Annual reports of major companies are littered with references to innovation, IP, patents, and “competing through investment in innovation.” No report is complete without an assertion about the positioning of their patents in support of their products and a detailed exploration of risk around intellectual property claims by other parties and the inability to protect their own IP rights.
IP is clearly understood as an important part of the valuation equation and future outlook for a company, but it is woefully un-quantified. This concrete example illustrates the challenge in the communicated value of “intangible assets” (where patents reside in the Balance Sheet domain):
Google Balance Sheet, intangible assets (in millions):
End of 2013 $6,066
End of 2012 $7,473
End of 2011 $1,578
Motorola Balance Sheet, intangible assets (in millions):
End of 2012 $109
End of 2011 $48 (net of accumulated amortization of $1,114)
On May 22, 2012, Google completed the acquisition of Motorola for a total purchase price of approximately $12.4 billion ($2.9 billion cash, $5.5 billion to patents and developed technology, $2.5 billion to goodwill, $0.7 billion to customer relationships, and $0.8 billion to other net assets acquired).
It is pretty obvious what happened to Google’s balance sheet from the above, although not so clear the implications for Motorola. Even if you take the unamortized intangible asset number of just over $1billion, it is a far cry from the $5.5 billion in the transaction (and accreted to Google’s balance sheet).
Further, does one really believe that Google’s total “intangible assets” were increased by 400% through the acquisition of Motorola. The vast majority of Google’s intangible assets prior to the transaction simply do not appear on their balance sheet at all.
By rule (GAAP), intellectual property is NOT reflected well in the balance sheet and in fact is largely left off unless it is ACQUIRED in a transaction. In other words, internally generated intangible assets have absolutely zero value from a balance sheet perspective. And, in fact, this is in perfect accordance with international standards, so this isn’t really something that the company can do anything about.
However, there is still a responsibility at the Board and CEO level to understand these assets. They should be able to articulate answers to these 7 questions:
- Are we investing enough in R&D and intellectual property development to compete now and into the future.
- Do we understand the value of our IP and how it drives our P&L (or not), especially forward-looking?
- Do we have a strong IP strategy to compete globally and can we articulate this to our shareholders and the market-at-large to realize increased value?
- Given that these critical assets are not captured in balance sheet, are investors expected to factor them into stock price or assume they are already accounted for in the P&L?
- Are we prepared to deal with the increasingly complex world of IP risk and opportunity and react (and communicate our plan) quickly to changes?
- How do we value IP when looking at our own acquisition strategy?
- Does our product roadmap include an IP roadmap and implications for financial projections?