Competing for Customers and Capital

Brand Robustness

A company’s brand name is among its most visible and valuable assets. So one would expect that the greater a brand’s value -- as a percent of its owner’s market cap -- the less its stock would suffer in a crash. Consciously or subconsciously investors are, like the rest of us, more comfortable and familiar with the better brands so they should naturally dump these stocks last on the way down.

The crash of ’08 provides an opportunity to design “natural market experiments” to answer important questions. Among them: did better brands suffer less than lesser brands?

To answer this question I analyzed the stock market performance of the 62 firms traded on U.S. exchanges that are the parent companies of 65 of the most valuable brands as measured by Interbrand in their 2008 valuations. Every one of the parent companies lost value in the crash of ’08. The combined loss of market value for these firms was $4.1 trillion USD: representing 64% of their highest pre-crash market cap.

Consider these two examples. The Coca Cola Company (KO) brand value was 44.0% of its highest pre-crash market cap. The company lost 43% of that value by March 2009. The pre-crash value of International Business Machines’ (IBM) brand represented 33% of its highest market cap. Then IBM lost 49% of that value in the crash.  In both these cases, the decline in the market value of the company was less than the average 64% decline for all 62 companies in the sample.

Alternatively, one might expect that the lower a brand’s value as a percent of market cap, the more its owner would suffer in a market collapse.

Here are two typical examples of less valuable brands. The pre-crash brand value created by JPMorgan Chase & Co. (JPM) was 6% of its highest market cap. Then JPM lost 71% of that value by March 2009. The pre-crash brand value created by Marriott International (MAR) was 17% of its highest market cap and the company lost over 79% of that value in the crash of ‘08.

As you will see, these results are not isolated examples – they are representative of the sample.

THE BEST GLOBAL BRANDS
Business Week, in cooperation with Interbrand, publishes a list of the Best Global Brands every year. In his September 18, 2008 article Picking the 100 Best Brands, Bert Helm explained how Interbrand puts a number on the power of a name:

Interbrand takes many ingredients into account when ranking the value of the Best Global Brands. Even to qualify for the list, each brand must derive at least a third of its earnings outside its home country, be recognizable beyond its base of customers, and have publicly available marketing and financial data.

These requirements eliminate many household names like Chevrolet and AT&T, Inc. (T) as well as privately owned companies and their divisions. Not all the brands from large portfolios are included, though two of the Proctor & Gamble Co.’s (PG) most valuable brands – Gillette and Duracell – are. In these cases the brand values were added and attributed to their owner.

Interbrand valuations are based on the net present value of forecast earnings using data from the twelve months ending June 30, 2008.  This is important, because it means the impact of the market meltdown was not reflected in the 2008 valuations of the 65 brands in this study. Thus, the foundation for natural market experiments was built.

Jonathan Knowles, who knows a thing or two about brand value, also took advantage of this opportunity. Using the classical finance approach he compared the S&P portfolio losses with the losses of valuable brand portfolios. See Is There a Brand Bonus?

A NATURAL MARKET EXPERIMENT
A “natural experiment” is one where unexpected, sometimes dramatic, circumstances create a real environment where one can approximate the controls of a laboratory. The massive market meltdown of 2008 created just such conditions.

The following chart outlines the conditions for this natural market experiment in brand value [BV] and cap loss [CL]. Note it’s impossible to have a true control group – firms that didn’t receive the “experimental treatment” -- because all firms suffered from the market crash.

  

The 62 firms are organized in this chart based on their relative performance in creating higher/lower than average brand value (X axis) and enduring lower/higher than average declines to their market cap (Y axis). The 15 green firms were out-performers, the 21 blue firms were underachievers, and the 26 red firms were inconsistent performers.  To create the experimental conditions the 62 firms in the sample were sorted into each of the four cells in the above chart based on the following criteria

• The 15 firms in the green cell (+,-) created greater than average pre-crash brand values and experienced less than average post-crash losses in their market caps;

• The 21 firms in the blue cell (-,+) created less than average pre-crash brand values and experienced greater than average post-crash cap losses.

• The 25 firms in the two red cells experienced simultaneously greater brand value and cap loss (+,+) or lower brand value and less loss (-,-).

These counts set up the conditions for this natural experiment. The green, blue and red cells serve as quasi-controls under the null hypothesis that there are no statistically significant differences between them. In fact, based only on these counts, there are no significant differences.

Keep in mind the counts in the chart above were used to design the experiment, not to test it. In this sense, the counts don’t count. What really count are the average dollar pre-crash brand values and the post-crash losses in market capitalization of the firms in each cell.

BRAND PERFORMANCE IN HARD TIMES
The greens outperformed the blues by 3 to 1. They created an average of $21 billion in pre-crash brand value (33% of the total sample pre-crash brand value). Then they experienced a $29 billion average decline in market capitalization during the crash (11% of the total sample cap losses). The Green firms did as well as they could during the crash of ’08.

  

The blue firms went down the drain. Before the crash these 21 firms created an average of $12 billion in brand value (25% of the total sample brand value). Then, during the crash they experienced an average decline of $96 billion in their market capitalization (50% of the total sample cap losses). In other words, the value of the blue brands was around ½ that of the green brands, but the owners lost over 3 times as much. In the crash of ’08 the blue firms did even worse than the red ones.

Overall, this analysis produced a highly significant F-stat (5.2) on the loss of market capitalization. The probability that these losses in market cap were due to chance is less than 0.01. And more important the F-stat (1.9) in pre-crash brand values was not significant. The probability the observed differences in pre-crash brand values were due to chance was 0.16. Excluding the seven financial institutions counted in the blue group had no material effect on these results.

BRAND ROBUSTNESS
Sixty-five leading global brands were sailing directly into a perfect financial storm. Some were a lot more valuable than others. The brand values of all firms were determined by the same process -- before the storm appeared on the radar screen. The companies that owned those brands were traded on U.S. stock markets, so there were no exchange rate differences to confound the analysis:

• The more valuable brands accounted for 33% of the total pre-crash value. The companies that owned those brands incurred losses in their market cap amounting to only 11% of the losses suffered by all firms in the study.

• The less valuable brands accounted for 25% of the total pre-crash value. Their owners incurred losses amounting to 50% of the total sustained during the storm.

• The brands with inconsistent performance accounted for 42% of the pre-crash value and 40% of the losses in market cap incurred by all firms in the sample.

One can conclude with high confidence that, as a rule, companies with better brands suffer less than those with lesser brands.

Thanks for visiting. As always your comments are welcome.

~V

Crossing the Bule/Red Ocean Divide

Between the 1st and the 2nd calendar quarters of 2007 Google's sales (NASDAQ: GOOG) increased from $3.664 to $3.872 billion. That's nearly 6%. In the same period Microsoft's sales (NASDAQ: MSFT) decreased from $14.398 to $13.371 billion. That's a decline of over 7%. And it's the only time in the last ten quarters that MSFT experienced a March to June quarterly decline in revenues.

From March 30 to October 19, 2007 Google's market cap increased over 42% from $142.2 to $201.2 billion. In that same period Microsoft's market cap increased just a bit over 8% from $261.4 to $283.0 billion.

It's a common expectation that when one company's revenues increase at the same time as a rival's revenue declines, both stock prices will be affected. This is an expectation one could easily forget while tracking the valuation measures currently reported in popular financial services like Yahoo!. Why? Because implicitly these measures assume that companies operate in a blue ocean – that they have no competitors.

Pick any popular metrics you want, from Price/Earnings to Market Cap or Enterprise Value to Earnings. They all are completely company specific. They do not even hint at how the 6% increase in Google's revenues, coupled with the 7% decline in those of Microsoft, might affect their respective market caps in the next quarter. Why? Because we seem to think it's all a mystery. Well, it isn't a mystery any longer. In my book Competing for Customers and Capital I pull back the curtain to reveal the often subtle and complex relationships between the sales revenue and market value of competitors.

SOME BACKGROUND
This is the 4th in my series of posts on the competition between a blue-ocean superstar (Google) and its red-ocean rival (Microsoft). This one, like the earlier posts in the series, was inspired by Blue Ocean Strategy, the book by Professors Kim and Mauborgne of the INSEAD business school in Fontainebleau, France.

The 1st post in this series was "Microsoft's $154 Billion Question: Optimizing Red Ocean Expenses." In it I mapped enterprise marketing expenses onto the sources of intangible market value and introduced a simple measure of how shareholders know if they're are getting their money's worth from "red ocean" spending. In the 2nd post on "Microsoft vs. Google: The Battle for Your Network" I argued that however appealing blue oceans may be, nearly every company ends up in a sea of red ocean expenses. At that point the most compelling question is how to manage expenses in this environment. Theoretically, the best way to do this is to "optimize" these costs. The 3rd post in the series was "Google vs. Microsoft: Blue vs. Red Ocean Earnings Productivity." That one addressed a larger question: are there significant differences between the earnings productivity of "Blue Ocean" compared with "Red Ocean" companies? The short answer is, yes at least in the case I am currently reviewing.

A SURPRISINGLY SIMPLE TRANSFORMATION
Here is a surprisingly simple transformation of commonplace financial accounting data into a metric that captures the competitive interactions between the separate, but equally important, markets for customers and capital. I call it the risk-adjusted (value-sales) differential: RAD (with a short "A"). It's what you need to cross the blue-ocean, red-ocean divide.

Column 1 in this table shows Google's share of value (SOV) based on the closing price of its stock at the end of each quarter from March 2005 through the close of trading on October 19, 2007. Column 2 shows the company's share of revenue (SOR) from March 2005 through June 2007. Quarterly value-sales differentials (VSD = SOV-SOR) appear in column 3. Enterprise Risk, the standard deviation in Google's VSDs, was 4.9. Risk-adjusted differentials in column 4 equal VSD/Risk. These ranged from a low of 0.5 in March 2005 to a high of 3.9 last Friday (using June 2007 revenue numbers for both companies). When Microsoft files its latest quarterly report with the SEC on October 25 I'll update the revenue numbers for both companies.

CROSSING THE DIVIDE
From a technical point of view, applying the RAD metric to a company produces a standard normal variable (mean zero and standard deviation one). Practically speaking, RAD captures the competitive interactions between sales revenue and market value. 

In the following chart risk-adjusted differentials are on the vertical axis ranging from +5 to -5. The 95% confidence limits within this range are marked by the dotted lines at +2 and -2 RADs. Ten quarters, marked by their month's end, appear on the horizontal axis.

With only two companies, risk-adjusted differentials always will be mirror images of each other. Notice that with the exception of March 2005, all of Google's differentials are greater than +2.0, meaning they are statistically significant at a 95% confidence level. Besides the March quarter all of Microsoft's differentials are less than -2.0 at the same confidence level.

The meaning of this chart is simple, yet powerful. In the last nine of the ten quarters since Google went public investors rewarded management with a significant value premium over and above its market power – the company captured only 22% of combined revenues, but created 42% of combined value. Of course, it follows that investors punished Microsoft by discounting its value relative to its market power. The company captured 78% of sales revenues, but created only 58% of shareholder value. In the long run, this is how free markets deal with monopolists.

ON THE OTHER SIDE OF THE DIVIDE
The best part of this story is what you see on the other side of the blue-ocean, red-ocean divide ... when both capital and customer markets are firing on all twelve cylinders.

The two axes on the following chart combine Google's earnings productivity (from my last post) with its risk-adjusted differentials. Risk-adjusted differentials [RAD] are calibrated on the left-hand blue axis from 0.0 to +4.5. Relative earnings productivity [REP with a short "E"] is calibrated on the right-hand green axis from 0% to -35%. REP is the ratio of actual to maximum potential earnings scaled to equal zero when they are equal.

In the 1st quarter of 2005 Google's actual earnings [EBITDA] fell short of its theoretical maximum by 31%. Theoretical maximum earnings are the point at which outgoing costs equal incoming profits, at the margin. Over the next nine quarters Google management guided the company systematically in the direction of greater relative earnings productivity. By June of 2007 the difference between actual and maximum earnings was just 2%. Over the same period Google's risk-adjusted differential increased more or less systematically from +0.5 to +3.9 points. The correlation between the two is +0.81.

By now you may be wondering what Microsoft looks like on the other side of the divide. The next chart tells its story using the same language. And it's not a pretty picture.

Microsoft's risk-adjusted differentials are the mirror image of Google's. But the company's relative earnings productivity is dramatically different. In March 2005 Microsoft's actual earnings after all expenses fell 42% short of its theoretical maximum. And the pattern didn't improve much over the next nine quarters. Microsoft's relative earnings productivity followed a zigzag path reaching a high of -18% in March 2007 and closing the last quarter at -36%. The correlation between Microsoft's risk-adjusted differentials and relative earnings productivity is -0.21. Beginning in March 2006 the two more or less move in step.

WHY DO THESE METRICS MOVE TOGETHER?
My RAD and REP metrics are not currently used by investors to value a company's stock. So why do they move together? Can it be that theses metrics capture underlying, but otherwise unobservable and mysterious, market behavior? Or is it simply that Google, on the blue-ocean side of the divide in this market, is in the driver's seat? Motivating investors' performance expectations on revenues, earnings and market value to follow its lead in the competition with Microsoft, on the red-ocean side of the divide?

Whatever the reasons, I believe these metrics pull back the curtain on market mysteries enough to consult them in forecasting stock prices. To find out how to do just that, stay tuned to this station. Next week, after Microsoft releases its September quarterly report (providing a full deck of fresh, concurrent information on both companies) I'll forecast their closing stock prices on Monday December 31, 2008.

Thanks for viewing.

~V

The New Battle for Your Desktop

If Microsoft (NASDAQ: MSFT) had optimized expenses in the quarter ended June 30, 2007 the company would have earned $6.3 billion. Its actual earnings were $4.0 billion. Management threw $2.3 billion down the drain by over spending on everything in its competition with Google (NYSE: GOOG). In their book Blue Ocean Strategy, Professors Kim and Mauborgne of INSEAD don't tell us what Microsoft might do for a second act. That's because Microsoft may have been born in a blue ocean, but now the company is living in a red one.

According to the latest Interbrand report puclished in Business Week Microsoft is the second most valuable brand on the planet. Google, incorporated in 1998, is number 20 on the list. Both of these companies were born in a "blue ocean" of their own creation. But today Microsoft, at 32 years old,  already is long in the tooth for an IT company. Management now must survive in a sea of "Red Ocean" expenses. Hounded on all sides by Google as well as newer upstarts.  However appealing blue oceans may be, nearly every company ends up in a sea of red ocean expenses. At that point the most compelling question is how to manage expenses in this environment. Theoretically, the best way to do that is to "optimize" these costs. This is the 8th in my series of posts on corporate brands in enterprise marketing.

THE OLD BATTLE FOR YOUR DESKTOP
IBM (NYSE: IBM), founded in 1898 as the Tabulating Machine Company, today is the third most valuable brand in the world. This makes it easy to forget that the company drifted into a sea of "red ocean" expenses by the early 1990s. 

IBM dominated the world market in computers. Its sales revenues in 1991 were $64.8 billion. In that year IBM captured 76.6% of combined revenues in a strategic group with Hewlett Packard (NYSE: HPQ), Dell (NYSE: DELL) and Compaq Computer. At that time the company had a huge "red ocean" spending problem amounting to about $7 billion. Just when the company was about to be spun off into five or six independent parts Lou Gerstner came to the rescue. Under his leadership IBM's sales increased to $88.4 billion in 2000. But its share of revenues in the same group fell dramatically to 41.9%.

How did Mr. Gerstner solve the problem? He and his management team increased the marginal earnings delivered by each 1/100th of a market share point and decreased its marginal cost until the two were almost exactly equal. This chart tells the story.

How did they do that? You can read the details in Chapter 6 of my book Competing for Customers and Capital -- "The Battle for Your Desktop."

THE NEW BATTLE FOR YOUR NETWORK
Microsoft and Google are the leading players in the new battle for your network. This table show how they stood as of June 30, 2007. With sales of $13,371 million Microsoft dominated the market, capturing 77.5% of the combined revenues.

Microsoft's total costs were $9,382 million compared with Google's $2,767 millon. A closer look at these numbers, standardized as the cost per dollar of revenue, reveals an important problem: the two companies apparently applied very different financial accounting rules to their income statements.

Google reported its cost of goods and services (COGS) was $0.40 per dollar sales, while Microsoft reported it was just $0.23 per dollar sales. Meanwhile GOOG reported sales and marketing (SNM) expenses as $0.09 per dollar, while MSFT reported they were $0.23 per dollar. Looks like their financial accountants have very different definitions of these two costs. Unexplained differences like these can play havoc with optimizations. Yet, research and development (RND) costs per dollar as well as general and administrative (GNA) costs per dollar were about the same. The only way to resolve these differences, without access to their books, is to add up all the expenses and run the optimization on each company's "Total Costs."

MICROSOFT THREW $2.3 BILLION DOWN THE DRAIN
A simple static analysis will serve as a first take on Microsoft's performance. The horizontal axis of this chart is Microsoft's share of combined revenues. The vertical axis is the company's marginal earnings (green schedule) and marginal costs (red schedule) per share point. The company actually captured 77.5% of combined revenues in the quarter ended June 30, 2007.

Sometimes it's great to be the market leader. But in this case it's not. Microsoft shelled out $539 million for that 77th share point. And it was worth only $172 million after total costs. Not a good thing. To maximize earnings (by optimizing total costs) the company should have captured only 60.3% of the market. That's the point where the marginal cost and earnings per share point were exactly equal.

But, wait a minute. Microsoft management would never give up revenue to "optimize" costs. Exactly so. They wouldn't "give up revenue." But, like Lou Gerstner, Bill Gates may be forced by customers to watch their major "blue ocean" competitor add billions to revenues that remain beyond his reach. With the result of a sinking share of future revenues.

This chart shows the theoretical impact on earnings of optimizing Microsoft's total "red ocean" costs of competing with Google in 2007. The horizontal axis is share of revenues. The vertical axis is earnings before interest, taxes, depreciation and amortization.

Microsoft's earnings were $3.991 billion at its actual revenue share of 77.5%. At the optimum level of competitive spending Microsoft's revenue share should be 60.3%, generating earnings of $6.271 billion. The difference is the $2.3 billion in theoretical earnings that management threw down the drain in the 2nd quarter of 2007.

IS MICROSOFT THE IBM OF THE 21st CENTURY?
We probably won't know the answer to this question for several years, if not for a decade. But the parallels are there. A brash young upstart (Google is Microsoft's Dell to IBM) steps in with a game changing "Blue Ocean" strategy. At first Google was not considered a threat. When the upstart became just that Steve Ballmer, Microsoft's CEO, called Google a "one trick pony". Sticks and stones! Is it likely that Microsoft can change its "desktop" business model to compete with Google for dominance of your network? What do you think?

Thanks for viewing.

~V

Accounting For The Unaccountable

Interbrand's estimate of the 2006 market value of the Microsoft (NASDAQ: MSFT) brand name is $58.7 billion. The value of goodwill and intangibles on Microsoft's balance sheet at the close of its fiscal year on June 30, 2007 was $5.6 billion.  The difference of $53.1 billion documents the inability of the company's balance sheet to capture the value of one of its most important market-based assets: the Microsoft brand name. But it does not even begin to reflect what I call the company's "unaccountable." This is the market value that remains unaccounted for after the summation of all "accountable" measures of asset values.

BRAND NAMES IN ENTERPRISE MARKETING
Corporate brands play a much more significant role in enterprise marketing than they do in traditional micromarketing. In fact, much of my book "Competing for Customers and Capital" is dedicated to highlighting the larger role of corporate brands and providing directions on how to deal with it. This is the 6th post in my series designed to document the larger role of corporate brands using real-world, real-time examples backed with published financial data.

The first post in the series was "Sears Brand Bonds," which took a look at how Edward Lampert captured the difference between the book value and the market value of the Sears brand name by issuing brand bonds. The second post applied these ideas to "Coca-Cola's Brand Bonds" to illustrate how the company might create new market value for its 200 lesser known brand names and, at the same time, resolve the ongoing battle with its bottlers. The third took a marketing oriented look at how to create value by co-branding a company's trademark and ticker symbol in Put a Little LUV in Your Logo!. The fourth post on "Brand Value vs. Book Value" was a broad-brush portrayal of the difference between Interbrand values and book values of 49 of the most valuable brands on the planet. My fifth post in the series took this broad-brush analysis a step further by examining the "Interbrand Value vs. Market Cap" of the same 49 valuable brand names. This article focuses on the panoramic view of how all three measures of the value of a company's assets can miss a huge chunk of its market value ... this is what I call the "unaccountable." I picked Microsoft for the analysis because it's the second most valuable brand in the world, after Coca-Cola (NYSE: KO).

MICROSOFT'S ACCOUNTABLES
The three existing measures of the value of a company's assets are (1) the book value of tangible assets, (2) the book value of goodwill and intangible assets, and (3) Interbrand value. In principle all three are what I call "accountables," because the first two already appear on a company's balance sheet and the third may yet find its way there.

Accounting rules that govern the book value of goodwill and intangibles are documented in the Financial Accounting Standards Board [FASB] Statement No. 142 on Goodwill and Intangible Assets issued in June, 2001. A quick take on this one-hundred and ten page document is available in the FASB Summary Statement No. 142.

It's clear from the headline to this post that the Interbrand value of Microsoft's brand name does not appear on its balance sheet. This simple fact provides a glimpse, when it comes to intangibles, of how reluctant financial accountants are to work with all the tools given them by the FASB. Here's what the Board says in its detailed statement on Goodwill and Intangible Assets:

The fair value of an asset (or a liability) is the amount at which that asset (or liability) could be bought (or incurred) or sold (or settled) in a currant transaction between willing parties, that is, other than in a forced or liquidation sale (# 23, page 13).

Since Microsoft is not about to sell its brand name to anyone, that seems to be the end of it. But it's not. On the next page, the FASB statement continues:

If quoted market prices are not available ... A present value technique is often the best available technique with which to estimate the fair market value of a group of net assets (such as a reporting unit). If a present value technique is used to measure fair value, estimates of future cash flows used in that technique shall be consistent with the objective of measuring fair value (# 24, page 14).

This reads like the methodology that Interbrand uses to measure brand value. So, why does Microsoft not take advantage of this option to value its brand name? I don't know the answer to this question. Perhaps some up and coming Microsoft employee does?

MICROSOFT'S UNACCOUNTABLE
In this chart I divided Microsoft's $276.4 billion market cap into the "accountables" and the "unaccountable." The accountables appear on the right-hand side of the pie. If Microsoft were to use Interbrand's methodology to value its brand name it would appear on the balance sheet as a $58.7 billion intangible asset. Its tangible assets were worth about the same as its brand name, or $57.5 billion. The combined value of the goodwill and intangibles that actually are reported on its balance sheet was $5.6 billion.

If you were to subtract the sum of the accounted for values ($122.9 billion) from Microsoft's market cap ($276.4 billion) you find its unaccounted for value on June 30, 2007 was $154.5 billion.

ACCOUNTING FOR THE UNACCOUNTABLE
Here's Microsoft's $154 billion dollar question: How can you account for the unaccountable? My hope is this post drives home the importance of finding an answer to this question. Fully 56% of Microsoft's market capitalization appears to materialize by magic! And that's only if you include the 21% represented by its Interbrand value.

Is it possible to account for the unaccountable? What do you think?

Thanks for viewing.

~V

Interbrand Value and Market Cap

The Interbrand value of Tiffany (NYSE:TIF) is 75% of its $5.3 billion market capitalization. That's no surprise. Tiffany is, above all else, the brand. But the Interbrand value of Johnson & Johnson (NYSE: JNJ) is just 2% of its $191 billion market cap. How do you explain these differences? That's the purpose of this article.

This is the 5th in my series of posts on brands in enterprise marketing. The first, "Sears Brand Bonds," was followed by "Coca-Cola's Brand Bonds." The 3rd article was on "Put a Little LUV in Your Logo!" And last week's was on "Brand Value vs. Book Value." In this post I compare Interbrand valuations with the market capitalization of the same 49 top 100 global brands in their 2007 report. The approach is based in part on an analysis of intangible market value in my book Competing for Customers and Capital.

A FALSE COMPARISON
I've learned at least one thing from posting these blogs: when you get it wrong, someone will let you know! In response to my last post Johathan Knowles, a widely respected consultant whose focus is on the branding dimension of business strategy, had this to say in an email:

I think the whole discipline of relating brand value to some financial metric is laudable - but I think you have chosen the wrong metric. As you know, the accounting regulations only allow for ACQUIRED intangibles to be shown on the balance sheet. The companies with the most disclosed intangibles are therefore those that have done the most - or the largest - acquisitions involving a significant amount of goodwill. It is no surprise that the acquisitive Citi has a low ratio and the non-acquisitive Harley has a stratospherically high one. Comparing overall brand value to disclosed intangibles is therefore a false comparison. The more meaningful question is to analyze what proportion of overall value (and of intangible value) is represented by brands.

Jonathon Knowle's comment motivated me to take a look at brand value and market cap. I think you'll find the results interesting.

A MORE MEANINGFUL COMPARISON
The following chart shows the Interbrand value for each of the 49 top brands as a percent of the company's total market capitalization. Tiffany is at the top of the list with a brand value that is 75% of its market cap. Johnson & Johnson is at the bottom with a brand value that is just 2% of its market cap.

The combined market cap of all 49 brands in 2006 was $4.294 tillion. The combined value of these brands was $735.5 billion. Overall brand values accounted for 17% of market cap. That's not a trivial number. But, I wondered: why the huge difference between Tiffany and J&J? So I ploted the percent of Interbrand value to market cap against the market cap of each company.

BRAND VALUE DECLINES WITH MARKET CAP
This chart shows how these 49 Interbrand values stand in relation to each company's market cap. Brand value as a percent of market cap declines systematically as company size increases. Market cap in billions appears on the vertical axis, with Interbrand value as a percent of market cap on the horizontal axis.

General Electric (NYSE: GE) is at the top of the chart at 13.5% of its $382 billion cap and Tiffany is at the bottom with 75% of its $5 billion market cap. Microsoft (NASDAQ: MSFT) and Citigroup (NYSE: C) also fit the expected pattern between size and brand value.

FORCES DRIVING INTANGIBLE VALUE
Three powerful forces drive brand values to decline as a percent of market cap: these are company size, market volatility, and other intangibles.

1. Company Size: Very big organizations have a lot more going for them than their brand name, even though it may have extraordinary value. GE's Interbrand value of $51.6 billion is just below IBM’s (NYSE: IBM), which makes GE one of the most valuable brands on the planet. But the GE brand is a relatively small (13.5%) part of GE's $382 billion market cap.
2. Market Volatility: Interbrand values are long run projections of the present value of cash flows. This makes them less volatile than market values. So, stocks that get beat up in the market will have a higher percentage of capitalization associated with their Interbrand value. Fitting this pattern are Ford (NYSE: F) and Eastman Kodak (NYSE: EK).
3. Other Intangibles: The impact of other intangibles on market capitalization is the final and most important factor driving value. The results of an FASB study of these factors were summarized in a Harvard Management Update in 2001: Getting a Grip on Intangible Assets. These are the seven dimensions of intangible shareholder value identified in that study:

> Technology (e.g. R&D)
> Customers (e.g. mailing lists)
> Markets (e.g. brand names)
> Workforce (e.g. management)
> Organizational (e.g. policies)
> Contracts (e.g. royalties)
> Statutory (e.g. patents)

LINKING INTANGIBLES TO MARKET CAP
The fundamental challenge of enterprise marketing is to link spending on these seven intangible drivers to shareholder value. Can it be done? What do you think?

Thanks for visiting.

~V

Brand Value vs. Book Value

The brand name "Harley-Davidson" (NYSE: HOG) has a market value of $7,718 million according to the 2007 Interbrand report. Yet, in its 2006 financial statement the company reported the value of intangible assets is just $59 million. Let's see, that means the name value is 131 times greater than the book value.

What's going on here?  In her article in the Sunday Times Denise Caruso, executive director of the Hybrid Vigor Institute, had this to say about valuing corporate assets:

TODAY’S sophisticated knowledge economy is stuck with the equivalent of an abacus for measuring the actual financial value of corporate assets and liabilities. At issue is a growing collection of crucial resources known as intangibles: assets or liabilities that have no obvious physical presence, but that represent real value or vulnerabilities. Patents, trademarks, copyrights and brand recognition are most commonly recognized as intangibles.

To drive home her point, the value of Harley-Davidson's corporate brand is 40% greater than the value of the company's total assets of $5,532! And it accounts for 42% of the company's market cap of $18.2 billion. What does Interbrand know that HOG's accountants don't know: the power of a brand name.

BusinessWeek chose Interbrand's methodology because it evaluates brand value in the same way any other corporate asset is valued—on the basis of how much it is likely to earn for the company in the future. Interbrand uses a combination of analysts' projections, company financial documents, and its own qualitative and quantitative analysis to arrive at a net present value of those earnings.

This is the 4th in my series of posts on brands. The first, "Sears Brand Bonds," was followed by "Coca-Cola's Brand Bonds." And last week I posted an article on "Southwest Airlines: Put a Little LUV in Your Logo! " In this post I compare the book value of intangible assets with the market value that Interbrand places on 49 of the top 100 global brands. The approach is based in part on an analysis of intangible market value in my book Competing for Customers and Capital.

SOME BALANCE SHEETS COLLIDE WITH REALITY
Few of Interbrand's top 100 companies undervalue intangible assets to the extent that Harley-Davidson did. But it's not alone in the stratosphere of intangible miss-valuations. Tiffany & Company (NYSE: TIF) is in the same orbit with a brand value to book value ratio of 130. Interbrand's valuation of Tiffany's is $4,003 million with a balance sheet intangible value of just $31 million. Not far behind is Gap's (NYSE: GPS) ratio of 114 which is based on a brand value of $5,481 versus a book value of $48 million.

Only 49 of Interbrand's top 100 best brands reported the data necessary for this analysis based on S&P's COMPUTSTAT database in 2006 downloaded from Wharton Research Data Services. The most important cause of missing data was due to foreign companies not listing on U.S. stock exchanges. And most offshore financial accounting regulations do not require (or do not recognize) "intangible assets" at all.

Consider the top 28 most valuable brands that reported intangible assets on their balance sheets, where these assets were less than half their Interbrand value. If you add up the Interbrand valuations ($475.5 billion) and compared them with their balance sheet value of intangibles ($65.9 billion) you get a miss-valuation ratio of 7.2 times.

SOME BALANCE SHEETS FLIRT WITH REALITY
To be fair to the accountants for companies that own 14 brands in the top 100 most valuable brands have book values that are "pretty close" to Interbrand's valuations. My measure of "pretty close" is that Interbrand valuations are no more than double the balance sheet values and these in turn are no more than double the Interbrand values. On the high end of this range is Kellogg (NYSE: K) with intangibles valued at $4,868 million on its 2006 balance sheet with an Interbrand value of $9,341 million. On the lower end is Citigroup (NYSE: C) with an intangible asset value of $49,316 million compared with an Interbrand value of $23,443.

The combined book value of intangibles reported by these 14 companies is $200.9 billion. Their combined Interbrand value is $192.7 billion. The brand to book value ratio is about one. To view the data on which this post is based Download the_power_of_a_name.xls

WHAT DRIVES INTANGIBLE VALUE?
For a preliminary answer to this question see my post on "Intangible Value Drivers." If you really want to know how enterprise marketing expenses drive intangible market value, and in turn add to (or diminish) shareholder wealth, read my book Competing for Customers and Capital. Then tell me what you think.

Thank you for viewing.

~V

Put a Little LUV in Your Logo!

In the first meeting of my undergraduate elective "Competing for Customers and Capital" at Tulane University I projected the following word on the computer screens in very large letters:

LUV

Then in the big classroom, speaking softly into my lapel mike, I asked:

What company owns this brand name?

My question was greeted with stunned silence. The students quietly discussed what it might be. Finally someone asked: Is it Procter and Gamble's brand of disposable diapers?  To which I replied: Close but no cigar. LUV actually is the ticker symbol for Southwest Airlines.

Everyone said: We knew that -- but a ticker symbol is not a brand name! To which I replied: On Wall Street it is.

This is the 3rd in my series of posts on brands in enterprise marketing. The first, "Sears Brand Bonds," was followed by "Coca-Cola's Brand Bonds." In this post I take an entirely original approach to co-branding from the first page in my book Competing for Customers and Capital.

CLEVER TICKERS
In his July 13, 2007 article published on Zacks Investment Research web site, Jim Licato asks the following questions:

Do stocks with clever ticker symbols outperform or under-perform the overall market? Do investors interpret such symbols as silly marketing ploys or will they recall memorable ticker symbols when they are contemplating which stocks to add to their portfolio? Well, these are the questions that Professor Gary Smith at Pomona College in California asked himself.

He's referring to a working paper by Alex Head, Gary Smith, and Julia Wilson titled "Would a Stock by Any Other Ticker Smell as Sweet?" Here's the abstract of their paper:

Some stocks have clever, eye-catching ticker symbols: for example, LUV (Southwest Airlines), MOO (United Stockyards), and GEEK (Internet America). These clever tickers might be a useful signal of the company's creativity, a memorable marker that appeals to investors, or a warning that the company feels it must resort to gimmicks to attract investors. This paper investigates the performance of stocks with clever ticker symbols during the years 1984-2004. Surprisingly, a portfolio of clever-ticker stocks would have beaten the market by a substantial and statistically significant margin, contradicting the efficient market hypothesis.

The authors found that 51 clever-ticker stocks delivered annual compound returns of 23.5% compared with the whole NASDAQ/NYSE portfolio which delivered returns of 12.3%.

FLUENT TICKERS
Adam Alter and his major Professor Daniel Oppenheimer of Princeton University's Psychology Department studied a refined property of tickers they dubbed "processing fluency."  To do so they gathered data on the rate of return on IPOs over 14 years. Their study, published in the Proceedings of the National Academy of Sciences

... investigated the impact of the psychological principle of fluency (that people tend to prefer easily processed information) on short-term share price movements. In both a laboratory study and two analyses of naturalistic real-world stock market data, fluently named stocks robustly outperformed stocks with disfluent names in the short term (abstract).

The 3rd in their series of studies is most relevant here because it examined

... the effects of fluency on stock performance in a semantically impoverished context: by using the pronounceablity of each company's three-letter stock ticker code as a predictor of performance (page 9370).

A fluent ticker was one that could be pronounced [e.g. KAR] compared with one that could not be pronounced [e.g. RDO].

The results of the 3rd study were quite interesting. The authors calculated the excess profits earned by an investment of $1,000 in the basket of NYSE and AMEX stocks with pronounceable tickers compared with non-pronounceable tickers. On the first day of the IPO the excess yield was $83.35. At the end of one week the excess yield was $42.40. After six months it was $37.10. Even after one year the excess was $20.25. Their tests for company size and industry effects were not significant.

SEMANTICALLY IMPOVERISHED TICKERS
Interbrand recently released its 2007 list of the 100 most valuable brands in the world. Fourteen of the top 15 brands also have a ticker symbol. How many of the following tickers (in alphabetical order) are pronounceable?

   AXP, BMW, C, DAI, DIS, GE, HPQ, IBM, INTC, KO, MCD, NOK, MSFT, TM

Only five of the tickers (in green) owned by 14 of the top 15 most valuable brands in the world are pronounceable. But none are particularly clever. And the other nine are more or less semantically impoversided.

It turns out that at least 80 of the 100 most valuable brands in the Interbrand list also have ticker symbols. The other 20 brands are owned either by private companies or are divisions of public ones. Only 15 of the 80 are pronounceable. Among the remaining 65 tickers the most semantically challenged are 005930 (Samsung on the Korean Stock Exchange) and RTRSY (Reuters on the NASDAQ). Only four of the pronounceable tickers are as clever as LUV. These are BUD, CAT, HOG and PEP.  Why was LUV not included in the fluency study? Because Southwest Airlines was not among the stocks listed in the Global New Issues Database from 1990 through 2004.

WHY NOT PUT LUV IN THEIR HEART?
If LUV is the brand name for Southwest Airlines (NYSE: LUV) on Wall Street, then why didn’t my students know this? It's probably because undergraduate seniors, even in a business school, don't trade many stocks on their own. But this raises a more important question: what would be the impact on its stock price if Southwest's management were to co-brand its corporate logo and its ticker symbol? Let's see, the company's logo is:

That red heart with wings makes co-branding easy. Why not put LUV in their heart? 

Just because it's easy, doesn't mean co-branding will succeed.

CAN CO-BRANDING TICKERS AND TRADEMARKS SUCCEED?
In their book Co-Branding: The Science of Alliance, Tom Blackett and Bob Boad write that:

... the term 'co-branding' is relatively new to the business vocabulary and is used to encompass a wide range of marketing activity involving the use of two (and sometimes more) brands. Thus co-branding could be considered to include sponsorships, where Marlboro lends it name to Ferrari or accountants Ernst and Young support the Monet exhibition ... The list of possibilities is endless. (page 1).

Would these authors consider combining trademarks and tickers as one of those endless possibilities? Tickers are not listed in the index to their book.  And my students said a ticker symbol is not a brand name. But ticker symbols have all the salient characteristics of a brand name.

The ticker symbol is a unique proprietary asset. It is a financial trademark. It stands as assurance to investors that buying it will deliver a genuine share of a company's stock. Because the ticker symbol practically is the product, it's superior to a trademark: even if you buy a share of LUV online you know you get a genuine Southwest Airlines common stock, unlike when you buy a Gucci bag or a Cartier watch on a city street.

Stock markets and product markets operate separately, but interact in many subtle ways.  Maybe more passengers would become stockholders, thus driving up the demand for Southwest Airline shares, if they saw LUV in the logo at the front of their Boeing 737.

Would it pay to mary your company's ticker to its trademark? It might, if that ticker were clever or fluent ... or both. What do you think?

~V