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.
M&A Insights: Use the Power of Intangibles to Maximize Your Company Value
M&A Insights: Two kinds of intangible assets
In the world of investment banking, there are two kinds of intangible assets. The first is known as “identifiable” intangibles. These are things like patents, trademarks, copyrights, and customer relationships. In short, these are intangibles that GAAP and FASB have determined are consistent enough to be subject to specific valuation rules. When valued these assets are referred to as “intangible assets.”
The second category of intangible assets is known as “unidentifiable” intangibles. These are essentially everything else. Examples include selection algorithms (Netflix, Amazon, and Hulu), operational synergies, talent, and other business combination advantages. When valued these assets generally fall under goodwill. Goodwill is defined as the amount over fair market value an acquirer pays for a target company.
These two kinds of intangibles play a significant role in the valuation of a company. In fact, Jahani and Associates analyzed over 500 M&A transactions among tech giants such as Apple, Alphabet, Facebook, and Microsoft to determine exactly how much value was placed in these categories. The results were astounding.
Intangible assets represented 22% of the money spent on acquisitions for these tech giants. Goodwill accounted for 77% of the money spent on acquisitions from 2010 – 2016. Together, identifiable and unidentifiable assets made up 99% of the purchase price for all acquisitions made by tech giants from 2010 – 2016.
M&A Insights: Maximizing a company’s value
These results are astounding, to say the least. They are astounding for two reasons: 1) They provide a clear and measurable path to maximizing a company’s value and the likelihood of being acquired by a tech giant and 2) they provide insight into why a tech giant will buy targets based on their business model.
M&A Insights: The way a company uses this information, and the unique value Jahani and Associates brings to our clients’ business, is based on three factors:
- The industry vertical of the target
- The specific business processes that are congruent with those of selected acquirers
- A proprietary and data-driven investment banking process
Owners of candidate businesses must consider these factors when building their business. The considerations play a significant role well outside of the traditional investment banking timeline. Meaning the business owner must identify, develop, and implement these intangible assets more than 12 months before they plan to sell their company.