Rembrandts in the Attic

Whether you like it or not Antiques Roadshow is a hard show to channel surf past. There’s something strangely compelling about someone finding a priceless painting in their attic or stuffed behind the water heater.

However, before you start ripping up the company floorboards you might be better dusting off past research and product development efforts and investing the time to understand the true value of the intangible assets your company owns which are more than likely off balance sheet but nevertheless valuable.

Over the past decade, there have been a number of significant intangible asset transactions of a billion dollars or more. Aging or distressed companies such as Kodak, Nortel and Motorola Mobility woke up to the value of their intangible assets – in Nortel’s case the sale of its patent portfolio netted the beleaguered company US$4.5 billion, effectively valuing it at three times the rest of the company. Or Google’s acquisition of Motorola’s Mobility business unit (after reporting 5 straight quarters of losses) for US$12.5 billion in 2011, a move motivated almost entirely by Motorola’s treasure trove of 17,000 patents. 

You could say that this is the stuff of fairy tales but like the proverbial retiree from Swansea with her 16th century Charles II tea set it actually does happen. In fact there’s a whole book about it, called fittingly “Rembrandts in the Attic” by Kevin Rivette and Davie Kline. It charts how companies (and individuals) can own intangible assets (not just patents but trademarks, data, content, copyright and confidential information) that are extremely valuable but are often unaware of their existence or fail to recognize the true value of these assets. A key driver for this ‘lost in the attic’ phenomenon is that modern accounting standards tend to encourage companies to ignore or overlook intangible assets – they either don’t make the balance sheet at all, are lumped together under good will or are merely recorded at cost (for which there is virtually no correlation at all to value).

One of the best examples of this phenomenon comes from New Zealand. In the early 2000’s a little known New Zealand software company developed what would come to be an industry changing technology. It filed a patent application over the area and attempted to commercialize the technology but for a variety of reasons (not the least of which that it was simply too early) it was unsuccessful. Management kept the patent application alive and it was eventually granted. At this stage they approached EverEdge and over a four month period we negotiated the sale of the patent for an eight figure sum (tens of millions of US$). The sale marked the highest price ever paid for a single US patent. The company netted $45 for every $1 invested into it. That’s a venture capital type return for a company that had otherwise stalled.

Or take Facebook’s acquisitions of Instagram (US$1 billion) and What’sApp (US$19 billion. Both these companies were yet to turn a profit – and in the case of What’s App, the company was running at a significant loss – but their management teams understood the value of their intangible assets, particularly data, brand and internet assets they were building which helped drive Facebook to pay the record breaking prices for these transactions.

Companies that have a knack for out of the box thinking (which tends to produce early, and therefore more valuable intangible assets) are well positioned to take advantage of the increasingly liquid market in intangible assets. This includes not just start-ups and backyard inventors but also medium and large corporates who often have little awareness of potential unrealized value sitting on or off the balance sheet. The irony is that many of these companies record low value items such as chairs, desks and laptops in their Fixed Asset Register but fail to identify assets that are potentially far more valuable – the intangible assets derived from R&D, innovation activities or ideas from the bright minds of staff or contractors.

However the mood is changing. Companies are starting to recognize the value of their intangible assets and are taking proactive steps to extract value and mitigate risk. The first step in this process is to undertake an intangible asset audit to determine what assets you hold at all. 

At its simplest level, an audit will look at:

  • What are our intangible assets?

  • What are the impact of these assets on our business and how are they driving economic benefit?

  • What risks are we exposed to through these assets?

An expert audit can help identify the valuable intangible assets (the Rembrandt’s in the Attic), held by the company. And, just like Antiques Roadshow once identified, it is possible to value these assets to determine the potential value (financial or strategic) the company will realize.

With intangible assets representing over 87% of all company value today and being the real drivers of growth and profitability for most businesses, failing to take the time to identify and manage these valuable assets not only represent a major missed opportunity to extract value but is also a potential breach of a Directors fiduciary duties to shareholders given that Directors have a duty to manage all company assets (tangible and intangible). I can hear the attic door creaking now…