Fall 2006 issue of Horizons

Intangible Assets and Value Creation

Dale Lash, CFA

One of the characteristics of successful companies that con- tinue to create shareholder value over time is strong and growing cash flow. But what drives the cash flow that builds value? One key component is intangible assets. It's widely accepted that intangible assets are the driver of value creation in the 21st century. In some industries, and among the market leaders, intangible assets can account for 90 percent or more of the total value of a company. Intangible assets include things like the trade name, cus- tomer lists, assembled workforce, patented technology and trade secrets. Although they typically are not listed on the bal- ance sheet, these assets are key contributors to the value of successful companies. They drive cash flow and value, because they provide their owners with competitive strength and benefits the competition cannot access. These benefits could be a long-standing customer relationship that enables the company to understand and serve the customer far better than the competition can. It also could be the benefit of

a strong brand presence in the marketplace or access to patented technology. Whatever it is, it creates value by providing real benefits - lower costs or higher revenues. Consider the total value of the intangible assets of your com- pany. Very simply, the value of your company's intangible assets is the difference between the total value of your com- pany and the value of the tangible assets. When you consid- er intangible assets from that perspective, there is a signifi- cant value that should be managed and enhanced. For many companies, focusing on tangible assets is a natural act with immediate results. Upgrading machinery at a manufacturing plant, for example, will provide immediate improvement in performance, adding value through greater efficiency, reduced costs and increased cash flows over time. Operational improvements such as these are easily under- stood, and the benefits derived from them are easily quanti- fied. More difficult to quantify, but no less important, are the benefits provided by upgrades in the intangible assets of an

11 • summer 2006 issue