It is very common in the area of finance management, marketing and finance to refer to intangibles in business organizations as an added value with differential advantages that can be especially significant both to determine their strategic positioning and to establish their real market value. There are different interpretations and perspectives to identify and classify intangibles, taking into consideration a variety of generic concepts that cover everything from reputation, notoriety, experience and the know-how of the firm to aspects related to the quality of the client portfolio and the talent of the human capital.
Brands and Human Capital
If, in addition to the concepts mentioned, we consider the brands themselves as intangible factors, many analysts would agree that they are a company’s most valuable asset, especially in large global companies. Annual reports – such as the BrandZ Top 100 Global Brands 2020, published by the specialized consulting firm Kantar Millward Brown – provide estimates and rankings that indicate the monetary value of the world’s top brands, covering and considering various intangibles associated with each firm. For the second consecutive year, the most recently published report lists Amazon in first place, with an estimated brand value of $415.9 billion. Apple is in second place at $352 billion. Close behind are Microsoft, at $326.5 billion, and Google, at $323.5 billion.
The overall value of the top 100 brands is $5 trillion, representing a 5.9% increase compared to 2019, though it is important to highlight that their average value prior to the global pandemic was 9% higher than it is currently, so the direct and collateral effects of consumer habits have had a clear influence on all brands. The report’s conclusions emphasize that large firms have understood the importance of investing in brand building to make themselves more resistant, and they use their brand as the primary measure to shield them from the impact of the COVID-19 crisis.
In the midst of this uncertain and turbulent situation, the emotional bond each brand has with current and potential customers and with the community in which they operate must continue to be taken into account as a key factor in enabling businesses to consolidate and survive.
Other significant intangibles include those deriving from human capital, i.e., valuing the skills and talent of an organization’s people and knowledge management. If brands are the most valuable asset, human capital has always been the driving force behind any company of value. In the current situation, where telecommuting and the digitization of operating processes has become the general rule by force, there are new considerations and subtleties with regard to the contributions and the new role of people within companies.
Contribution of Intangibles to the Value of the Organization
Beyond monetary value or stock market value, businesses also have a market value generated by many of the issues related to their intangible assets. It is obvious to assume that, when acquiring a company, the negotiation of the final price should take into account the brands’ power, the quality of the executive team and the workforce, customer loyalty, etc.
Companies can and must generate their own intangibles through coherent management based on the principles of quality, stringency and social responsibility. Good people management, for instance, will provide intangible benefits that will add value to the organization. Aspects such as the work environment and occupational risk prevention must be reinforced in the current situation, as well as the ability to adapt technologically and provide efficient support for other stakeholders: customers, suppliers, shareholders, partners. In addition to that, there is also involvement in and awareness of the social problems aggravated by the post-COVID situation.
When there is a major crisis like the current one, caused by a non-temporary factor, some defend the supposition that “you can’t eat your image.” These people believe that some of the most ethereal intangibles, which companies look to use as their foundation, are nothing but smoke doomed to fade away. Business is vulnerable and lacks the necessary physical consistency and financial solvency. When there is a general drop in demand for products; companies face a clear shortfall in productive muscle and a financial structure based on debt.
On the other hand, there are those who believe that it is precisely now when intangibles become a lifeline to grab onto and use to reemerge and reinvent the firm. Intangibles are like a sourdough starter or yeast enabling the necessary fermentation and subsequent rising of the dough.
This situation is comparable to that of the countries themselves. Spain and Italy, with a soaring levels of debt, must trust in their life-long intangibles: Marca España, Bella Italia, etc. They need to gradually recover the special advantages of their most characteristic productive activities. These activities are especially related to the tourism sector, their key industry, in addition to food products and cuisine. In fact, there are already institutional promotional campaigns underway appealing to these connotations.
History tells us that many large corporations, current and, in some cases, centuries-old multinational leaders, have weathered domestic and global crises of different magnitudes and gotten back on their feet thanks to their brands and the positioning of those brands in consumers’ minds. They have even survived terrible management and an inability to adapt, as well as malpractice by their managers.
Intangibles in a Financial Context. Goodwill
From a strictly economic and financial perspective, the intangible assets normally considered include aspects that are easier to quantify: patents, copyrights, business transfers, domain names, franchises, etc. But there are other more subjective assets, such as those already mentioned in this article (customers, brands, positioning, experience, know-how, talent, etc.), which are included in the vague concept of goodwill. Given the current crisis situation, many companies are on the market for a possible takeover or merger, and the goodwill created by their most important intangibles will need to shine to demonstrate their market value. Some well-known companies, which are trading low during the pandemic crisis, are now becoming more susceptible to potential takeover bids. The paradox is that with this downward trend, their market capitalization could be even lower than the real value of the company if their intangibles are considered and added, as is happening, for example, with some large banks in Spain.
If an investment group buys a company for its stock valuation and it is less than its book value or carrying value, it benefits from the goodwill not reflected in the purchase price, meaning that the firm is worth more than what was paid. This is what is known in financial circles as badwill or negative goodwill, even though it generates value for the buyers, as there is an undervaluation for the sellers. On the other hand, if a takeover bid is not possible or the attempt fails, a negotiation with the sellers takes place with the intangibles on the table, provided there is real interest in purchasing. If the selling price ends up being greater than what the books indicate, then there is goodwill, aside from the organizational adjustment costs deriving from acquisitions or mergers.
This is the world of finance, with all the deviations and considerations that are currently so relevant. It will be important to pay attention to future transactions in a new scenario of various uncertainties that are yet to be defined.
Máximo Cortés is professor of Economy and Business in the Grado en Administración y Dirección de Empresas