Maximizing M&A Value with Intangible Assets
DEFINING AND COMMUNICATING M&A VALUE IS DIFFICULT AND COMPLEX
All business owners want to increase the value of their company. But defining value is a challenge for most of them. This challenge particularly presents itself when selling a business and considering merger and acquisition (M&A) options. All leaders of companies, from startups to those in the Fortune 500, are faced with the same difficult questions when building their company’s value:
- What makes my company valuable?
- How can I communicate that value to buyers better than my competition?
Selling a business is a unique process. M&A buyers think differently than customers, vendors, and partners. The skills business leaders develop over years of building their business does not overlap with the skills they need to communicate and negotiate with M&A buyers. As a result, executives are often unprepared, lacking clear and effective answers to questions about the value of their company. To make matters for the business owner more complex, the M&A industry is full of advisors who provide different areas of expertise to the M&A process but often fall short of providing a clear, comprehensive, and long-term strategy for maximizing M&A value. Owners need a strategy that helps them show how their company is valuable and how to communicate that value during the M&A process. The strategy should be customizable to a business’ unique characteristics and simple to implement. Business owners have full agendas. They cannot spend years on exit strategy planning.
INTANGIBLE ASSETS ARE THE GREATEST DRIVERS OF M&A VALUE
Identifying and defining M&A value is only possible with a deep understanding of how valuation is influenced by a business’ assets, proprietary data, and unique strengths. Because of this, top NYC investment bank Jahani and Associates (J&A) analyzed 334 M&A transactions between 2010 and 2016. To uncover what really drives value, J&A examined the purchase price allocations of each M&A transaction and then segmented them by industry. Conducted by J&A’s team of tech investors led by Managing Director Joshua Jahani, the study focused on technology companies and included buyers such as Alphabet, Amazon, Facebook, Twitter, Microsoft, Apple, and Yahoo!. Out of the 334 companies purchased by major tech giants and the more than $94 billion spent between 2010 and 2016, intangible assets accounted for over 90% of M&A dollars. These intangible assets included customer contracts, customer lists, patents, trademarks, copyrights, and business combinations. In contrast, only 10% of M&A dollars were spent on tangible assets. Examples of tangible assets include office space, machinery, and equipment.1
BUYERS SPEND NINE TIMES MORE MONEY ON INTANGIBLE ASSETS THAN TANGIBLE ASSETS
The vast majority of M&A dollars spent on intangible assets is a surprise to many business owners. M&A is generally viewed as a tangible and financial process. M&A valuation methods are almost always driven by cash flows and income analysis. However, due to technology, intangible assets have played an increasingly central role in international capital markets since the dot-com boom.2
Another reason for the increased role of intangible assets in M&A is how their definition has evolved over time. The Financial Accounting Standards Board (FASB) updated its definition of what constitutes an intangible asset (including business combinations) 26 times since 2010.3 As technology has become more sophisticated and businesses have invested more in their intangible capabilities, the FASB updates have become more specific. For example, in March 2018, there was a proposed change to FASB’s accounting rules for implementation costs incurred during a cloud computing arrangement. All of this shows that intangible assets and their measurement are more important now than ever before for business owners, especially in an M&A setting.
Business owners know intangible assets are valuable. But they struggle to understand which assets are more valuable than others and how to measure that value accurately. FASB provides guidance for measuring and defining intangible assets. Valid intangible assets must possess three characteristics. They must be separable, measurable, and predictable.
Separability means they should be able to be sold, transferred, or licensed. An example of a separable asset is a creative work, such as a book. Measurability refers to that which can be quantified (for example, the number of times a book is licensed). And predictability connotes access to historical performance and that historical performance is related to future performance.
Armed with this information, business owners can now understand what truly makes their company valuable. For example, culture is often identified as an intangible asset. But culture can only be an intangible asset as much as it can be separated and sold, as during an M&A, measured through demographic diversity or uniformity, and predicted: if a company has a specific culture today, it will have the same or similar culture tomorrow.
This broad range of intangible asset definitions may provide business owners the opportunity to sigh in relief. They always knew their culture was valuable. Now they can prove it. But the flexibility of the definition of an intangible asset actually creates a whole new set of challenges for business owners. Namely, determining how they can start capturing information and using it to inform the M&A process, thus increasing M&A value.
The shift of value from traditional income-driven metrics like earnings before interest, taxes, depreciation, and amortization to intangible assets means business owners need a very specific strategy to successfully complete an M&A. To understand this, J&A investigated the intangible assets valued at the greatest dollar amount for ad tech acquisitions. Two intangible assets create the greatest ad tech target-firm value. They are data interfaces and data processing power. Acquisitions that support this include FameBit, DeepMind, Adometry, Invite Media, Teracent, Navic Networks, Admeld, and Interclick.
Measuring intangible assets like these are outside the ability of the traditional M&A banker or CFO. Ad tech businesses are fast-moving and highly technical. Because of this, transparency, organized processes, and clear objective outcome–oriented measurements are needed in select business units to create the greatest purchase price for the M&A seller.
Effectively delivering this enhanced separability, measurability, and predictability inside the M&A process requires a technical skillset as well as a deep understanding of M&A. Therefore, business owners must combine diverse skillsets within their organization, from technological to financial, before starting the M&A process. When brought together, this strategy generates a tremendous competitive advantage.
Business combinations and other intangible assets are always process-driven and industry-specific. According to FASB, business combinations are only generated when two processes create something that neither the buyer nor the seller possessed independently prior to the M&A.4 This means the same intangible assets will be valued differently by different buyers. Therefore, business owners will need to plan for a range of valuations based on who they approach to buy their business.
Utilizing this strategy answers both what M&A value a company presents and how to communicate that value better than the competition. During an M&A, FASB rules must be preserved to make a strong case to the buyer. This strategy is successful because it focuses on combining technical components, such as interfaces and processing power, with FASB valuation rules for intangible assets.
IDENTIFY, DEVELOP, AND MONETIZE INTANGIBLE ASSETS TO MAXIMIZE M&A VALUE
The figure below outlines the new M&A strategy successful companies use when selling their businesses. M&A bankers often cite the lack of measurable information as the number one barrier to better negotiation outcomes.5 This strategy removes that weakness and gives business owners a road map for how to combine the right talent from relevant business units to systematically increase M&A value.
This strategy aligns business owners with drivers that will improve valuation and negotiation positions based on M&A market activity. It shows owners and leaders how to determine the market forces responsible for intangible assets in M&A at the business level, not just generic financial indicators. The strategy then walks business owners through implementing these intangible asset drivers.
STEP 1: Identify what makes your company valuable
This M&A strategy is based on increasing a firm’s valuation according to FASB rules. The valuation process draws from asset and market valuation methodologies with a focus on intangible assets. Because intangible assets are often more elusive and difficult to quantify, the first step is identifying exactly what will be valued, why it will be valued, and how it will be valued. The quantitative drivers for this are often key performance indicators (KPIs) that are specific to the business. For example, ad tech KPIs may include daily active users, time spent inside an application, or the number of interfaces integrated into the technology.
KPIs must be very specific and consistently measurable. If they are not, then the valuation will be indefensible. This process requires a deep understanding of a firm’s industry, potential buyers, M&A activity, and internal strengths. Business owners should conduct an internal assessment of their perceived strengths and then compare those strengths to measurable intangible assets identified through market analysis as shown in the tech giant analysis explained above. The owners must determine how to value these intangible assets and collect relevant information as required through income, market, or asset valuation methodologies.
STEP 2: Develop, prove, and maximize the identified value over time
The process of developing an intangible asset becomes the process of doing business. In fact, business as usual and intangible asset development are often two ways to describe the same thing. The only difference between business as usual and developing intangible assets is the data collected along the way. Developing intangible assets means carefully collecting data that was previously identified as valuable and relevant from the market analysis in step one. For example, if time spent on the application is identified as an intangible asset in the market, then a company should record both the costs and effort to develop those assets through user experience design, added functionality, better graphics, and any other relevant business processes.
STEP 3: Monetize your assets by communicating your value better than your competition
For the business owner, monetization happens when the transaction is consummated and the investment banking process is complete. M&A provides an excellent way to measure the impact of intangible assets on a company’s valuation and confirm their role in the purchase price. As of December 2018, all public and private companies are required to allocate M&A purchase prices according to FASB Accounting Standards Codification Rule (ASC) 805.6
M&A VALUE MAXIMIZES WHEN THE SELLER ACCURATELY MEASURES RELEVANT INTANGIBLE ASSETS
Jahani and Associates’ experience using this strategy for our clients has been very successful. With this strategy, our driven team of tech investors consistently creates scientific evidence for why a business should be valued at the highest end of valuation ranges or in a new valuation range altogether. Implementing this strategy allows our sell-side client to speak directly to the corporate development officer’s or private equity buyer’s business case. The buyer no longer has to search for information and make extravagant assumptions. Most importantly, it allows our clients to communicate what makes their business special to begin with, bringing to light decades of the owner’s hard work and sacrifices.
The foundation of this strategy is demonstrated through the study of thousands of M&A transactions from buyers in industries that consistently place more value on intangible assets than tangible assets, such as technology and healthcare.7 Business owners are at a disadvantage when selling their companies because there is no standardized reporting for intangible assets. Most business owners are not M&A experts. They are unaware of how the absence of reporting limits the value of their company. It is difficult for business owners to take time away from serving customers, coaching employees, and developing products or services. But when armed with this strategy and the help of a top investment bank for M&A, business owners have a concrete plan that allows them to build their business and prepare for the most valuable exit possible. Without this strategy, owners face a difficult, uphill battle.
Intangible assets are the greatest drivers in M&A value-driven conversations today. These conversations are not limited to scientists, technologists, tech investors, and software developers. C-suite leaders and financial executives are at the center of them.
As technology continues to play a more dominant role in the global economy, intangible assets will become even more relevant. Business owners must be prepared to speak the language of intangible assets when communicating the value of their businesses in cross-border capital markets.
ABOUT THE RESEARCH
In 2017, Jahani and Associates reviewed 334 acquisitions from technology giants and recorded their purchase price allocations. Information was only collected from publicly available data sources. Intangible asset pro formas were taken from the Securities and Exchange Commission (SEC reports only). J&A also surveyed over 100 business leaders from startups and Fortune 500 companies to explore strategic areas and opportunities where companies are harnessing technology to increase business value.
ABOUT JAHANI & ASSOCIATES
Jahani and Associates (J&A) is an independent investment bank located in New York, New York. The firm specializes in healthcare and technology and provides specialized M&A and capital markets advisory services to its clients. The combination of J&A’s unmatched skills in technology, engineering, and business operations allows the firm to create sustainable value for its clients. J&A works at the intersection of cutting-edge financial theory and business practicality. Creativity is highly valued within the firm which allows J&A to continually improve the way businesses thrive.
Sources
1. All data is sourced from publicly available data sources such as the annual reports for Alphabet, Apple, Microsoft and others.
2. Baruch Lev and Feng Gu, “The End of Accounting and the Path Forward for Investors and Managers.” 2016.
4. FASB Accounting Standards Codification Rule 805.
5. Conversation with Kenneth Marks in December 2017, managing director of High Rock Partners and coauthor of Middle Market M&A: Handbook for Investment Banking and Business Consulting.
All data is sourced from publicly available data sources such as the annual reports for WellPoint, UnitedHealth Group, Centene, Aetna, Anthem, Cigna, Humana, WellCare, Molina, and Kaiser Permanente. This document makes descriptive references to trademarks that may be owned by others. The use of such trademarks herein is not an assertion of ownership of such trademarks by Jahani and Associates and is not intended to represent or imply the existence of an association between Jahani and Associates and the lawful owners of such trademarks.
Copyright 2018 Jahani & Associates. All rights reserved
Exiting vs Thinking Defensively: M&A Strategies for 2019 and Beyond
J&A held an event for over 30 business owners in Florida. The topic of discussion was exiting vs thinking defensively in current markets. The presentation can be downloaded here.
We want to thank all our Florida partners, clients, and employees for attending the “Exiting vs Thinking Defensively” dinner in January. It is always a pleasure to experience the energy of everyone we work with. We will continue to deliver peak performance for our Florida clients.
– Joshua Jahani, Managing Director
Using Intangibles to Advance Your Sell-Side M&A Strategy
Download J&A’s latest whitepaper on a sell-side M&A strategy to maximize value.
Part 3
Monetizing Intangibles in Ad Tech M&A Value
In this article, we will briefly explain how to monetize intangibles.
In the first two articles of this series, Identifying Intangibles in Ad Tech M&A Value and Developing Intangibles in Ad Tech M&A Value, we specified how you, the business owner, can identify and develop your company’s most valuable intangible assets to maximize your value.
In any M&A deal, sellers highlight the importance of their intangibles so the buyer can use them to create a competitive advantage. The third step in this process, learning how to monetize your business’ intangible assets, is where you reap the fruits of your labor. This step occurs when the buyer pays a price for the intangibles you have identified and developed. This includes the steps leading up to the sale, such as valuation, negotiation, pitching, and due diligence. So how do you monetize intangibles?
How to Monetize Intangibles When Selling Your Company
An M&A valuation can be conducted in several ways, including through a business appraisal or the valuation of a public company’s stock. The valuation of your company often amounts to a number that is negotiated between the seller and the buyer. Middle-market companies in particular possess a range of values based on the buyer’s profile. Fair market valuation is the most common valuation technique.
Fair market valuation occurs when you determine how similar businesses have sold based on multiple types and multiple factors. Multiple types include earnings before interest, taxes, depreciation, and amortization (EBITDA), annual recurring revenue (ARR), and, in some cases, book or tangible asset value. Multiple factors (referred to as 3X, 4X, or 10X) simply identify the number you agree to multiply the selected factor by to determine the valuation number.
Obviously, multiple types and factors depend on industries with similar characteristics to the company being valued. For example, industry growth, the strength of the management team, competitive advantages, access to suppliers, and access to buyers can all influence multiple types and factors.
How to Use ASC 805 to Maximize Your Valuation
The Accounting Standards Codification (ASC) 805 allows the business owner to understand how the expected purchase price can be broken down based on the transaction’s fair market valuation and associated purchase premium or goodwill. In the ad tech industry, the amount paid for goodwill makes up, on average, 70% of the purchase price. This means, for example, that a company with a fair market valuation of $100 and 70% goodwill was purchased for $170.
At J&A, our banking practice conducts detailed M&A studies of goodwill and purchase price allocation to understand why companies command a premium and how business owners can make sure they land at the top of valuations when selling their businesses. After looking at over 500 M&A transactions executed by technology giants over a six-year period, we segmented purchases by industry and certain goodwill parameters, narrowing our study to 34 purchased companies. These 34 ad tech M&A transactions completed at the greatest premiums had the following two things in common: the target company increased the data interfaces of the acquiring company and the target company increased the data processing power of the acquiring company.
Data interfaces and data processing power are both intangible assets. These intangibles were systematically identified and developed by the business owners over time before they sold their companies. The monetization of those assets became effective when the companies were purchased at higher than average premiums.
This analysis becomes the cornerstone of an effective M&A strategy. Armed with the framework of identifying, developing, and monetizing intangible assets, business owners have a predefined plan they can take to increase their company’s value.
As a business owner, you should always study different purchase premiums in your industry to identify drivers that will create the highest return for your business. Using ASC 805 principles to uncover M&A value allows you to create a roadmap that will help you land on the high end of valuation because it is a scientific way to tie your valuation to intangible assets.
The Takeaways of Intangible Asset Monetization
Intangible assets can only be monetized if you have measured them in-depth. There is an infinite number of intangible assets you can identify, develop, and monetize.
As a business owner, you must determine which ones you can leverage most effectively. Trusted advisors can help you create a clear vision and strategy to maximize your company’s value. The role of intangible assets in M&A markets will increase over time. The most successful companies will use the information presented in these articles to maximize the value of their company.
Part I: Identifying Intangibles in Ad Tech M&A Value >
Part 2: Developing Intangibles in Ad Tech M&A Value >
Photo by Vincent Tantardini on Unsplash
Part 2
Developing Intangibles in Ad Tech M&A Value
In this article, we will briefly explain how to develop intangibles.
In our earlier article Identifying Intangibles in AdTech M&A Value, we explored how you, as a business owner, can identify the intangible assets that make your company more valuable during the M&A process. After identification is complete, the next step is to develop those same intangible assets. Developing intangible assets relies on key performance indicators (KPIs) in the same way identifying intangibles does. KPIs are the metrics you choose to represent the performance of an intangible asset.
Developing an intangible asset is the set of actions you will take to optimize a KPI. For example, we previously explored how more data interfaces can lead to optimized conversion. Therefore, the intangible asset is the data interface and conversion is the KPI. Optimizing conversion means increasing or decreasing it based on drivers like technology, advertising spends, or advertising quality.
To measure conversion, you must define the desired final action you wish your customer or visitor to take. This could include clicking an ad, buying a product, or providing an email address. The development of the intangible asset (e.g., data interfaces) becomes any action, investment, or improvement you perform to accomplish the final objective (e.g., click, buy, provide email). These developments increase M&A value. In our next article, Monetizing Intangibles in Ad Tech M&A Value, we will show you how to monetize them.
There are multiple ways to develop an intangible asset. Building a company for sale requires considering accounting and banking principles as well as intuitive, strategic ones. Imagine a company that performs direct digital marketing. If this firm wants to increase the number of people who click ads served to drive more website traffic, they have several options to encourage their users to do so:
- Create more compelling marketing content and design
- Acquire new contact information of people who are more likely to click the links in the body of the message
- Retarget consumers by making sure prospects are seeing ads in multiple locations and in multiple instances
- Invest in new technology that places more relevant ads in front of potential “clickers”
- A combination of some or all of the above
The best choice for the company is likely a mixture of the five options laid out above. The company must understand that each choice represents a distinct set of intangible assets, all of which are inherently identified and developed when the decision is made. The investments made in one, some, or all of these options are a part of “developing” the intangible asset. The intangibles must be measured and monitored so they can increase corporate value at the time of M&A.
As a business owner, how you choose to develop an intangible asset affects the accounting options available to your management team. Capitalization is a common technique for recording expenses as assets to minimize long-term costs. Specific rules exist about how and when to capitalize expenses that overlap with the development of the intangible assets recommended here. For example, you can capitalize costs to develop patents, copyrights, trademarks, and even proprietary software intangibles, but those costs must be recorded correctly. You cannot simply download a credit card statement 11 months after the expenses were incurred and then claim them as assets.
The principles of identifying and developing intangibles are relevant to business owners because they tie together strategies for growth, development, accounting, and exits. When used correctly, they break down silos between business units and bring together the operation and value of a business. Most venture-capital investors wait for companies to be purchased so the investor can then achieve liquidity. All owners desire M&A options for their hard work. Developing intangibles is the only way to combine the traditional business operations of growing, scaling, and building a company with the gritty accounting principles that affect the valuation and closing of an M&A deal.
Companies are rarely acquired with the intention to conduct business the same way it was conducted before the purchase. Therefore, it is important for you, the seller, to highlight the most valuable intangible assets of your business through their development and investment. This allows the buyer to utilize these intangibles to their own advantage. Ad tech companies are driven by these intangible assets, such as data interfaces, and new technology development that engages specific customers. Measuring these intangibles through the life cycle of the company will affect your exit valuation, creating a more accurate picture of what a buyer is ultimately paying for.
Part 1: Identifying Intangibles in Ad Tech M&A Value >
Part 3: Monetizing Intangibles in Ad Tech M&A Value >
Photo by Alice Achterhof on Unsplash
Part 1
Identifying Intangibles in Ad Tech M&A Value
Identifying Intangibles is the first article in our series about intangible assets.
Part 2: Developing Intangibles in Ad Tech M&A Value >
Part 3: Monetizing Intangibles in Ad Tech M&A Value >
What makes your company special, unique, or valuable? As a business owner, you will be asked this question countless times when you are talking to potential buyers for your ad tech company. But the value of a company is not inherently defined; value is defined differently by parties based on their respective goals, biases, and objectives. For a banker, this discussion is the foundation for all buy-side and sell-side M&A conversations. Based on our experiences and research at Jahani and Associates (J&A), intangible assets make up over 90% of M&A value. There are simple, repeatable processes you can use to increase your company’s value, especially in the ad tech industry (J&A, “Understanding Ad Tech M&A Value”). So how to identify intangibles for M&A?
How Accounting Standards Codification (ASC) 805 Can Be Used to Maximize M&A Value
In 2014, the Financial Accounting Standards Board released an update to ASC 805 addressing how to account for intangible assets in business combinations. ASC 805 is the basis for the financial reporting of intangible assets post-acquisition. Although it is not necessary for you to follow the ASC 805 framework, if you do not utilize it to uncover and measure your company’s intangible assets, you will ultimately limit that value. Businesses can use FASB’s ASC 805 as a framework for maximizing their value prior to beginning M&A conversations.
Step 1: Define the Most Valuable Intangible Assets for Your Ad Tech Business
The first step to maximizing your company’s value is to determine which intangible assets are the most valuable. In order to do so, you must define your desired business objectives. If you are not sure where to start, begin by asking yourself the following questions:
- Who are my customers?
- How is the strength of my customer relationship measured?
- What will my revenue stream rely on over the next one to five years?
Your business’ relationship with its customers is a symbiotic one: your company exists to serve your customers and your customers are the ones who keep your company in business. Utilizing valuable intangible assets will only enhance the business-customer relationship.
For example, if your desired business objective is to increase the number of users who click the ads placed on your platform (in other words, increase conversion), you need to provide more relevant ads to the user. Tracking cookies from a user’s browser history to service these ads is a common practice to accomplish this relevant placement. This is also known as retargeting. At its core, retargeting is accomplished by increasing the number of data interfaces an ad publisher uses to determine which ads are shown to a user.
Therefore, driven by the objective to increase conversion, data interfaces are intangible assets. Collecting this browser history allows ad publishers to uncover novel patterns, enhance ad relevance, and create new solutions that increase conversion. According to an analysis conducted by Gallup, “companies that apply the principles of behavioral economics outperform their peers by 85% in sales growth and more than 25% in gross margin.”
Data interfaces are just one example. As an owner, you must determine the most valuable intangible assets for your business objectives.
Step 2: Determine How the Most Valuable Intangible Assets Affect Your Revenue Streams
Once you have defined your company’s most valuable intangible assets, you must document the way those intangibles affect your company’s revenue streams. How many events must take place for your intangible asset to create revenue? At J&A, we refer to these as “steps removed” in a process flow. For example, when a user clicks on an ad, the platform owner generates revenue. Therefore, if the intangible asset is a data interface and the presence of more data interfaces increases conversion and revenue, then that asset is one step removed from revenue. Social connections are a more complex example. The presence of social connections on a platform encourages a user to spend more time on the platform, and the more time a user spends on a platform, the more ads the user will click over time. This is two steps removed. The number of steps removed in a process flow completely depends on the business model and business objectives employed. Conversion is important for multiple types of businesses, but the steps between conversion and data interfaces can be drastically different for an infrastructure company and a platform company.
We chose to use revenue in this example because our objective was conversion. Other objectives can include reducing costs, managing risk, or increasing cash flow.
Once you have determined which intangible assets are the most valuable, it is important to measure the outcomes for the selected business purpose over time. Generally, intangible asset data and key performance indicators (KPIs) should be measured for at least one year. Business owners need to determine the right KPIs and track them regularly. The KPIs most related to encouraging conversion are traffic, traffic sources, the technology used to serve ads, and the data that determines when an ad is served.
Knowing how and what to measure is essential to increasing your company’s value. Certain interfaces are more valuable than others. A valuable interface must enhance a desired business objective. Therefore, if your goal is to increase conversion and a certain interface supports that, it is an intangible asset. A popular example of this in the M&A world is Facebook’s purchase of Instagram. Facebook approached Instagram for purchase because Facebook’s application program interfaces (APIs) were increasingly being pinged by Instagram users. Before the acquisition, a Facebook API made Instagram more valuable because it allowed Instagram to use Facebook’s large pool of customer data to enhance its own platform. J&A’s research has also shown that more data interfaces lead to higher purchase price premiums (J&A, “Understanding Ad Tech M&A Value”). Before the acquisition, this integration did not necessarily increase the value of Facebook.
Conclusion About Identifying Intangibles
Measuring important aspects of your business and tying them together with corporate financial statements is powerful. Data analyses conducted for thousands of M&A transactions confirm that they can be used to maximize the transactional value for both sides of an M&A before the sale is closed (J&A, “Understanding Ad Tech M&A Value”).
As a business owner, you can utilize the information herein to maximize your company’s value. When developed correctly, this material can significantly impact the value of your organization. Along with specialized bankers, you are uniquely positioned to develop the relationship between intangible assets and corporate financial metrics. Defining the assets that are valuable and then measuring those assets over time is the simplest yet most effective process you can use to increase the overall value of your company.
Part 2: Developing Intangibles in Ad Tech M&A Value >
Part 3: Monetizing Intangibles in Ad Tech M&A Value >
Photo by Neven Krcmarek on Unsplash
Cornell Systems Seminar
Using Systems Engineering to Maximize Corporate Value by Measuring and Developing Intangible Assets
The rise of intangible assets is well underway. Since 1995 and the dot-com boom, the value of companies has shifted from their financial statements and into their intangible assets. The narrow definition of intangible assets by regulators and investors causes innovative companies to be consistently undervalued. This undervaluation exacerbates the difficulty innovators have when aligning their competitive advantages, such as operational efficiencies, competitive business combinations, and cutting-edge technology with the business needs of a market. Systems engineering represents a powerful framework for solving this problem.
Joshua Jahani is a Cornell alum, NYU lecturer, and owner of Jahani and Associates, an investment banking firm focused on identifying and developing a company’s intangible assets to maximize its value. The firm’s Intangible Asset Methodology™ (IAM) is built on systems engineering principles to identify, develop, and monetize intangible assets across a variety of verticals. Utilizing proven qualitative and analytical skills driven by business objectives and up-to-date technology, he has spearheaded the movement towards rapid evolution and sustainable growth using rigorous profitability, ROI, and TCO analysis for organizations of all sizes. Working with exciting startups in digital advertising or large Fortune 500 companies keeps him traveling all over the world.
Joshua Jahani earned his M.Eng. in Systems Engineering from Cornell University in 2012 and teaches courses on strategy, finance, and entrepreneurship at NYU. His current research interests are intangible assets, goodwill calculation and sustainability, the customer franchise value in subscription businesses, and value-based healthcare systems and technology. He has a passion for uncovering how to create corporate value that is not shown on financial statements.
Enhance Your Company’s Strategic Assets to Increase Value
What are a Company’s Strategic Assets?
A company’s strategic assets sit at the intersection of tangible and intangible assets and create recurring benefits, are unique, and difficult to imitate. Such strategic assets can include intellectual property, customer relationships, proprietary business processes and algorithms, novel revenue streams, and brand value.
Why focus on strategic assets?
The definition of strategic assets is related to the accounting term goodwill, which is an intangible asset that results from the acquisition of a company at a premium value. The premium is the amount an acquiring company pays for a target company in excess of the target company’s book value. Strategic assets have historically been difficult to quantify, but are known to make a company more valuable.
Corporate buyers have been placing increased emphasis and value on strategic assets compared to tangible assets like property, equipment, and manufacturing facilities. Corporate resources applied to build a robust set of a company’s strategic assets are increasingly providing a higher return on investment than those focused strictly on earnings growth.
High-profile transactions such as Facebook’s acquisition of WhatsApp, AT&T’s purchase of DirecTV, and Campari’s acquisition of Wild Turkey all demonstrated the high percentage of purchase price allotted to goodwill due to the seller’s strong set of strategic assets.
According to research by Carol Corrado, “companies put far more money into non-physical assets, such as customer databases, than in building new factories. In 2014, companies invested the equivalent of 14% of the private sector’s gross domestic product in intangible/strategic assets. The investment in physical assets was about 10% of that sum, which is essentially the reverse of 40 years ago when 13% of the private sector GDP went to tangible/physical assets and only 9% to intangible/strategic assets.”
There is currently more than $2.5 trillion in goodwill on corporations’ balance sheets (source: Time magazine). Why? As corporate awareness of intangible asset value is increasing, fewer companies are pursuing acquisitions to add production facilities and other tangible assets. For example, when Microsoft bought LinkedIn, it was almost exclusively for their intangible and strategic assets, such as their brand, website platform, user/customer data, and perhaps the management team and their connections (e.g., Reid Hoffman!).
How to determine which company’s strategic assets to pursue?
Over the past few months, Gates and Company, in conjunction with Jahani and Associates, have been working to determine the strategic assets that help companies achieve premium valuations that can be identified and developed. Knowing that the concept of strategic assets would not benefit every business, and would certainly vary sector by sector, the team began by reviewing M&A deals in the tech sector. Over 500 transactions that closed between 2010 and 2016 were analyzed to determine strategic asset characteristics and goodwill drivers.
Some of the tech M&A deals reviewed for this initiative included:
- Google acquired Waze for $969 million and allocated $843 million to goodwill
- Yahoo! paid $990 million for Tumblr, with $750 million going toward goodwill, including $182 million for customer contracts and relationships
- Facebook’s $17.2 billion acquisition of WhatApp had an astonishing $15.3 billion recorded as goodwill
- Microsoft acquired LinkedIn for $27 billion and allocated $16.7 billion of its purchase price to goodwill; and when it acquired Skype for $8.6 billion, $7.1 billion went to goodwill
In each of these examples, the target company’s strategic assets (IP, customer relationships, brand, etc.) were valued significantly higher than their tangible/physical assets (plants, property, equipment, etc.). Results from the tech sector analysis indicated that companies with recognizable strengths in social media, web advertising, and data analytics consistently received valuations above market. Additionally, an active user/subscriber base was a driver in over 60% of the acquisitions.
Corporate leaders, business owners, and investors face a critical issue: in order to maximize value, they must enhance the set of strategic assets in their company and/or portfolio of businesses. A thorough analysis of transactional data to identify strategic asset characteristics and goodwill drivers must be considered in conjunction with corporate core competencies, market dynamics, and economic trends to build out the most relevant value-enhancing strategic assets.
About Gates and Company
With offices near Philadelphia and Munich, Germany, Gates and Company is an investment banking and management consulting firm dedicated to helping companies grow. With an impressive track record of helping numerous companies reach their goals, Gates and Company specialize in M&A, market research/analysis, growth strategy formulation, business plan development, product/venture launch, and financial advisory services.
Gates and Company’s management consulting team has invested significant time and resources to refine and validate its methodology of determining strategic asset characteristics and goodwill drivers in the tech sector. Current efforts are underway in the health IT sector. By reviewing market dynamics and hundreds of M&A deals on a sector-by-sector basis, Gates and Company offer these insights to their clients so they can better understand how to identify and develop an optimized set of strategic assets. Gates and Company’s investment banking team helps companies seeking liquidity with comprehensive M&A services to sell businesses or business units, including identifying and assessing those potential buyers most likely to be attracted to a company’s current and developing set of strategic assets.
For more information about Gates and Company, visit gatesandcompany.com.
Company’s Strategic Assets to Increase Value Articles
Identify, Develop, and Monetize Your Intangible Assets
Jahani and Associates utilize a proprietary Intangible Asset Methodology™ (IAM) to help our clients identify, develop, and monetize their most valuable intangible assets. We recently led a Cornell Seminar on the same topic.
Intangible assets take work and time to develop into the premium commanding, goodwill-driving assets that maximize value in capital raises, M&As, and other scenarios. Think about a platform that boasts an above-average amount of time users spend on the technology per day. Such an intangible asset will command a premium, but only if it is identified and measured. Being able to measure this intangible asset (users spending more time on your platform than others) is work in and of itself. Some technological sophistication is required.
Developing the intangible asset takes the longest time out of the three steps:
- Part 1: Identifying Intangibles in Ad Tech M&A Value
- Part 2: Developing Intangibles in Ad Tech M&A Value
- Part 3: Monetizing Intangibles in Ad Tech M&A Value
Sticking with the same example of time spent on a platform per day, the theoretical firm in question must determine why users are spending more time on their platform, and then they must find ways to increase the user’s positive experience inside this intangible asset. Does the user want more videos? More pictures? Will the user share more on your platform when the colors are brighter? All these questions require testing. They require a rigorous process of engineering and business acumen.
Developing intangibles inside the IAM™ is done with consideration of those that generate the highest premium. This is always determined as part of the preceding identify phase. These two phases build on each other to empower the third and final phase: monetize.
Monetizing intangibles is done through investment banking scenarios. This can be done when bringing a company to market for an M&A, when performing investor relations for publicly traded companies, when raising capital from VCs, or a variety of other scenarios. This is when J&A takes its powerful, data-driven story to command a premium in the marketplace.
