You only have to look at the changes at the top of our stock indexes – including Apple’s recent trillion-dollar market valuation – to see there’s been a seismic shift in the reasons why one company is worth more than others.
In 2000, the 10 largest companies by market capitalization in the S&P 500 in 2000 were: General Electric, ExxonMobil, Pfizer, Citigroup, Cisco Systems, Wal-mart Stores, Microsoft, AIG, Merck and Intel. The 10 largest today: Apple, Microsoft, Amazon.com, Facebook Class A, JP Morgan Chase, Berkshire Hathaway Class B, Alphabet Class C, Alphabet Class A, ExxonMobil and Johnson & Johnson.
In less than two decades, technology firms now dominate the top 10 as intangible assets such as intellectual property (IP) have replaced tangible ones as the major source of corporate value. Today more than 84 percent – $19 trillion – of the S&P 500’s market cap is represented by intangible assets.
Yet most businesses have a difficult time quantifying the value of their IP or that of potential mergers and acquisitions (M&A) targets.
The implications of not fully understanding the value of IP are significant. Among other things, it’s difficult for companies to protect value they know is on their balance sheets but can’t properly identify.
Theft of IP is a very real threat to businesses, whether it’s as the result of industrial espionage, hackers or a company’s own employees. The theft of data is constant and the volume staggering. Yet Aon and the Ponemon Institute’s 2017 Global Cyber Risk Transfer Report highlights a serious gap between companies’ efforts to insure cyber assets vs. physical ones – companies surveyed devoted four times as much budget to insuring physical assets as they did to cyber ones.
That insurance gap is particularly striking given the average potential loss to information assets exceeded that to property, plant and equipment (PP&E) $979 million to $770 million, according to the report. At the same time, companies surveyed indicated they felt it was more likely they’d experience a loss to information assets than to their physical ones.
On top of that, companies that have failed to properly value their IP face serious and punitive difficulties when they are confronted with a patent or trademark lawsuit or embark on a takeover deal.
Companies’ struggles to understand the value of their IP make it difficult for them to protect it adequately.
The trend toward IP becoming the primary source of business value began in the mid-1970s, accelerating after the financial crisis of 2007–08 with the rise of mobility, cloud computing, social media and other technologies.
According to Lewis Lee, CEO of Aon’s Intellectual Property Solutions Group, markets first started to recognize IP as an asset class in 2006 when BlackBerry maker Research in Motion reached a $612.5 million settlement with patent holding company NTP over the technology used to push emails to BlackBerry phones. Still a disconnect remained in the business community between the existence of the IP asset class and how to value it.
IP is difficult to quantify, yet it’s increasingly valuable. The need to protect those intangible assets’ ever-growing value is significant. Consider the issue of “patent trolls” – companies whose sole purpose is to obtain the rights to patents and profit by means of licensing or litigation. More than 10,000 companies have been sued at least once by a patent troll, and over the past 10 years patent troll lawsuits have grown 500 percent.
Understanding the value of IP is also critical when it comes to M&A. A classic IP horror story is that of a major car maker that acquired a well-known luxury auto maker. After closing the deal, the acquiring car maker learned that while it had acquired everything needed to produce the luxury vehicles, the one thing it failed to acquire was the luxury brand’s trademark, which sold to a rival firm.
Losing Value In The Inability To Value
“Very few companies recognize the value of their IP, nor have they secured an IP strategy that mirrors their long-term corporate strategy in order to maximize this value,” said Brian Hinman, Chief Innovation Officer and Head of EMEA for Aon’s Intellectual Property Solutions. “The C-suite often has no visibility into their IP portfolio, let alone those of competitors. They usually leave that to the general counsel who usually leaves that to the IP counsel, if one exists.”
The implications of not accurately valuing IP could play out across various scenarios. Among them:
- Failure to align IP strategy and business strategy:While many firms do a good job focusing on the legal aspects of their IP, such as whether a patent is filed, they fall short in recognizing and maximizing the value of their IP portfolio. If a business uses the number of its patents, rather than the growth in its IP value, as a metric for its innovation that company will not only fail to maximize the value of its IP but it won’t be able to align its IP strategy with its overall business strategy.
- Failure to understand IP value:A new company has suddenly appeared in an established firm’s market. The start-up, it turns out, was founded by a disgruntled former employee who took IP with them when they left. Just how much is that IP worth? What value should the company attach to it in litigation?
- Inability to value IP in M&A:A technology company might be looking to make an acquisition in the network security space, but with dozens of potential targets how does it make the best choice? The ability to value the IP of each of the targets would contribute significantly to a deal’s success. Not only would the company likely select the best target but possessing a deeper understanding of the acquired company’s IP would allow it to better integrate those intangible assets with the overall business strategy going forward.
- Not properly protecting IP:Perhaps a company does recognize the significance of its IP enough to want to insure it. If the company is unable to quantify the value of its IP, it might not find a satisfactory solution in the insurance markets. “Limited data and analytics available to the underwriting community has meant higher retentions, deductibles and co-insurance requirements for potential policyholders, limiting the value insurance can bring to the world of IPs,” said Eric Boyum, Managing Director, Technology & Communications Industry – National Practice Leader, at Aon. Still, Boyum noted, “The importance of managing the value and risk of IP has never been higher.”
Measuring IP To Drive And Protect Value
As the value of intangible assets continues to grow versus that of companies’ physical assets, it becomes ever more important that companies take advantage of them.
While many companies find it confusing putting a price tag on their IP, there are tools available that can help.
Companies that measure the value of their IP portfolios accurately will be better positioned to protect those assets and to connect them to the overall business strategy. “Not only is an understanding of assets essential to the business – but necessary if firms are looking toward mergers and acquisitions,” states Lee. Measuring IP value well could also provide a source of competitive advantage and will allow companies to realize the maximum return from their innovation efforts. “If we look at today’s top companies, it’s clear – you can place a premium on innovation, and the challenge is how to best value it.”
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