Value of the brand

By Stephen Cole and Nicole McNeill
Illustration: Susanna Denti

Determining its value is more complicated than simply looking at the goodwill value of a company’s balance sheet

For investors and purchasers, determining brand value is an integral part of the purchase due diligence. For purchase price allocation and goodwill impairment testing, brand and related trademark values are often pivotal. The data contained in a recent Canadian study on brand values, Measuring and Valuing Brand Equity, by David Haigh and Jonathan Knowles, provides additional objective valuation benchmarks for these and other constituents.

The study examined: what constitutes a brand; the importance of a brand in communicating to customers the unique benefits of a company product or service; the relative contribution of brand value to the company’s overall value; and the enormous importance of intangible assets across various industries.

Determining brand value is more than simply looking to the goodwill value on a company’s balance sheet. Rather, value is the price the brand would fetch in the open market. Michael Eisner, Disney Co. CEO, says, “A brand is a living entity — and it is enriched or undermined cumulatively over time, the product of a thousand small gestures.”

All figures in Canadian $ millions. Source: Brand Finance, CIBC World Markets, Bloomberg data

From the study, a comparison of the brand value of some of Canada’s top 25 most valuable brands using the Relief from Royalty Method (in simple terms, the monetary value of the brand by looking at what it would cost in the marketplace to license the brand) with the market value of the associated company is set out on the table below.

Intangible assets include brands, technology, contracts, artistic assets, customer lists and marketing-related assets. Intangible asset value as a percent of overall asset value is revealing. For example, it should come as no surprise that it is approximately 75% of overall asset value for Canadian technology, financial, communications and noncy-clical consumer companies; approximately 50% for industrial, energy, base metal and consumer cyclical companies; approximately 25% for the utility sector.

VC and private equity perspectives
These observations from Jerry Borrell, a senior editor of Venture Capital Journal, are a helpful insight into the private equity world in late 2004 — particularly which trends have continued into early 2005.

The funds have yet to come clean, observes Borrell in a November 2004 article, “Ho Hum.” Borrell says the problem with writeoffs is ongoing, and we have a long way to go yet. The effect of bad news from most funds investing in vintage years 1999 to 2001 has yet to be reported. Many investors refuse to participate in an existing fund manager because they have so many struggling companies, the values  of which have not been written off.

The best venture firms are way ahead, having already shot the “guilty early or merged the stinkers into other companies and walked away.” Seasoned players know that “your first loss is your best loss” and are not afraid to put bad news behind them. Undue capital, intellectual and emotional energy is wasted on investments that will never recover and only seasoned players who have been through the experience once or twice have the courage to bite the bullet early.

During 2004, a stunning 76% of private equity and venture capital investors (investors) declined to participate in a new fund of an existing manager. This not-withstanding that typically once investors make an investment decision they “tend to stick with an investment partner over the long haul.”

On the other hand, when a top-decile VC or PE firm calls “to ask for an investment in their new fund, your due diligence takes about the length of the phone call,” says Alain Vandenborre, a director at US private equity and asset manager Hamil-ton Lane, even though the institutional investors are perceived to be “very deliberate folks who apply rigorous due diligence when making investment decisions.”

The expected returns from venture capital and buy-out funds generally reflect a more optimistic perspective than in 2003 — as set out in the charts on this page.

With these kinds of returns, it is no surprise that while buyout funds continued to dominate in 2004, investors are increasing allocation to venture capital and special situations indirectly indicating they are recovering from the doldrums of the Internet era.

Memories are short and Borrell rightly reminds readers that “expectations about venture capital returns show a gentle increase but an increase nonetheless — making promises generally and certainly for fixed returns is something that most VCs see as tantamount to professional suicide.” However, the memories are not so short that investors will rush into China as the flavour of the month.

Fifty-four percent of investors indicated they were interested in increasing their investment in Europe. But only 27% indicated they would be catching a fast boat to China.

Says Chris Mead, a partner at Pantheon Capital in Asia: “The actual returns from Chinese investments to date are so low that at present it’s almost better to sit and wait for the situation to improve.” What he is really saying is “I would like to be the first one to get it right the second time around.”