Valuation of Intangible Assets: Innovation Capital, Human Capital, Customer Capital, Supplier Capital, Investor Capital, Location Capital

WIPO Valuation and Commercialization of Invention, Trademarks and Industrial Designs Valuation of Intangible Assets: Innovation Capital, Human Capital, Customer Capital, Supplier Capital, Investor Capital, Location Capital Tehran, October 23 and 24, 2012 Prof. Dr. Ulrich Moser Erfurt University of Applied Sciences

Valuation of Intangible Assets Agenda Understanding Intangible Assets as Business Assets Classifying Intangible Assets Identifying Intangible Assets Analyzing Different Types of Intangible Assets in Context of Valuation Technology, e.g. Patent Protected Technology, Trade Secrets, Patent Portfolios Trademarks and Trademark Portfolios Customer Relationship Goodwill Others (Software, Databases, Know How) 2

Intangible Assets in Accounting The amount of Intangible Assets shown in balance sheets is typically (very) low January 1, 20xx Book Values Intangible Assets Tangible Fixed Assets Working Capital Market Value of Equity Market Value of Debt

Intangible Assets are Business Assets Fair Values - January 1, 200X E N T I T Y Intangible Asses Tangible Fixed Assets Market Value of Equity Market Value of E N T I T Y Working Capital Debt 4 04.07.2008

Looking on Intangible Assets Fair Values - January 1, 200X Goodwill E N T I T Y Intellectual Property Asses Customer Relationship Contracts Tangible Fixed Assets Market Value of Equity Market Value of E N T I T Y Working Capital Debt 5 04.07.2008

Context of Valuation of Assets Fair Values - January 1, 200X Goodwill E N T I T Y Implications Market Value of Intellectual Property Asses A business is Equity a portfolio of Customer Relationship assets Contracts This portfolio generates the Tangible Fixed Assets business Market valuevalue of E N T I T Y Working Capital Debt 6 04.07.2008

Valuation of Intangible Assets Agenda Understanding Intangible Assets as Business Assets Classifying Intangible Assets Identifying Intangible Assets Analysing Different Types of Intangible Assets in Context of Valuation Technology, e.g. Patent Protected Technology, Trade Secrets, Patent Portfolios Trademarks and Trademark Portfolios Customer Relationship Goodwill Others (Software, Databases, Know How) 7

Categories of Intangible Assets Innovation Capital Patents Know How Supplier Capital Favorable Contracts Human Capital Assembled Workforce Sales Force Process Capital Organization Computer Software Customer Capital Customer Relationships Trademark Investor Capital Relationships Location Capital 8

Definition of Intellectual Property Value Creation Human Capital Experience Tacit Know How Skills Creativity Value Extraction Intellectual Assets Programs Methodologies Processes Databases Intellectual Property Patents Copyrights Trademarks Sullivan/Edvinsson 9 04.07.2008

Classification of IFRS 3 / ASC 805 Overview of Customer-related Assets Marketing-related intangible assets Trade marks Internet domain names Non-competition agreements Customer-related intangible assets Customer lists Order or production backlog Customer contracts Customer relationships Artistic-related intangible assets Plays Books Pictures Contract-based intangible assets Licensing, royalty agreements Leasing agreements Broadcasting rights Technology-based intangible assets Patented and unpatended technologies Software Databases Secret formulas, processes

Intangible Assets Alternative Classifications IFRS 3 / ASC 820 Reilly/Schweihs Schmalenbach Ges. Marketing-related Customer-related Artistic-related Contract-based Technology-based Marketing-related Customer-related Artistic-related Contract-related Technology-related Data processing-related Engineering-related Goodwill-related Human Capital-related Location-related Customer Capital Innovation Capital Process Capital Human Capital Location Capital Supplier Capital Investor Capital

Identifying Intangible Assets Basic Idea Analysis of Business Model Intangible Asset Business Analysis, e.g. Porter s Value Chain Sales & Marketing Manufacturing Procurement Competitive R & D Human Advantage Ressources Management & Organization Information Systems Margin Free Cash Flow Analysis Sales./. Cost of Sales./. SG&A Operating Profit./. Tax NOPLAT./. Changes WC./. CapEx Free Cash Flow Capitalization Business Value

IP Assets in Context of Business Examples Product feature is based on patent protected technology Higher Prices Increased Volumes Differentiation Cost savings in manufacturing are based on trade secrets Cost agvantage Lower Costs (Higher Profit Margins) Selling of products under famous trademarks Higher Prices Increased Volumes Differentiation

Identifying Intangible Assets Conducting the Analysis Analysis of Business Model Business Analysis, e.g. Porter s Value Chain Sales & Marketing Manufacturing Procurement R & D Human Ressources Management & Organization Information Systems Competitve Advantages Margin Free Cash Flow Analysis Sales./. Cost of Sales./. SG&A Operating Profit./. Tax NOPLAT./. Changes WC./. CapEx Free Cash Flow Capitalization Business Value

Basic Analysis Tools for Identifying Intangible Assets Market Attractiveness Market Potential Market Volume Market Growth Industry Structure Porters Five Forces P E S T Analysis New Competitors Supplier Negotiation Power Threats Competitors Intensity of Rivality Threats Substitutes Negotiation Power Customer Competitive Advantages Value Chain Analysis Sales & Marketing Manufacturing Procurement R & D Human Ressources Management & Organization Information Systems

1. Technology and Technology Portfolios

Patente

Examples Packaging / Insulation sleeve Packaging Insulation Sleeve EP 1 362 793 A2 20 04.07.2008

Patents Analysis of Value Drivers Value of unprotected technology Patent value Value of protection rights Market share Margin Competitive advantages Exclusivity Freedom-to-Operate Technology Strategic Alignment Stage of development Innovativeness Technology Lifecycle Realization Commercialization Market potential Industry structure Product/Process Strategic Alignment Product Lifecycle Protected Coverage Solution Complementary Assets Exploitation Business use Blocking Legal Protection Legal status / Validity Extent of protection Territorial scope Age 21

Structure of a patent portfolio Business units Products Components Technologies Patents BU 1 BU 2 P 1 P 2 P 3 P 4 P 5 Technology 1 Technology 2 Technology 3 Pa 1 Pa 2 Pa 5 Pa 3 Pa 7 Pa 4 Pa 6 T R A D E M A R K S

Typical patent portfolios Number of patent families 10.000+ 300-800 20-50 Startup SME Global player Zeit

Values Distribution of the patent values in the portfolio 4.000.000 3.500.000 3.000.000 2.500.000 2.000.000 1.500.000 1.000.000 500.000 0 Patents 1998 P07951 2002 P18962 1995 P07533 2001 P19637 1997 P07898 2000 P07450 1997 P07954 2000 P07459 1999 P07575 2001 P05880 1996 P07602 1994 P07452 1994 P07459 1996 P07430 2002 P12455 2000 P07801/ 2000 P07802-1a) 2002 P13057 1996 P07593 2002 P01898 2001 P24588 1992 P07404 1992 P07501-2 1992 P07501-4 1992 P07502 1991 P07470

2. Trademarks

26 Valuation of Trademarks Examples

Charakteristics of Trademarks Function of Trademarks authentication of the origin of goods or services buyer can select products seen in advertisement or previously purchased Guarantee of a certain level of quality or performance Valuable Trademarks Recognizability Versatility applicability to a wide range of products Identification with positive attributes 27 04.07.2008

Trademarks Analysis of Value Drivers Trademark Value Realization Complementary Assets Market share Margin Competitive advantages Commercialization Market potential Industry structure Exploitation Authentication Strategic Alignment Types of Marks Recognition Lifecycle Potential for Extension Product/Service Strategic Alignment Price relative to other Products in industry Product Lifecycle Legal Protection Range of Protection Validity Territorial scope 28

3. Customer Relationship

Customer Relationship Characteristics Inertia Mobile phone provider Customer Relationship Inertia low high Product Commodity diff. Newsstand in large city Customer Base Information Information Customer records Useful in selling efforts History or other useful information about customer business association, credit information, previous purchases, preferences Critical location Brand names Critical Skills Necessity of Advertising Cost of new Customer Substitution of Supplier (Cost) (+) (-) (+)*) (-) (+) (-) High Low Low High Low High *) not property of business

Relationship between Enterprise and Customer Examples B-2-B Manufacturer Wholesaler = Customer Consumer B-2-C Manufacturer Consumer = Customer Distribution Network Manufacturer Agent etc. Consumer = Customer

Customer Relationship Characteristics Sales IFRS 3 IE 28 CR Customer Relationship IFRS 3 IE 28 the entity has information about the customer and has regular contact with the customer the customer has the ability to make direct contact with the entity time Sales IFRS 3 IE 26, 27 Contracts Contractual-Legal Criterion IFRS 3 IE 26 / 27 If an entity establishes relationships with its customers through contracts A customer contract and related customer relationship may represent two distinguished assets time

Customer Relationship Criteria of IFRS 3 IE 28 Customer Relationship Information about customer regular contact with customer Manufacturer Wholesaler = Customer Consumer Ability to make direct contact with entity Customer Base Manufacturer? Consumer = Customer

Customer Relationship Characteristics Sales Sales IFRS 3 IE 26, 27 IFRS 3 IE 28 Contracts CR time Contractual-Legal Criterion IFRS 3 IE 28 an entity has a practice of establishing contracts with its customers, regardsless of whether a contract exists at the acquisition date. Order Backlog IFRS 3 IE 25, 29 If an entity has relationships with its customers through these types of contracts, the customer relationship also arises from contractual rights Customer relationships may also arise through means other than contracts, such as through regular contact by sales or service representatives time

4. Goodwill

Components of Goodwill E n t i t y V a l u e Synergies Going Concern Element Not identifyable assets Assets to be developed (future technology, future trademarks, future customers) Identifyable Assets P u r c h a s e P r i c e = Goodwill-Komponenten

Komponenten des Goodwill am Beispiel der SP Fair Purchase Entity Future Components Total Value Price Value Assets of Goodwill Assets Mio. EUR (1) (2) (3) (4) (5) (6)=(1)+(4) Entity Value 650,00 Purchase Price 700,0 Customer Relationship acquired 160,60 160,60 after acquisition date 118,1 118,1 118,10 Core Technology acquired 161,50 161,50 after acquisition date 7,9 7,9 7,90 Process Technology 20,40 20,40 Assembled Workforce 6,50 6,50 Working Capital 75,00 75,00 Tangible Fixed Assets 100,00-524,0-524,0 100,00 Total 176,0 126,0 126,0 Workforce 6,5 6,5 6,5 Goodwill originär 132,5 132,5 Synergies 50,0 50,0 derivativ 182,5 182,5 182,5 Entity Value 650

5. Software, Databases, Know How

Software Data Processing Assets Software Electronic Databases Mask Works Computer Screen Displays Multimedia Work IP Protection Copyright, Patent, Trade Secret Copyright, Trademark, Service Mark Semiconductor Chip Protection Act Part of Software Copyright Software Product Software Operational Software Valuation Approach Income Market - Cost Cost Market Income

Software Application of Valuation Methods Trended Historical Cost Method Software Engineering Model Method Basic approaches Relief from Royalty (Cost Savings) Excess Earnings Method Market Replacement Cost Method Reproduction Cost Replacement Cost Hybrid Income and Market Approach Residual Value Hybrid Cost and Market Approach Functional Obsolescence Technical Obsolescence Economical Obsolescence

Cost Approach: Software Engineering Model Stages of Software Development Planning Analysis Design Implementation Time Steps Project coordination Development of an operating system Writing specific program codes Program testing Installation and debugging Preparation of operating manuals... design of specific program

Software Development Corp. Product Software Workflow Management Software for a specific service industry Customer: Leading companies all over the world Analysis of P & L and Value Chain Software License Maintenance Customizing Consulting Revenues Different Modules, Price 4.5 Mio.EUR Updates, hotline Customer Relationship 1.5 to 8.0 of license revenues per customer Applying software Database Test Data Cost of Sales Charges Assembled Workforce Charges Value of Software = Excess Earnings Method + Royalty Income

Databases Examples Type Valuation Approach Different Industries Income Market Cost Customer lists, mailing lists, credit information, financial studies or compilation, scientific data Directly used to generate income Outlicensing, sale Sometime data available e.g. price/rent per name EUR 2,5/0,5 Replacement Cost / Trended Historical Cost Mechanical Engineering, Aircraft Industry Drawings Trial runs of jet engines Typically no external use Expected future cost savings Not available Replacement Cost (?)

Know How - Manufacturing Working Processes Incremental Improvement Process Optimization Competitive Advantage Assembled Foundry, Steel Production of e.g. time from Workforce Production Paper, Choclate, order to delivery Chip board is critical in some Experience of Industries Production Recipe, Trial Runs, Specialist Factory Layout Significant reduction of Competitors do production time more or less the same Proprietary Know How (Trade Secret) Tacit Know How Documentation

Contact Prof. Dr. Ulrich Moser WP/StB/CVA Wilhelm-Kuelz-Str. 12 99048 Erfurt Germany Tel.: +49 172 73 69 962 Fax: +49 361 6531 646 E-Mail: u.c.moser@t-online.de 46 04.07.2008