News & Events: Blog Articles

March 18, 2010

A friend of the IA Centre alerted me to a piece by Peter Ranscombe in last weekend’s ‘Scotland on Sunday’ (http://www.scotsman.com/business/Jim-McColl-warns-firms-are.6150046.jp) which headlined that Jim McColl, Chairman and Chief Executive of Clyde Blowers, warned that many firms were undervalued in mergers and acquisitions by as much as 40% due to undervaluing of their intangibles.  Potential  M&A’s were thus being put at risk. McColl said he and his team had paid close attention to the value of intangibles in their $1b takeover of the fluid and power division of US industrial conglomerate Textron in 2008.

McColl says it’s a mistake to go by the numbers when valuing a business.  He told Scotland on Sunday “...One of the reasons not every business pays enough attention to the intangibles is that it’s hard to quantify the benefits. You need to believe that it’s going to add value without necessarily knowing in exact detail how much and when it will be realised.”

Kicking off this subject had been a report from the Hay Group which stated that business leaders are currently valuing intangibles such as brand value, leadership skills and staff morale at no more than one third of a company’s market capitalisation but real value could be as high as 75% [in small companies I would argue that the intangible value is often substantially above 75% of total value].  Deborah Allday, M&A Director at Hay Group, quoted in the article, believes that devaluing a business threatens both the deal and potentially the viability of the business. “Without paying the right attention to intangibles, the full potential of a deal cannot be achieved and could even damage the business”.

I am confident that Jim McColl and Deborah Allday are both correct.  The valuation of intangibles is a complex and difficult business.  Undervaluing or overvaluing a business is a risk.  The methodologies for measuring the investment made into innovation are getting better. I have more faith that we can identify the scale of investment and the likely future results of such investment in terms of cash flow for an organisation than I am about asset valuation.  Intangible assets value, like beauty, is in the eye of the beholder so it’s difficult to come up with objective valuation. I am happy to leave that sort of activity to the experts like Deborah Allday and Jim McColl. A wise owl once texted me: “hate what u cant see, love what u can get”.