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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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Banking on Intellectual Property

C. HUYGENS - Monday, November 18, 2013
This Society, dedicated to the promulgation of the best practices for managing intangible assets, has for years argued that cash flows are materially impacted by how those intangible assets are appreciated and valued by stakeholders. The Society has also suggested that while intangibles may comprise 70% of the market value of the average public company, only around 14% of that market cap is vulnerable to swings in value based on the relative ability of the company to meet stakeholder expectations on the delivery of execution on the intangibles. The shorthand for all that has been the word "Reputation," which has helped link the accounting notions of intangibles to the overall operations of the greater business community in such areas as ethics, innovation, quality, safety, sustainability, and security.

A good friend of the Society, Ken Jarboe, President of Athena Alliance, has championed the cause of collateralizing intangibles. Giving visibility to intangibles, as would be the case in a loan, has been part of the Alliance's core mission. By implication, this is an approach to giving visibility to reputation, which in other studies has been shown to move the cost of debt up or down by around 60 basis points.

This week, Jarboe can claim partial vindication. He writes in the Intangible Economy blog of a new study by the UK government that provides specific recommendations for "Banking on IP."

Read more.

Giving Intangibles a Backbone

C. HUYGENS - Wednesday, July 31, 2013
Just last week, Huygens happily shared news that management accountants were taking interest in reputation, a highly ethereal and ephemeral asset if there ever was one. Not that what was just shared is true -- reputation leaves a material mark on profit and loss statements which is why its management is so important, and so difficult.

Also, last Friday, the Society hosted its monthly Mission Intangible Monthly Briefing where the issues of giving substance to intangible assets was again hotly debated. Now Society friend Ken Jarboe, CEO of Athena Alliance, shares that intangibles are becoming less intangible as a result of new accounting rules.

The big news...is the treatment of spending on two intangibles: R&D and "creative works" -- which will be treated as an investment rather than an immediate expense ... This means that for purposes of calculating the size of the economy, this spending will be depreciated over a number of years just like spending on plant and equipment.

Intangibles looking more like plant and equipment? Really? Read More.

2012: Year in Intellectual Property

C. HUYGENS - Tuesday, January 01, 2013
U.S. patent law experienced a significant number of changes in 2012, as the America Invents Act, new regulations, USPTO actions and court decisions all left an impact that will affect patent filings for years to come.

1. New rules created several new options for challenging granted patents, as well as a new process for third-party participation in patent application examination.

2. The USPTO opened its first satellite office, announced plans for several more, and increased the size of its examining corps by about 17%.

3. The Courts offered several significant decisions including a non-obvious definition of obviousness.

You will find details on the above as part of an excellent 2-part synopsis of changes in patent law on the blog of Jim Singer from the law firm of Fox Rothschild LLP, whom the Society thanks for its support through pro bono legal advice in intellectual property matters.

IP Worth Fighting For

C. HUYGENS - Tuesday, October 09, 2012

Briefing Friday 12 October at 10h00 ET

Program: Intellectual Property Worth Fighting For

Before we went on summer holiday, the guests of our prior program titled "Total Patent War" explored the rough and tumble world of IP litigation. In our program 12 October at 10h00 ET, we look at the process through which valuable IP is first created. What are the the best practices for producing on a regular, reliable, and repeatable basis IP worthy of a good battle?

Joining our conversation and bringing clarity to the issue are two authorities on operations and communications. Dr Jackie Maguire is founder and Chief Executive Officer of Coller IP, which provides a full range of Intellectual Property services. Bruce Berman is a principal at Brody Berman Associates, a consulting firm advising IP holders about conveying the value of their rights and reputation. Jonathan Salem Baskin, global brand strategist, speaker, and author, moderates. Learn more.

Eastman Kodak: Not a pretty picture

C. HUYGENS - Wednesday, October 26, 2011
Ever since Stone v. Ritter sensitized corporate boards to the risks of not protecting a firm's intangible assets, there has been a progressive growth of intangible asset monetization programs. These have been recently supplemented by nascent reputation risk management programs.

From time to time, a booster has enhanced that sensitivity. Today we have a good example of that.The disposition of Kodak's (NYSE:EK) patent portfolio is exemplary.

As reported by Bloomberg (10/27, Keehner, McCracken, and Saitto), "Eastman Kodak Co.’s lenders sent a letter to the board of directors reminding the company of its fiduciary duty to sell its patent portfolio for fair market value. " In case you are missing the punch line, the article explains that "'Kodak’s board has been put on notice by lenders, who are saying ‘If you destroy value, we will sue you,’' said Amer Tiwana, an analyst at CRT Capital Group LLC in Stamford, Connecticut."

The reputation metrics, as we noted earlier, reflect low expectations and suggest progressive value destruction of the likes that moved Johnson & Johnson's equity holders to sue last December.

Over the trailing twelve months, the Steel City Re Corporate Reputation Index ranking for Kodak decreased from the 12th percentile to the lowest rank of zero (0) among the 29 firms comprising the Electronic Appliances sector. The exponentially weighted moving average of the volatility of the reputation index was most recently under 7%, and the twelve week trailing vector and velocity were most recently -55% and -7%. The corresponding return on equity over the trailing twelve months has been a dismal -44% relative to the median of its peers.

The company's intangible asset fraction is now in excess of 500% of enterprise value which would indicate to some that the patent portfolio is worth more than $1.25 billion. The creditors would like to get their hands on that value. The company's equity value is around $250 million. The equity holders are loathe to surrender that excess intangible value. The board is between the two, and that is not a pretty picture.

SAP AG: Blind to intangible risks

C. HUYGENS - Wednesday, December 01, 2010
SAP is the dominant solution provider in the $8 billion enterprise management and business intelligence software sector. The company's products provide businesses with an integrated view of their operations for cost and asset value optimization, and predictive analytics to help identify opportunities and risks. But their software doesn't manage intangible assets, and the risk their software didn't help them see was a breach of ethics and intellectual property management best practices by a partner company that they subsequently acquired.

Cutting to the chase, Oracle (NASDAQ:ORCL) last week won a $1.3 billion jury verdict against rival SAP (NYSE:SAP), netting the biggest copyright-infringement award ever. According to Bloomberg News, the jury delivered the verdict Tuesday, after an 11-day trial in federal court in Oakland. The lawsuit started in 2007, with Oracle claiming the German company's TomorrowNow business made hundreds of thousands of illegal downloads and several thousand copies of Oracle's software as part of a plan to steal customers.

SAP acquired the TomorrowNow in 2005 and closed it in 2008. SAP had hoped to use the unit to lure thousands of customers of PeopleSoft and JD Edwards, which Oracle had acquired, to purchase SAP software, according to evidence presented at trial. The unit garnered 358 customers.

The award was more than analysts had estimated - and far beyond the $160 million that SAP had set aside for the litigation.The immediate equity costs -- SAP is underperforming the mean of its 217 peers in the Systems and Subsystems sector by 7.71% -- are therefore understandable. What about the long-term reputation effects?

One week out from the verdict,  the signals are mixed. Over the trailing twelve months, The Steel City Re Corporate Reputation Index has risen from the 92nd to the 96th percentile. The Exponentially Weighted Moving Average of the volatility of the Index, which had been falling for most of the past six months, has been rising over the past few weeks to .4%. This is a negligible amount. On the other hand,  the trailing twelve week Index velocity is negative and the vector is negative, and these are worrying signs. The intangible asset fraction is unchanged at around 93% beating the sector mean of around 80%.

If the stakeholder community looks at SAP and concludes that they are really a good company that had a rogue unit, then they will come through this period with a loss equal to the cash costs of litigation. If the stakeholders view SAP as a behemoth that may harbor other TomorrowNow-like risks, then there will be significant long-term costs.

Valuation of intangibles: New international standards

C. HUYGENS - Thursday, October 14, 2010
Justice Potter Stewart’s concurring opinion in Jacobellis v. Ohio 378 U.S. 184 (1964) enshrined the qualitative standard “I know it when I see it” into business culture. Now there is a quantitative standard too. For features other than the content of films, that is, as well as other intangibles.

The International Organization for Standards (ISO) has adopted a standard for the valuation of brands - a common term for many of the assets comprising some fraction of the typical ~70% gap between market value and book value. As abstracted from the report in the IAM blog,

ISO 10668 applies to brand valuations commissioned for all purposes, including: accounting and financial reporting; insolvency and liquidation; tax planning and compliance; litigation support and dispute resolution; corporate finance and fund raising; licensing and joint venture negotiation; internal management information and reporting; strategic planning; and brand management. The last of these applications includes brand and marketing budget determination, brand portfolio review, brand architecture analysis and brand extension planning.

ISO 10668 is a meta standard which succinctly specifies the principles to be followed and the types of work to be conducted in any brand valuation. It specifies that when conducting a brand valuation the brand valuer must conduct three types of analysis before passing an opinion on the brand’s value. These are legal, behavioural and financial analysis.

1. Definitions: The first requirement is to define what is meant by brand and which intangible assets should be included in the brand valuation opinion. The brand valuer is required to assess the legal protection afforded to the brand by identifying each of the legal rights that protect it, the legal owner of each relevant legal right and the legal parameters influencing negatively or positively the value of the brand.

2. Behavior: The brand valuer must understand and form an opinion on value drivers; ie,  likely stakeholder behaviour in each of the geographical, product and customer segments in which the subject brand operates.

3. Financial:  [The standard] specifies three alternative brand valuation approaches - the market, cost and income approaches.

The above, which seem to enshrine common practice, may move valuation experts to apply these principles to patents and other intangible assets, and the fact that these practices now have the imprimatur of the ISO may enable the capital markets to accept more readily these indications of value.

To find out if this is the case and to get the latest news from the valuation front, the Society will be hosting three consecutive Mission Intangible Monthly Briefings programs on the subject of intangible asset valuation: markets, value management, and valuation, on Nov 5, Dec 3 and Jan 7. Registration is free. You won't want to miss these!

Hewlett-Packard: Silicon Valley smackdown

C. HUYGENS - Friday, October 08, 2010
The most recent “gotcha last, no tagbacks” comes from the Hewlett-Packard (NYSE:HPQ) team who named former SAP boss Leo Apotheker as its new chief executive 30 Sep.

Team HPQ sued its rival, team Oracle (NASDAQ:ORCL) recently when the latter hired briefly-disgraced HPQ CEO Mark Hurd. The grounds: misappropriation of trade secrets. ORCL is now enraged. This is why. Not only did HPQ just name Ray Lane, former Oracle president and COO, as nonexecutive chairman of HP's board, it turns out that Mr. Apotheker had been in charge of SAP (NYSE:SAP) at a time when it was stealing Oracle’s software. The case of ORCL v SAP is scheduled for trial soon.

On the basis of reputation and financial metrics, Oracle is winning this spat. A side by side comparison of metrics from the Steel City Re Corporate Reputation Index, with a customized peer group comprising relevant hardware and software companies totalling 132 in all, shows that HPQ’s reputation ranking (on the left) has slid over the trailing twelve months 27 points from the 97th percentile to the 70th percentile, while ORCL’s (on the right) has slid only 18 points from the 84th to the 66th.

While the former’s slide has been chronic and steady -- the most recent six months shown in the second set of graphs -- the bulk of ORCL’s reputation change has occurred only amidst the sturm und drang of the past few weeks. Hence HPQ is underperforming this peer group by a respectable 18% (yellow line, top graph, left)while the now volatile ORCL is currently outperforming this peer group by 21% (yellow line, top graph, right).

Reputation vs. IP vs. Intangible Assets

Nir Kossovsky - Friday, June 11, 2010
This past Monday, the Society began publishing data from the Steel City Re RepuStars™ Composite Index. This equity markets composite index tracks companies with rising reputational metrics and draws from the S&P500™ Composite Index eligibility pool.

The purpose of publishing these metrics is to provide additional financial evidence for the value of superior reputation management. Reputation management is what the Society calls ‘intangible asset management’ when speaking to the general public. This nomenclature is captured in the Society’s book, Mission: Intangible, subtitled Managing risk and reputation to create enterprise value.

The Society’s mission is education, advocacy, and the promulgation of standards. When we provide content for general consumption, we talk about reputation rather than ‘intangible assets’. This is why. ‘Intangible asset’ is an esoteric term of accounting that once represented the corporate balance sheet equivalent of “petty cash” but now represents 70% of the value of the average company. More than a decade ago at the dawn of the knowledge economy, the term ‘intellectual property’ took on the meaning of ‘intangible asset.’ Alas, that term too is in relative decline as shown in the Google Trends chart below. (So is the term 'national security,' just to give you a reference point).

In contrast, ‘reputation’ is on the rise. It is a term that is being searched with increasing frequency. It is a term that is appearing in news stories with increasing frequency. It is a risk about which companies are fretting in greater numbers. In short, as we reported in Intellectual Asset Management magazine not long ago, reputation is the new IP.  Dowload a copy of the article here.

Hyundai: Court says defend me!

Nir Kossovsky - Monday, April 12, 2010
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?"

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