Over at the blog IP finance Jeremy Phillips reaction to a new book on IP valuation is that he "can't help feeling that, if we've created a web of issues that take nearly 700 pages to expound, we have unleashed a monster of our own making." In fairness, the book Calculating Lost Profit in IP and Patent Infringement Cases appears to be a highly technical handbook that covers case law and legal procedures in infringement cases as well as valuation methodologies for determining lost profits damages. But Jeremy's reaction (as an experienced IP professional and academic) is instructive as to the difficult nature of the valuation proposition.
Another illustration of those difficulties is the Cisco deal to buy Tandberg. That deal is appears to be driven by good strategic reasons. As the New York Times notes:
But, according to the Wall Street Journal, the $3 billion deal "is an all-cash tender offer that Cisco characterized as an 11% premium to Tandberg's closing price Wednesday, and 25.2% higher than a three-month average price for the stock." So first of all, the book value of Tandberg is mostly likely lower than its market capitalization -- because of the value of intangibles are not counted on the books. Second, Cisco values those intangibles even more than that general market and is therefore willing to pay the premium. Which of those three valuations is correct?
Interestingly, we will know after the fact what the value of Tandberg's intangibles was. After the acquisition, Cisco will have to carry the value of the intangibles and the goodwill on their books (even though Tandberg is prohibited from assigning a value to the intangibles for its accounting purposes). It will be interesting to see how much of the over book value is assigned to intangibles and how much is carried as goodwill. It would also be interested to hear about the valuation methodology used to make that determination.
But while we will see the outcome of the accounting decisions, I doubt we will get a look at the process. Maybe SEC or FASB should start requiring that as well. Then someone could write a 700 page book on the rules for disclosing the processes of valuing intangibles.
Another illustration of those difficulties is the Cisco deal to buy Tandberg. That deal is appears to be driven by good strategic reasons. As the New York Times notes:
Cisco has sold expensive, room-sized video conferencing systems to companies that it calls TelePresence systems. Tandberg has similar technology but also sells smaller-sized, cheaper conferencing units. In addition, Tandberg has specialized software for managing video conferencing systems and for creating connections between conferencing systems that rely on different underlying technology.In other words, Cisco is buying Tandberg's intangible assets. (Of course, we will see if they keep one of those intangibles: the brand.)
But, according to the Wall Street Journal, the $3 billion deal "is an all-cash tender offer that Cisco characterized as an 11% premium to Tandberg's closing price Wednesday, and 25.2% higher than a three-month average price for the stock." So first of all, the book value of Tandberg is mostly likely lower than its market capitalization -- because of the value of intangibles are not counted on the books. Second, Cisco values those intangibles even more than that general market and is therefore willing to pay the premium. Which of those three valuations is correct?
Interestingly, we will know after the fact what the value of Tandberg's intangibles was. After the acquisition, Cisco will have to carry the value of the intangibles and the goodwill on their books (even though Tandberg is prohibited from assigning a value to the intangibles for its accounting purposes). It will be interesting to see how much of the over book value is assigned to intangibles and how much is carried as goodwill. It would also be interested to hear about the valuation methodology used to make that determination.
But while we will see the outcome of the accounting decisions, I doubt we will get a look at the process. Maybe SEC or FASB should start requiring that as well. Then someone could write a 700 page book on the rules for disclosing the processes of valuing intangibles.
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