©Karl-Erik Sveiby 26 May 1995. All rights reserved.
Share prices are the only reasonably reliable measure of the market value of intangible assets. Companies rich in intangible assets tend to have high share prices, relative to their tangible assets. The trouble is the value of intangible assets cannot be deduced, like the value of tangible assets, from routine market transactions. It only emerges in an indirect way, or when a company changes hands.
And by no means all the highest intangible values are found in the so called high-tech industries. The intangible assets of electronic companies, for instance, are rated fairly low, compared to those of media, waste management and many branded consumer products companies.
Figure 1. Health Care and branded consumer products have the highest intangible assets. In real estate on the other hand, most of the assets are tangible and therefore measured.
Pharmaceutical companies are generally rated even more highly than service companies, whereas companies whose mission is to manage tangible assets like banks, and real estate, insurance and investment firms, are typically valued at, or near their visible equity.
One important point to bear in mind when assessing the commercial value of invisible assets is that although service and knowledge companies depend heavily on their human resources, much of the internal and external structure remains intact even when the most valuable employees leave the company, and can serve as a platform for a new start.
The commercial value of intangible assets like well-known brand names and knowhow built into internal structures are that they are owned by the company and that they survive the individual.
The market value of a company can thus be interpreted as a direct reflection of the Invisible Balance Sheet. Total market value consists of the visible tangible equity, plus the three kinds of intangible assets: the external and internal structures, and the competence of the personnel.
The intangible assets of Coca Cola Company lie mainly in the brand names, and the established organization (the external and internal structures). The market value of a car manufacturer like Ford Motor consists largely of the tangible assets and the internal structure.
The most valuable assets of McDonald's are its brand name, and franchisee network (external structure). A construction company's main asset is its ability to carry out complex projects (internal structure).
The intangible assets of pharmaceutical companies lie in their R&D-portfolios; and brand names. The value of a consultancy firm consists mainly of the competence of its staff and the relationships with its customers, and hardly at all of its tangible assets, and visible equity.
Figure 2. The total market value of a company consists of its visible equity and three kinds of intangible assets.
Microsoft's huge intangible assets, of some $45 bn (April 1995), consist mainly of external structure, in the form of 35 million people who use 80 million copies of its "Windows" operating system. These customers can be seen as "captive", insofar as it is hard to switch from one operating system to another. They are therefore likely to buy Microsoft's software in the future.
It was the enormous value of this external structure that led the US anti trust authorities to block Microsoft's proposed acquisition of the Intuit software company in 1995.
Figure 3. Market Values of well-known companies consist more of intangible than tangible assets (April 1995).
Thus the composition of market value differs from industry to industry, as indicated below.
Figure 4. Composition of market values differ depending on the type of industry.
But the market only imputes value to intangible assets that clearly contribute to the corporate mission. The knowledge of how to design elegant, practical buildings, for example, is very valuable to the customers of a firm of architects, but financial analysis skills are irrelevant. No matter how good they are, financial analysts will feel out of place in a firm of architects, because their specialized knowledge is not required to accomplish the corporate mission.
In a brokerage house, on the other hand, financial analysts can find meaningful employment, and architectural skills are more or less irrelevant. People knowledgeable about medicine are of no use to a bank, unless it numbers pharmaceutical houses among its major customers. Similarly, the talents of the world's most brilliant electronic engineer will not be fully appreciated if he or she happens to stray into a public relations firm.
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