Intangible Value

February 28, 2007

Intangible Value Drivers

In my last post on "Oil vs. Images" I speculated that the intangible market value of a company was driven by three forces: brand names, technology, and service. And design plays an important role in all three of these areas. In this entry I want to add some evidence to support the role of brand names, technology and service in creating intangible market value.


Total market value (v) is equal to tangible market value (v1) and intangible market value (v2). To make this simple, let’s assume the depreciated book value of a company’s tangible assets is approximately equal to their market value. If that’s true we can estimate the intangible market value of the company by subtraction: v2 = v – v1.

In order to control for shifting market forces, I ran these numbers on the financial accounting statements of the fifty companies with the highest intangible market value in both 1966 and 2003. Twelve of these companies reported the data in both years. And all of them had an intangible market value greater than 50%.


The intangible market value of five of these twelve companies appears to me to be brand driven. And their intangible value as a percent of total market value is relatively stable of the thirty-seven years. Coca-Cola (1966 v2 = 76%; 2003 v2 = 81%); Gillette (80%, 77%); Procter & Gamble (57%, 77%); Johnson & Johnson (68%, 76%); PepsiCo (52%, 75%).


The intangible value of seven of these companies appears to me to be technology driven: Pfizer (1966 v2 = 59%, 2003 v2 = 78%); 3M (77%, 78%); Eli Lilly (77%; 73%); Texas Instruments (65%, 71%); Merck (85%, 62%); Bristol-Meyers Squibb (85%, 62%); IBM (77%, 38%).


Fifteen companies of the top fifty companies in 2003 weren't even on the radar screen in 1966. These companies were (along with an estimate of their 2003 intangible market value): eBay (91%); Amazon (90%); Genentech (86%); Yahoo (86%); SAP (86%); Amgen (85%); Cisco Systems (81%); Qualcomm (80%); Sysco Corp (76%); Microsoft (74%); Clear Channel Communications (72%); Nokia (63%); Wal-Mart (58%); Home Depot (58%); and Nextel Communications (57%). I'll leave it to you to decide whether the intangible market value of these companies is driven by brands, technology, or service … or some combination of all three.


What do these results mean to managers and investors? In my view the market value of leading companies across a broad spectrum of industries is driven by the intangible forces of brand names, technology, and service. Just as clouds in the sky drive the weather. And accountants can't agree on how to (or even if) these can be reported in the balance sheet. So, we've got to figure out what inputs drive intangible value and how they affect total market value. More on this in future posts.