Intangible Asset Bubble?


By Ken Witt

If one subscribes to the unfortunate theory that it takes a crisis to precipitate change, a recent article, Welcome to the IP Bubble, suggests that a change might be in the winds as it relates to valuing intangible assets. 

In the article, David Rosenbaum argues that we may be seeing an intangible asset bubble. He cites several examples of tech companies buying and selling patents for large amounts of money, along with cases involving significant subsequent write-downs in value. Drawing on the Dutch Tulip Mania of the 1630s and the dot.com bust as analogous situations, he suggests that a belief that prices will always go up (evidenced by the price spikes seen in recent transactions) combined with a disconnect between perceived and actual value (evidenced by the transactions resulting in write-downs) constitutes a bubble. 

Research underlying the CGMA report Rebooting Business: Valuing the Human Dimension showed that 75% of respondents agreed that they need to put more emphasis on measuring and demonstrating the non-financial value of their business. Similarly, 76% hold the view that the current reporting system promotes excessive focus on the financials. Baruch Lev, who is quoted in the Rosenbaum article, concurs. Lev, from the Stern School of Business, argues that the inability of our current financial systems to provide adequate information about corporate intangible assets and their economic impact causes volatility in stock prices, losses to investors, and misallocation of capital resources. 

In addition to the capital market implications, understanding the value of intangible assets and how they drive value in an organization is critically important for effective internal decision-making. Hopefully your company does not have any “tulips” on its balance sheet, but do you understand the specific IP that drives earnings and cash flow in your company? 

If you need guidance for valuing intangible assets, either in connection with a transaction or for internal purposes, you may find the CGMA tool Three approaches to valuing intangible assets helpful. This tool provides an overview of the income, cost and market approaches to valuing intangibles and recommends the best approach for valuing various types of intangibles.