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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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Nokia: Stained shorts

C. HUYGENS - Tuesday, September 03, 2013
Surprise, surprise! Shorting securities is a high risk gamble. Never mind that a key motivator is a deep-seated belief that a company is doomed. Dead is dead. But equity investors have a wonderful way to resurrect companies in advance of a sale. Nokia (NOK), pronounced dead by Huygens long ago, returns to help Microsoft (MSFT) address its own problems. The street says Microsoft is buying hardware, intellectual property, and a former Microsoft executive who may replace Ballmer.

Over the past five years, Nokia has lost 80% of its value falling from $21 to less than $4 on Friday. Today it is up 40% in early morning trading. Nokia shareholders are celebrating. Nokia shorts are turning to NetFlix (NFLX) shorts for advice. Microsoft investors are less enthused. The stock is down 4.75% in early morning trading.

That equity investors were surprised should not be surprising, looking at Steel City Re's reputational value metrics. Stakeholders as a group were seeing upside, but no there was no expectation of a major event. Stakeholders collectively were progressively giving Nokia some additional reputational premium that was pushing its equity returns to above average levels relative to the 72 peers of the telecommunications equipment sector. The expectations were for continued increase in the reputation premium (CRR). Also, while forecast stability, a vital sign, was only in the 14th percentile, the consensus trend (RVM Volatility) was below average suggesting a uniformity of expectations. These data all suggest that shorting Nokia at this time would have been a bad idea, but they also indicate that there was no real expectation of a major upside event.

Apple: Core disagreement

C. HUYGENS - Thursday, February 28, 2013
Apple Inc. is a firm that has sought to communicate a singular message through every channel. Whether the message was sent by the marketing department, investor relations, or the product team, the content was the same: Apple is an innovative company producing the coolest products on the plan.

It so happens that even with such clarity, stakeholders can get confused when it comes down to the details. Consider this post, a few weeks ago, labeled "contrarian." (1) Tim Cook is an innovator on the supply-chain side despite his stuffy reputation, (2) Apple Inc. (NASDAQ:AAPL) has the potential to "become a massive mobile-payment provider," (3) it still has the "best selection of apps of any mobile operating system," and most notably, (4) it predicts that "Apple’s sales in China are only beginning their upward arc."

Now fast forward to this week's shareholder meeting where investors are battling over Apple's use of cash and are expressing their unhappiness with executive compensation plans. The company is under pressure to return more of its cash hoard to investors after David Einhorn’s Greenlight Capital Inc. persuaded a judge to block a vote on whether to limit creation of preferred shares. According to Bloomberg, "Einhorn has used the lawsuit to drum up support among fellow investors to get Apple to return some of its $137.1 billion in cash and investments back to shareholders. The push comes as Apple’s stock has declined 36 percent from a record in September on concern that growth is slowing." The Financial Times reported that "at least a third of Apple’s shareholders have declined to back the company’s executive pay at its annual meeting, after chief executive Tim Cook was given a 51 per cent increase in his basic salary last year and other members of the management team were given big equity awards."

Wait. There's a contrarian view. Calpers, the largest US pension fund, disagrees with Einhorn. According the the Financial Times, Anne Simpson, head of corporate governance for Calpers, said that shareholder support for Apple’s proposed changes reflected a fundamental difference in approach between activists and long term shareholders. “Do you throw a brick through the window, or do you walk smartly up to the front door and ring the doorbell?” One of Einhorn's own investors took issue, too. In a letter to the founder of Greenlight Capital, the Nathan Cummings Foundation said: “By threatening to disenfranchise Apple shareholders, Greenlight Capital has acted in a manner that is not consistent with our understanding of Greenlight Capital’s own orientation and investment philosophy.”

There is ample anecdotal evidence that Apple's stakeholders are confused. What say the measures of reputation, which are nothing more than an indication of the economic consequences of stakeholder expectations. As provided by Steel City Re, the measures show, well, confusion.  Call it lack of consensus. RVM is a non-financial measure of reputational value, and its volatility is an indicator of alignment. Apple's current RVM volatility is up from the 33rd percentile among its peer group, its historical value, to the 48th percentile with recent spikes as high as 8% after running lows of sub 2%.  Stakeholders are surprised. They're not used to dealing with an unclear picture from Apple, and the cost of that confusion is the equity investors are fleeing.  In local parlance, Apple's reputational value premium, while still at the 86th percentile of its peer group, is no longer at the 100th percentile. The company is losing reputational value, which, as described in great detail in Reputation, Stock Price, and You, rarely goes unnoticed.

Tsk tsk, Liska

Nir Kossovsky - Monday, April 20, 2009
You may have heard about the spat between Motorola Inc. (NYSE:MOT) and its former CFO, Paul Liska. Briefly, Liska believes he was dismissed for blowing the whistle on inaccurate financial forecasts; Motorola's version is that he was dismissed for "serious misconduct and incompetence."

Our interest was piqued by a recent JP Morgan analysis that reported "this entire soap opera likely ends with little or no impact to Motorola." We are less sanguine for we see evidence of significant , albeit restorable, reputation impairment.

Liska was dismissed 29 January. He was officially fired 19 February according to an SEC filing. As shown below, between 2 and 9 February, Motorola's reputation as measured by the Steel City Re Intangible Asset Finance (corporate reputation) Index dropped precipitously from the 82nd percentile to the 23rd percentile among 93 companies in the Communications Equipment sector.

The data indicate a decreasing IA index, an increasing EWMA IA index volatility with an average log magnitude of 4, and a not unexpected economic underperformance of 3% below peers. In contrast, Qualcomm Inc. (NASDAQ:QCOM) the #1 ranked firm in this sector, shows a decreasing EWMA IA index volatility with an average log magnitude of 3, and an economic return that exceeds its peers by 41%

We believe Motorola's reputation issues are significant and now center about the core issue of ethics. This additional concern exacerbates pre-existing concerns about innovation which have dogged the company for some time. To stakeholders facing ambiguous facts as they now stand, ethical concerns place all executive pronouncements under a cloud. The discounting effect on share price, in our opinion, is similar to the discounting we saw years ago when Research in Motion was laboring under the uncertainty of intellectual property litigation.

It doesn't have to be this way. Operational transparency and some fine footwork by corporate communications should be able to undo the damage if indeed, as JP Morgan suggests, Motorola's case is the stronger of the two. The reward for success by our estimation, if you want to put a number to it, is up to $11B in restored market capitalization (F-test 10E-30, adj. R2 0.79). But as most companies are learning in these challenging times, in reality, reputation is priceless.

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