Presented at the Marketing Strategy Meets Wall Street conference at INSEAD in June 2019, this analysis has three goals: provide macro data on the economic significance of brands, evaluate how consistent the annual brand value league tables are, and highlight the problems caused by the gap between economic and accounting views of brand.
It rests on three strands: a fifteen year comparison of balance sheet value with market value for all publicly traded companies with revenues over $50 million, an analysis of how acquirers allocated the premium they paid in mergers, and an aggregation of the four published top 100 brand lists.
Key findings
- Tangible assets accounted for only 38 percent of the value of the world’s 12,000 largest companies in 2018.
- Acquirers put an even lower weight on the physical. Across more than 3,500 mergers completed between 2009 and 2016 with purchase price allocation disclosures, tangible assets were 29 percent of transaction value, identified intangibles 33 percent and goodwill 38 percent.
- Within those identified intangibles, customer-related assets are the largest single category at 14 percent, developed technology 10 percent, in-process research 6 percent, and trademarks and trade names only 3 percent.
- Brand value is a meaningful but bounded share of company value. Across the 2015 to 2018 league tables, the listed brands represented 19.3 percent of the enterprise value of their 146 non-financial parent companies, and 22.1 percent of market capitalization.
- That value is concentrated. Seven industry sectors account for 77 percent of brand value, while brands play a limited role in capital goods, energy, materials and pharmaceuticals, which together account for 34 percent of global enterprise value.
The league tables do not agree
The four publishers all claim to report economic use value, the financial benefit a company derives from the brand, and there are only two major methods for calculating it: an earnings split approach used by Interbrand and Millward Brown, and a relief from royalty approach used by Brand Finance.
Both methods are conceptually sound and compliant with the ISO 10668 standard, and in principle should produce similar numbers. In practice the reported values differ significantly, because of assumptions about total brand revenues, the role of the brand in creating preference, and the discount rate.
The overlap between the lists is small. The four tables contain 185 brands in total, only 6 appear in the top 30 of every list, and only 36 are common across all four top 100 lists.
Even direction of travel is disputed. Among the 34 brands common across the past two years, there is only 50 percent consensus on whether value went up or down year on year.
Why the definitions collide
The presentation sets two definitions side by side. Accounting treats a brand as legal property, meaning trademark, copyright, customer contracts and lists. Marketing and finance treat it as a resource that generates future cash flow, reaching through to customer behavior and preference.
That is why brands do not appear on balance sheets. Brands are not recognizable as accounting assets, and only the underlying intellectual property meets the test of a resource controlled by the business from which future economic benefits are expected to flow.
Intangible value is defined here as the gap between enterprise value and net tangible assets, and it contains three things: the excess of market over book value of tangible assets, intangible assets that qualify accounting-wise, and other resources that contribute to future cash flow but cannot be recognized because they are not legally owned and controlled.
Where brand matters most
By sector, brand value as a share of enterprise value ranges from 11.8 percent in capital goods to 28.3 percent in consumer durables and apparel, with media and entertainment at 24.6 percent, telecommunications at 21.7 percent and software and services at 21.5 percent.
The largest brands by sector follow the same pattern: Google, Facebook, Disney and Tencent in media, Microsoft, IBM and VISA in software and services, Apple, Samsung and Cisco in technology hardware, and Amazon, Alibaba and Home Depot in retailing.
Scope and limitations
Financial services companies are excluded from the headline intangible value figures because of the specific nature of their balance sheets. The brand value figures are aggregations of third-party league tables that the analysis itself shows to disagree with one another.
Source
This page summarises Intangible Value: How Much of It Is Brand?, by Jonathan Knowles, 17 June 2019.