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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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Blackberry: A RIM by any other name

C. HUYGENS - Thursday, January 31, 2013
A magician's tradecraft, the art of deception, can transform mundane physical acts into wonders of amazement. Asking a moribund company's marketing department to do likewise is patently unreasonable. Research in Motion announced a name change to Blackberry (the company), and equity investors rewarded the obfuscatory act with another 8% loss in market cap at the close of markets yesterday. Perhaps they have another trick up their sleeve?

Turning to reputational value metrics from Steel City Re, the vital signs (top left) reflect a company struggling to make a comeback after a volatile (top percentile) past. Current RVM volatility (RVM is a non-financial measure of reputational value) is down to the 14th percentile relative to the 74-member Telecommunications Equipment peer group. The CRR, a measure of relative ranking, is in the 22nd percentile which reflects poorly on a $9.2 billion company; return on equity is median for the sector, but the time series chart just below the vital signs shows an equity spike and a sustained CRR drop suggesting equity investors may have been getting ahead of other stakeholders. Yesterday's price drop is keeping with that interpretation. The last of the five vital signs, forecast stability, is also in the lowest quartile but the directional markers are only slightly negative.

Collectively, these measures suggest that from a reputational value perspective, Blackberry, as the company is now called, has not quite bottomed out, but it is not expected to soar either. They also indicate, to the extent that reputation comprises confidence in a future behavior or outcome, that stakeholders as a group have little hope for a more compelling performance.

For more background on the relationships between reputation, value, corporate financials, and stock prices, read, Reputation, Stock Price and You: Why the market rewards some companies and punishes others.

Reputation Year In Review

C. HUYGENS - Saturday, December 31, 2011
Let's not get carried away. Huygens can not possibly do justice to a review on reputation in a year which almost $6.3tn (12.1%) was erased from global stock markets as the eurozone financial called into question the future of the world’s largest currency bloc, according to the Financial Times (Dec 30, Wigglesworth). Instead, Huygens offers a tale of two intellectual property strategies, and an example of reputational resilience.

TIVO and Rambus are two firms that have been fighting IP infringement battles for many years. At the end of 2011, TIVO finds itself experiencing one of the greatest reputational jumps over the trailing twelve months while Rambus story has a less than happy ending, so far.

Among the 28 companies in the Electronics/Appliances sector, Tivo's reputation metrics, according to the Steel City Re Corporate Reputation Index, rose from the 3rd to the 84th percentile. Its most recent EWMA reputational volatility was 74% after a very volatile year, and while its volatility continues to trend downwards, its trailing twelve week reputational velocity and vector are at 8 and 11 percent, respectively. All good signs consistent with the fact that it has outperformed the median of its peer group by 37%.

Among the 98 companies in the Semiconductor sector, Rambus dropped from the 89th percentile to the 4th percentile. After a volatile year, its exponentially weighted moving average volatility is down most recently to 30% while its vector and velocity continue to trend negative at -36 and -9% respectively. Not surprisingly, Rambus is underperforming the median of its peer group by 39%.

Last, the Coca Cola Company distinguished itself this year by exhibiting among the lowest levels of reputational metric volatility. Among its 14 peers in the Soft Drink Producers & Bottlers group, it showed no change on any metric. It outperformed the median of its peer group by 7.67%.

The first lesson among many this past year comes from the last case: in a highly volatile market, reputational stability has value. Things do go better with Coke.

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.

RIM Shot

C. HUYGENS - Friday, October 14, 2011
It is never good to stumble before your competitor rolls out a new product. Ever so much so when your competitor, Apple Inc., rolls out a new iPhone dubbed 4S the day before its iconic founder dies, and the phone acquires the moniker "4 Steve." In other words, this is not a good time to be Research in Motion (Nasdaq:RIMM).

The Globe and Mail (Oct 14, Babad) headlined the story this way: "Is Steve Jobs crowing in Heaven or RIM's week from hell?" Continuing the story, it notes "RIM is in what charitably might be called a rough patch. Its quarterly results disappointed investors, to put it mildly, the launch of its PlayBook tablet was weak, and there are questions dogging the Waterloo, Ont., group about its management structure. Then came what Queen’s University marketing professor John Pliniussen dubbed the "Blackout-Berry" as RIM reeled for three days this week to get its e-mail, instant message and Internet services back up and running for millions of BlackBerry users around the world."

The Street (Oct 12, Oran) more charitably stayed technical quoting company sources, "'Global disruptions in Research In Motion's service beginning earlier this week were caused by the breakdown of a core switch in Europe and the subsequent malfunction of its back-up system,' the BlackBerry maker said Wednesday in a press conference. These failures then resulted in a backlog of unsent messages which have caused service problems and disruptions for other RIM users around the world, including the U.S. and certain countries in South America, including Brazil and Argentina." But don't be lulled by the technical speak. When a technology company stumbles on a major service quality issue, its reputation takes a beating, its enterprise value falls precipitously (what else is going to go wrong?), and the sharks begin to circle.

Motley Fool
(Oct 14, Kawamoto) observed that "Fast-moving Jaguar Financial is breathing down the neck of Research In Motion (Nasdaq: RIMM), and if the BlackBerry maker isn't careful, it could see a dramatic change in its board of directors and potentially management as early as three months from now. Under Canadian securities laws, investors holding a 5% stake in a company -- either individually or as a group -- are allowed to call a special meeting, says Chris Makuch, vice president at proxy solicitation firm Georgeson. And once a formal letter is sent to a company requesting a special meeting, the clock starts ticking and the process takes roughly 80 days to complete, notes Makuch, who works in Georgeson's Canadian office."

How bad is it? Turning to the Steel City Re Corporate Reputation Index metrics, over the trailing twelve months since Steve Jobs declared war on RIM, the company's reputation index metrics have slipped from the 64th to the 46th percentile among the 70 components of the Telecommunications Equipment sector. The company's exponentially weighted moving average reputational metric volatility has stabilized at 42.6%. The trailing 12 week velocity is a miniscule 1% and the trailing 12-wee vector is 87.8%. Not surprisingly, the company is under performing the median of its peers by nearly 34%.

The sector is suffering the general tribulations of a volatile economy and is showing an general reputational decline. That provides little comfort to RIM which, as a major holder of intellectual property rights, could be valued on its breakup and licensing fee value. With the market cap component comprising intangible assets now representing only 40% relative to the peer group median of 60%, it appears equity investors are placing less value in the management of those assets.

The list of companies stumbling badly after a reputational crisis continues to grow. One could hope that a massive PR effort might help reverse the tide of adverse news. One would be wiser first to pay attention to the business processes (intangible assets) underpinning reputation.

It is said of war that it has no winners, only survivors. Research in Motion out survived Steve Jobs. It is not winning.

Eastman Kodak: No expectations

C. HUYGENS - Wednesday, October 05, 2011
Reputation is a consequence of corporate behavior that motivates stakeholders to behave in ways that either reward or punish the corporation. This is how.

Reputation is a stakeholder’s expectation of behavior. Stakeholders include customers, vendors, employees, creditors, equity investors, and regulators. Reputation is an expectation stakeholders form based on how a company manages six key areas of business: ethics, innovation, quality, safety, sustainability, and security.

Reputation also drives stakeholders’ behavior. In the glow of a superior corporate reputation, customers are more willing to accept higher prices, vendors and employees offer better terms for their services, creditors and equity investors offer better terms for capital, and regulators tend to be more forgiving. These are all value-creating behaviors. And they are not present in Eastman Kodak's (NYSE:EK) stakeholders.

Excluding the momentary surge of optimism associated with the prospects of wholesale intellectual property monetization, Kodak's key reputation metrics have been steadily working their way down. As the Steel City Re Corporate Reputation Index shows, over the trailing twelve months, Kodak's index ranking slipped from the 12th percentile to the bottom among the 29 peers in the Electronics/Appliances sector. Reflecting the slow and steady decline, the exponentially weighted moving average volatility has only been 7.5%. More recently, over the trailing 12 weeks, the reputation velocity has been -7% and the reputation vector has been -32.6%. Last the economic return has been 40.4% lower than the median of its peer group.

Looking at the sector as a whole, the mean reputational values and spreads have been largely the same over the past year. As to Kodak's balance sheet, the intangible fraction is now at nearly 450% indicating an unsustainable level of debt.

As a group, stakeholders appear to have thrown in the towel. There are no expectations.

Kodak: Patently optimistic

C. HUYGENS - Thursday, August 25, 2011
ZD Net greets readers to Larry Dignan's 17 Aug blog, Between the Lines, with the banner, "Welcome to the patent valuation bubble." In this patent bizarro world, Kodak looks like a screaming buy and no-names like InterDigital get tech giants to drool. You can thank Google’s Motorola Mobility purchase and the Nortel patent auction for this nonsense...Simply put, any company with a significant technology patent portfolio will be in play. The patent arms race is on and now the valuation for patents has been set at “ridiculous” cash-rich companies have the go-ahead to gobble up portfolios that would have tanked stocks just a few years ago.

Let's cut to the metrics, shall we? The Steel City Re Corporate Reputation Index rankings for Kodak (NYSE:EK) reflect a company whose reputation, primarily for innovation, is not quite there anymore. Among the 30 peers in the electronics/applicances sectors, Kodak began the trailing twelve months ranked in the 6th percentile and wrapped up on the 18th of August in the 3rd percentile. Its reputational exponentially weighted moving average volatility is 7.3%, its velocity is -8%, and its 12-week vector is -13%

The stock price surge commensurate with the large patent transactions, to a level that still represents an underperformance relative the mean of its peers by 7.86%, implies an enterprise value floated by intangibles to the extreme - nearly 400%! Meanwhile, the balance of the sector appears non-plussed.

The surge implies something -- but what? ZD Net sees a bubble; an alternative explanation is that the patent portfolio comprises a sleeping asset that investors did not expect Kodak management to monetize either by developing or selling. The former is evidenced by experience, and the latter is not being challenged by management's own declarations, giving hope to value release?

To test the latter premise, we surmised that other firms known for their patents might be experiencing a surge. Which brings us to the Guggenheim-sponsored OT 300 Index and fund, an equity strategy driven by algorithms that are said to expose superior patent portfolios. We show below the returns for three equity indices, RepuStars representing a reputation strategy, OT300 representing a patent strategy, and the S&P500, representing the market. We look at returns these past few weeks during which patents have been making the news.

Comparing the relative returns over the past few weeks starting 30 June and ending 18 August, the S&P 500 lost 13.63%, RepuStars Variety lost 14.52%, and the patent-driven OT300 lost 17.36%. Which brings us to the overall conclusion that if there is a widespread patent bubble, it is not yet manifesting in the OT300 patent-driven equity fund.

But before we walk away confident that another asset bubble isn't brewing, take note. Over the trailing week ending 18 Aug, when even with a flight to quality, the S&P500 dropped another 2.7%, the OT300 Patent Index lost only 2.0%. Moreover, since 15 December 2006 with the patent index was first launched, the OT 300 Patent Index is down 4.89% while the S&P500 is down more than 20% (RepuStars Variety is up 26%). Cutting to the chase, maybe there is some additional alpha in them-there patents.

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