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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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Coke v Pepsi: Pepsi challenged

C. HUYGENS - Saturday, July 16, 2011
On this particular sunny weekend day, Huygens is busily putting the final touches on an article for IAM magazine’s issue 49 that examines the reputational issues raised by the News Corporation (NASD:NWSA) matter. Pausing to refresh, Huygens reaches for the carbonated cola drink.

To his surprise, even amongst these age old competitors, reputational issues leave their financial mark. In any sector, only one company can be #1. The title goes to the company that both tries harder and succeeds. Currently, among the 17 members of the Non-Alcoholic Beverage sector, the Coca Cola company (NYSE:KO) company holds that title.

For most of the trailing twelve months, the Steel City Re Corporate Reputation Index, the same metric that underpins the RepuStars® composite equity indices, has ranked Coke solidly in the senior position. This level of performance enabled Coke to outperform the median return of its peer group by 12.22%. The lack of reputational volatility over the trailing twelve weeks is evident in the unremarkable exponentially weighted moving average, vector, and velocity indicators.

PepsiCo (NYSE:PEP), on the other hand, shows a reputational slide from the #1 ranked position at the beginning of this twelve month period to the 92nd percentile most recently. The volatility metrics, as modest as they are, capture this movement, and in the hypercompetitive world of Coke. v Pepsi, these differences matter greatly. Pepsi has underperformed the median of its peers over this period by 10.53%

Looking quickly at the market cap to book valuations, both companies are composed mostly of intangible assets at rates greater than the median of their peers. In Pepsi's case, its intangible value is in excess of the firm's market cap suggesting that certain physical liabilities may be weighing on stock price.

Accenture: Tigers, elephants, and frogs; oh my!

Nir Kossovsky - Wednesday, February 10, 2010
“…it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.”

True or false: Finding himself unable to keep his fly in the full, upright, and locked position, Tiger Woods’ ethical downfall precipitated reputation-associated losses on the order of $12 billion by his sponsors?

FALSE. The Steel City Re Corporate Reputation Index shows no evidence of headline risk effects.

On 28 December 2009, Christopher R. Knittel and Victor Stango posted on the web their study, Shareholder Value Destruction following the Tiger Woods Scandal. These economists, associated with both the University of California, Davis, and NBER, reviewed the market behavior of six public sponsors of Mr. Woods—Accenture (NYSE:ACN), AT&T (NYSE:T), Nike (NYSE:NKE), Gillette (NYSE:PG), Electronic Arts (NASDAQ:ERTS) and Gatorade (NYSE:PEP). Using an ‘event study’ method, they concluded that shareholders of companies that Mr. Woods endorsed lost $5-12 billion in wealth between 27 November and 11 December. The authors imply headline risk as the proximate cause.

We disagree. While there were some market cap losses and fewer gains, we see no evidence of consistent decreased reputation metrics among the sponsors. Using tools described briefly at Steel City Re, and in more detail in the forthcoming book, Mission: Intangible. Risk and reputation management to create enterprise value, we see no change in reputation rank trends over the relevant two week window. We share exemplary Steel City Re Corporate Reputation Index metrics for four (4) of the companies alleged to have suffered the consequences of headline risk.

First, AT&T rewarded its shareholders over this period with a positive bump, although it was not as significant of a bump as the median of its 57-member peer group. Its Reputation Index also showed a small positive bump ending the period at the 92nd percentile. The bottom line: better reputation metrics over the critical period.

Second, Accenture and Nike showed no movement in their reputation metrics. In the charts showing the Reputation Index and its exponentially weighted moving average volatility for the past six months, Accenture is flat at the 94th percentile and Nike is flat at the 100th percentile. The bottom line: no change in reputation metrics over the critical period.

Last, in the chart showing both the Reputation Index for Electronic Arts and the both the median and variance of the index measurements for the Software Group sector, three things are apparent. First, Electronic Arts’ Reputation Index ranking continued its downward trend during the critical period. Second, the median reputation ranking for the entire sector slid over the course of the entire year. Third and last, there is much volatility in the variance of the index rankings in this sector. The bottom line: weaker reputation metrics over the critical period reflecting continuation of a year-long trend.

The data suggest that in this instance, the downfall of an iconic spokesperson generated significant press, much speculation, but ultimately nothing untoward with respect to his sponsors. Bottom line: No headline risk seen. Goodbye Tiger. Hello elephant and frog.

Beverage grandmasters

Nir Kossovsky - Wednesday, May 06, 2009
This note explores whether a proposed transaction by a $75B beverage company, Pepsi Inc. (NYSE:PEP), is motivated by costs savings, brand enhancement, or reputation protection. Seeing no perceptible movement in the reputation index of either the company or its arch rival, we conclude that notwithstanding which of the three was the initial trigger, the greatest value may be in reputation risk management.

On 20 April 2009, Pepsi proposed buying the outstanding shares it does not own in its two largest bottlers, Pepsi Bottling Group (PBG.N) and PepsiAmericas (PAS.N), in a $6 billion cash and stock deal. Many in the financial press suggested it was a cost-cutting initiative. Jon Baskin, a marketing iconoclast, a keynote speaker at the Society’s 2008 annual conference, and the author of the book, “Branding OnlyWorks on Cattle,” opined that the move represented brilliant, strategic branding. In Jon’s words:

Think about it. New packages and formulations, available at new and different locations, priced and supported in novel ways...all thanks to a holistic approach to the brand, vs. some archaic top-down application that sees it only as image and words. It's these actions, and real investments, that will build sustainable, long-term brand growth.

Cost savings and long-term brand growth are both good things, reflect well on management and enhance reputation. So, with two weeks having now elapsed during which the market has had an opportunity to digest the news, and while the deal is still in the negotiation phase (the bottlers rejected it on Monday), we called on the Steel City Re corporate reputation index to see what impact the news has had on the reputations of Pepsi and its arch rival, The Coca Cola Company (NYSE:KO).

As shown in the charts below, the short answer is “not much.” Pepsi tops the fifteen-member Soft drink sector; Coke is in the 92nd percentile. Volatility is nil. In fact, in the midst of the most tumultuous market since the great depression, these two iconic firms emerge with nearly identical profiles comprising exceedingly stable reputation metrics. With Pepsi and Coke’s market caps at $75B and $100B respectively, are they too big to budge?

Big, yes, but not too big to trip and fall. As we see it, both pay exquisite managerial attention to their reputations. Ethics, quality, safety, security and sustainability are all watchwords. Innovation is alive and well. So the competition between these two is analogous to that of two chess grandmasters. They see all, know all, and understand the implications of every move and its derivatives. The game, therefore, is waiting for one or the other to make a mistake. It is a game where risk management is the winning play. And given the relative values of the physical assets and intangible assets at the two companies, reputation loss arising from a business partner where visibility and control are weaker – supply chain headline risk, if you will – is one of the major risks we believe needs to be managed.

So let us put our own spin on Pepsi’s announced acquisition: from an intangible asset finance management perspective, it is a prudent move to manage reputation risk arising from a third party. While it may not increase Pepsi’s brand value or enhance its reputation, it may prevent the sort of reputation loss that destroyed nearly 14% of Coke’s value 10 years ago.

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