint of IA around open innovation. That is – demonstrating that the ability to creatively and facily interact in the open market for innovations creates a competitive edge for a company –by capturing value through the process of bringing in technology, aligning it well to corporate goals and monetizing as well as process of spinning out unused technology.

Judith Giordan.
Steel City Re

QUESTION TO DAVID HETZEL: You talked about the market for patents maturing. Is this something that will happen organically or can it be speeded up? If so, how?

ANSWER: The re-institutionalization of the public, real-time live auction ala Ocean Tomo would assist. Now that OT auction are under the umbrella of ICAP, we'll have to see what they do. ICAP, as you may know, has tremendous resources. I'm sure standardizations around patent quality and valuation would go a long way to accelerating the market's development.

David Hetzel
Motorola

Among the educational resources offered by the Society are the Mission:Intangible® Monthly Briefings. These one hour events, moderated by Mary Adams who chairs our Member News Committee, comprise about 45 minutes of prepared remarks backed up by presentation materials, and about 15 minutes of responses to questions submitted by listeners. Often, because of time constraints, there are questions leftover.

The 8 January 2010 Mission: Intangible Monthly Briefing comprising a robust panel of Society committee chairs evoked many questions. As promised, here are some more of the leftovers.

QUESTION TO JON LOW: You talked about how we shouldn't look to the accounting profession for support on intangibles yet you also call for comparability. If we don't get this from financial data, where will we find it? What will it look like?

ANSWER: Useful, comparable data supporting the growing economic importance of intangibles will most likely come from practitioners who perceive a financial benefit to themselves. Historically, this is where such innovations have come from as opposed to regulators or stolid, conservative and internally conflicted practitioner groups like the accountants. In the case of comparable data for intangibles we are already seeing growing interest in certain segments like reputation, brand and R&D as a proxy for innovation. Sustainability in its various manifestations is also gaining as a topic of interest.

From these basic roots, successive branches will grow as more factors become important to more industry segments. For instance, once M&A activity revives, data on post-merger integration success or failure – already a subject of considerable research – will probably also blossom.

It would be nice to think that some supra-national organization like the UN or OECD will take the lead, but they see no financial incentive or moral imperative to do so. Self-organized groups like WICI might have been able to lead had they adopted a more open-source approach, but they appear to be pursuing the secretive ‘let’s corner the market and see how much we can charge for our insights’ approach that has failed repeatedly in the past. Any group wedded to a particular technology or set of what they hope will be patented-able processes are similarly doomed because the market is simply too dynamic and unmanageable at this stage. Again, this is not a philosophical, political or doctrinal point of view, it is simply a reflection of natural phenomenon based on historical experience.

When comparable data emerge I believe they will look like the sort of ratios and benchmarks that managers use as a practical means of evaluating their performance. This is in contrast to the increasingly ambiguous or obfuscated metrics served up by GAAP or international accounting standards. The basis of intangibles importance to managers is their usefulness in evaluating and predicting performance, not in enabling arcane acts of financial sleight of hand. It is this usefulness that has prevented their oft-predicted demise and will support their ultimate adaptation.

Jon Low.
Predictiv

QUESTION TO NIGEL PAGE: You predicted a convergence of IP and IA/IC. I agree with you although in my experience, many folks in the IP space have a very strong prejudice that leads them to think (and often say) that intangibles outside of traditional IP (patents, trademarks, copyrights and trade secrets) have limited value. How do we cross this chasm?

ANSWER: I suspect that the events of the coming few years will see this prejudice start to disappear. Most organisations are likely to refocus their priorities as they emerge from recession and, as they do so, they will begin to pay far greater attention to the whole range of intangible assets they own, as well as the potential for monetising these assets. At the same time, CIPOs (or equivalent) will increasingly realise that the best way to secure C-suite attention for their efforts will be to make sure that they incorporate IP into a broader reputation-based 'package'. CEOs will sit up and pay attention to IP if and when they can be made to understand that it is a cornerstone of their corporate reputation, and not a techy side-avenue that's best left to in-house counsel.

Nigel Page
Intellectual Asset Management Magazine

As financial intermediaries, brokers play a crucial role of matching buyers and sellers. Central among those role is facilitating price discovery. This is especially true in markets for bespoke, less liquid products. Having a reputation for ethical behavior is valuable—as are the underlying business processes that foster ethical behavior.

Faking trades to distort pricing could threaten the commercial viability of a broker were the practice found to be widespread. At the very least, it is fraud. On Friday 18 December, ICAP Securities USA LLC reached a settlement with the United States Securities and Exchange Commission (SEC). The company, a US subsidiary of ICAP plc (LON:IAP) and winner of a Queen’s Award for Enterprise, is alleged to have posted fictitious trades in 2004 and 2005 on some Treasury brokers’ screens to encourage trading by attracting those brokers’ attention.

ICAP is active in the wholesale markets in interest rates, credit, commodities, FX, emerging markets, equities and equity derivatives. ICAP has an average daily transaction volume in excess of $2.3 trillion. In June 2009, ICAP purchased the intellectual property markets division of Ocean Tomo thus becoming one of the largest market makers in a class of bespoke intangible assets. Intellectual property markets have suffered chronically from price discovery challenges.

ICAP Securities has agreed to pay the SEC disgorgement of $1 million and a penalty of $24 million as settlement to end the investigation. The settlement includes the concept of non-intentional fraud. ICAP Securities has also agreed with the SEC that ICAP Securities will appoint an independent consultant to review the improved control environment that is now in place. Shares of ICAP ADRs fell 46 cents or 3.37% in Friday’s session in New York to close at $13.19 a share. The S&P 500 index was up 0.58% and the financial services sector average was up 0.68%

The Society's mission is to increase the visibility, transparency, and positive impact of intangible asset finance through education, the promulgation of standards, and advocacy. The Athena Alliance, a friend of the Society, specializes in advocacy. Its President, Ken Jarboe, provided us with the following:

As innovative companies struggle to raise funds, intellectual property and intangible assets are providing alternative ways of financing innovation. But greater awareness of them as an asset class is needed. Raising that awareness is the focus of a new report from Athena Alliance, Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance by Ian Ellis, a former U.S. Department of Commerce official specializing in intellectual property and international trade.

The report outlines increasing, but still nascent, means of financing innovation based on these assets in public, private and venture capital markets. As industry has invested capital in research and development to develop new technology and advance other creative activities, intellectual capital has become a valuable asset class, according to the paper. In response, firms specializing in intangible-based financing are springing up, using them to raise capital for the next round of innovation.

The paper details equity, equity-debt, debt, and sale-leaseback transactions, both private and public, that have helped companies raise capital, based on careful, rigorous analysis and conservative underwriting standards. For example, the author notes that in 2000, there were two public deals using royalty securitization, raising $145 million. In 2007-08, $3.3 billion was raised in 19 deals.

Unlike some of the exotic financial vehicles, however, the financial products discussed in this paper are some of the most basic financing mechanisms in business. The innovation is in recognizing the value of intangible assets for corporate finance. These new financial firms are using traditional financial techniques in new ways to help innovative companies.

But more should be done.

One important step would be developing sound, industry-wide, underwriting standards, according to the report. For example, Small Business Administration (SBA) rules permit its loans to be used for acquisition of intangible assets when buying on-going businesses. Rules are unclear on whether those assets can be used as collateral. The paper recommends that SBA work with commercial lenders to develop standards for using intangible assets as collateral.

The report builds on earlier Athena Alliance papers, notably Intangible Asset Monetization: The Promise and the Reality.

During the 6 February 2009 MISSION:INTANGIBLE Monthly Briefing, Fish & Richardson’s Cathy Reese, who chairs the Society’s IA Corporate Governance Committee, indicated that under Delaware Law, Directors and Officers had a Duty of Care to oversee the management of the business processes that help establish reputation. She noted that absent oversight systems, Members of the Board could be personally liable to shareholders for adverse events that impaired a company’s reputation.

Cathy’s warning of shareholder-driven exposure is just the beginning. Now companies are seeking restitution, too. According to the newspaper Deutsche Welle, after spending nearly 2.5 billion euros to cover legal bills and fines stemming from an international bribery scandal, Munich-based Siemens AG (NYSE:SI) is seeking payments from its former leadership team. Siemens was investigated for paying 1.3 billion euros in kickbacks between 2003 and 2006 to potential buyers in 12 countries, including Italy, Greece, Russia and Nigeria. In Germany and in the United States, the company was found guilty of corruption and ordered to pay combined fines of just over a billion euros. After the 2006 investigation, Siemens then accused some of its former managers of having failed to stop illegal practices and wide-ranging bribery.

It gets more interesting. The Financial Times reports that some of Siemens’ investors have threatened to sue the company if it did not claim damages from its former managers.

The value of risk and reputation management at the board level should be painfully obvious. The consequences of failing to manage a firm’s business processes for ethics, sustainability, innovation, quality, safety, security, etc. – the drivers of reputation – can place officers and directors at great personal peril. Yes, it’s personal.

As he made his way here to Pittsburgh, home of the Intangible Asset Finance Society, to address a gathering of union leaders on Tuesday, US President Obama stopped by a General Motors plant in Ohio, where he said the government’s intervention in the automobile industry “may not have been popular,” but helped jumpstart the struggling sector. Let’s take a closer look at the sector from the Society’s perspective.

Let's first look at the reputation metrics from the Steel City Re IA (Corporate Reputation) Index? from 22 April when we last looked at this sector. The Index, which correlates with reputation surveys such as those published by Forbes, Fortune, and Harris Interactive, captures the financial implications of stakeholder behaviors and expectations of stakeholder behaviors as determined by corporate reputation. The Index is a good leading indicator of financial performance and returns on equity.

At that time, Ford (NYSE:F) showed a rising IA index and decreasing EWMA IA Index volatility with a final log magnitude of 2 while GM (NYSE:GM) showed opposite directional movements and a final volatility log magnitude of 3. From these data, we projected great financial results for the former, and ongoing dismal financial results for the latter.  Honda (NYSE:HMC) was our highest ranked automotive firm on 22 April.

Let’s see how those financial projections panned out as demonstrated in these graphs from BigCharts.com.



Since April, Ford has returned nearly 100% on equity; GM has lost nearly 65%, and Honda (which had returned 45% for the year until 22 April) still had some firepower left and continued to move upwards, but underperformed the S&P500 for this period.



If we take the long view of a 2-year return, Honda just barely beats Ford but is in negative territory; both outshine the S&P500 which is about 30% off from the 2007 peak, and GM is, well, "underperforming."

Let's wrap this up with an homage to reputation management. Kudos to Ford for demonstrating the power of reputation mangement, and its ability to create value on the basis of expectations of further great things to come. This type of financial result is exactly what the Society seeks to promote. And kudos to Honda for demonstrating the power of a superior reputation to forge resilience. This type of financial resilience is exactly what the Society hopes will motivate companies to exercise best practices in the management of their intangible assets.

Financial players are salivating over opportunities in the Food Products sector following Kraft Foods’ (NYSE:KFT) unsolicited $16 billion for Cadbury PLC (NYSE:CBY). According to Kraft’s CEO, Irene Rosenfeld, "We are eager to build upon Cadbury's iconic brands and strong British heritage through increased investment and innovation." Sounds to us like a reputation (brand) and intangible asset (innovation) opportunity.

So now that the sector is in play, we thought we’d look back over the past year and see how our predictions for value creation panned out. After all, when mergers and acquisitions are all the rage, if you are not at the table, you are on the menu.

Our last look at the Food Products sector was April 14 and was motivated by the sudden decline in the reputation standing of the HJ Heinz Company (NYSE:HNZ) as measured by the Steel City Re IA (Corporate Reputation) Index. The Index, which correlates with reputation surveys such as those published by Forbes, Fortune, and Harris Interactive, captures the financial implications of stakeholder behaviors and expectations of stakeholder behaviors as determined by corporate reputation. The Index is a good leading indicator of financial performance and returns on equity.

Six months ago, the top dozen ranked companies in the Food Products sector, according to the Index, included Heinz and Cadbury. Kraft was number 17. Here is our recap of the baker’s dozen with market value as of the close of the markets Friday 4 September before Kraft's announcement.



Heinz, a company that was highly ranked in March 2009 but caught our attention because of a sudden drop in its reputation standing, underperformed the balance of the baker's dozen over the full year with a disappointing -24.5% ROE. Kraft, which lost only 11% over the year, outperformed Cadbury which lost 16.5%.  Firms that had a higher reputation ranking in March 09 slightly outperformed their peers. The correlation between rank and six month return was 16%. The top 12 firms, in a demonstration of reputation resilience, outperformed both the S&P Index and the Food Sector index with a loss, as a group, of less than 1%.

One other reputation note. Kellogg and Cadbury, both firms with strong reputation rankings and exceedingly strong brands, reported quality issues related to melamine and salmonella. We know that the impairment of reputation-linked assets such as quality have brought down companies from all sectors. We wonder, for the record, if business process challenges were responsible for making Cadbury an appealing target?

Note added after original posting:

Comments received after posting from readers of MISSION:INTANGIBLE focused on the relatively short window in which we reported economic results. The readers rightly pointed out that the Food Products sector is a long-term business. Tastes may evolve over time, but the business processes associated with delivering tens of millions of safe, quality meals reliably and repeatedly demand eternal vigilance. Consistency is the watchword, and therefore long-term financial results should be included in any discussion of reputation.

We agree. Below, the ten-year returns of the Baker’s Dozen listed above less Campbell’s soup (CPB) due to space limitations. Highest returns: JJSF; lowest returns shown KFT. The only major Food Products sector firm from our top 12 (sector rankings for reputation as of April, ’09) to underperform the S&P500 (10 yr equity return -20%) was CPB (not shown). Prices not adjusted for dividends.