Company Valuation

VALUATIONOf THE

COMPANY

04/10/23 1- BY ANKIT GOR

Brand Valuation


Agenda

Introduction & evidence of brand valuation.Brands on the balance sheet.Social value of brands.Approaches to brand valuation.Calculating a brands value.Five steps to brand valuation.Applications of brand valuation


Introduction & evidence of brand valuation

•Initially tangible assets were regarded as the main source of business value

•The market was aware of intangibles, but their specific value remained unclear and was not specifically quantified

•Brands, technology, patents and employees were always at the heart of corporate success, but rarely explicitly valued.



The increasing recognition of the value of intangibles

came with the continuous increase in the gap

between companies’ book values and their stock

market valuations, as well as sharp increases in

premiums above the stock market value that were

paid in mergers and acquisitions in the late 1980s.



Why are brands valuable?

Why are brands valued?




Brands on the balance sheet

•The wave of brand acquisitions in the late 1980s resulted in large amounts of goodwill that most accounting standards could not deal with in an economically sensible way.

•Accounting practice for so-called goodwill did not deal with the increasing importance of intangible assets.


Brands the balance sheet

TRADITIONAL VIEW

•The traditional view is that any valuation figure, other than one supported by a specific purchase price on change of ownership is too arbitrary at all to be credible.

•The balance sheet is not intended as a statement of corporate worth and that subsequently, inclusion of values of brands in fixed assets would mislead the figures in the balance sheet.


Social value of brands

•Do brands create value for anyone other than

their owners?

•Is the value they create at the expense of

society at large?



Brands are accused of stifling competition and tarnishing the virtues of the capitalist system by encouraging monopoly and limiting consumer choice.

The opposing argument is that brands create substantial social as well as economic value as a result of increased competition, improved product performance and the pressure on brand owners to behave in socially responsible ways.



Competition on the basis of performance as well as price, which is the nature of brand competition, fosters product development and improvement.


Approaches to brand valuation

Research based approaches Use of consumer research

Financially driven approaches Cost based approach

Premium price NPV of a future price premium that a

brand would command


Calculating a brands value

Discounted cash flow: A classic approach to the financial evaluation of any investment whether material or intangible. This is the model-type for evaluation by means of discounted net anticipated cash flows.


Value of a brand

N = ∑ RBt / (1+r)t + residual value/(1+r)n

t = 1 = Anticipated revenue in year t, attributable to the brand

r = discounting rate

Residual value beyond year n

RBn/r or RBn/r-g

g= Rate of revenue growth


Multiple methods

Market value of equity Firm : P/E = Known profits

Brand equity Brand Multiple = Brand net profits


Stages to determine Brand Multiple


Deciding the applicable net profit Use of profit for 3 previous years Discounting the profits to take inflation

into consideration Weighted average of the profits takes

account of least and most representative years

Weighted average of the post –tax net profit attributable to the brand forms the basis of all calculations


Assessing the brands strength

Overall marking based upon a set of marketing and strategic criteria

Weighted sum of individual marks of each factor determines the overall marks


Deciding the multiple A relation has to be established

between the multiple and brand strength

The multiple is the indication of confidence in the brand in future

The relation is indicated by a brand strength score

S-curve is the chart linking multiple with brand strength


Means of evaluating brand strength

Evaluation Factor Maximum Score Brand A Brand B Brand C

Leadership 25 19 19 10

Stability 15 12 9 7

Market 10 7 6 8

Internationally 25 18 5 2

Trend 10 7 5 7

Support 10 8 7 8

Protection 5 5 3 4

Brand strength 100 76 54 4604/10/23 22- BY ANKIT GOR

S-curve


Deciding the brand value

Brand Value = Net brand profit X Relevant

brand multiple


5 steps to brand valuation

Market segmentation Financial analysis Demand analysis Competitive benchmarking Brand value calculation


Applications of brand valuation

Brand management and development Bench marking of competitors Monitoring value year on year Brand control Brand licensing Mergers and acquisitions Join-venture negotiations


“If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than you.”

-John Stuart, Chairman of Quaker (ca. 1900)


HUMAN CAPITAL

VALUATION


INTRODUCTION• The concept of value has essentially two

different meanings. 'Value' expresses the utility or service of a particular resource (e.g. the future use of a capital asset) and the purchasing power of the resource (e.g. money, securities).

• If an object is not capable of rendering future economic services in the form of utility to the possessor, no value can be attached to it.

• Human Resource Valuation means identifying and measuring value of human resources and communicating the information to the interested parties.


• In India HR valuation was first implemented by the public sector giants (e.g. BHEL, SAIL, etc.) For the last two years, HR value reporting has gained momentum amongst the software companies.

• These companies have valued their Human Resources which has been disclosed in their Annual Reports as a statement of intangibles (additional notes to the accounts).


HUMAN RESOURCE ACCOUNTING

Several models have been developed to try to quantify the intangible and specifically the human component.

• Cost models (Brummet, Flamholtz and Pyle) are based on the acquisition cost, including replacement and training costs and opportunity cost of human asset

• The Lev & Schwartz model, more monetary-centric, is based on the likely future earnings of an employee till his retirement.


METHODS• Historical cost method: The method

suggests capitalizing the firm’s expenditure on recruitment, selection, training and development of employees and treats them as assets for the purpose of human resource accounting.

• Replacement cost method: This method involves assessment of replacement cost of individuals, and rebuilding cost of the organization to reflect HR asset value of both the individuals and the organization. However, the replacement cost may not reflect either the actual costs or the contribution associated with HR.


• Opportunity cost method: This model envisages computation of monetary value and allocation of people to the most promising activity and thereby to assess the opportunity cost of key employees through competitive bidding among investment centers.

• Behavioral Model: This model aims to establish a set of casual variables through psycho- social test results reflecting the appreciating or depreciating condition of human organization as reflected by a set of intervening variables, which in turn, are likely to result in the achievement of the end result variables.


Economic model: Lev & Schwartz advocated the estimation of future earnings during the remaining life of the employee and then arriving at the present value by discounting the estimated earnings at the employee's cost of capital.


VALUATION OF INTANGIBLE ASSET


Valuation of goodwill

Normal capitalisation method

Normal capital required to get actual return less

actual capital employed

Super profit method

Excess of actual profit over normal profit multiplied

by number of years super profits are expected to

continue

Annuity method

Discounted super profit at a suitable rate04/10/23 36- BY ANKIT GOR

COMPANY A

• Capital employed: Rs. 45 cr• Normal rate of return: 12 %• Future maintainable profit: Rs. 5.5 cr

What would be the goodwill under the normal capitalization

method?

SOLUTION: • = (5.5/.12) – 45 = Rs. 0.83 cr



COMPANY B

• Capital employed: Rs. 50 cr• Normal rate of return: 15 %• Future maintainable profit: Rs. 8 cr• Super profit can be maintained for:3 years

• What would be the goodwill under the super profit method?

SOLUTION:

= [8 – (50*.15) ] * 3 = Rs.1.50 cr



Bharti Airtel – flagship company of Bharti enterprise

The businesses at Bharti Airtel have been structured into three individual

strategic business units (SBU’s) - mobile services, telemedia services (ATS)

& enterprise services

First private telecom services provider

In 10 yrs, Airtel became the leader in providing telecom services to its

customers

Company profile


Goodwill Other acquired intangible assets Software Bandwidth Licenses License entry fees Brands Distribution networks Customer relationships

Intangible assets


March 31, 2008 March 31,2009

Balance ( beginning of the

period)

23683549 27043223

Additions 3427020 10834

Valuation allowance reversals

(67,346) -

Balance ( end of the period)

27043223 27054057

Good will(Rs in thousands)


Other intangible assetsParticulars March 31,

2008Less

Amortization

March 31, 2009

Less Amortizatio

n

Software 83,993 83,993 1,00,458 88,659

Bandwidth 20,96,218 96,346 33,63,064 3,07,261

Licences 63,59,042 29,87,002 63,59,402 34,27,900

Licence entry fees 1,08,16,027 31,15,513 1,08,97,940 36,97,713

Brands 1,10,514 92,250 1,10,514 94,990

Distribution networks 11,34,508 11,344,188 11,34,508 11,34,484

Customer relationships

7,28,840 7,23,639 7,28,840 7,28,004

Other intangibles 1,54,659 47,234 1,54,659 60,874

Total 2,14,84,161

82,80,165 2,28,49,385

95,39,885

NET 1,32,03,996 1,33,09,500

(Rs in thousands)


Intangible assets of the company –

Human resourcesCollective expertise, innovation, leadership, managerial skills of

employees

Intellectual property assetsKnow-how, copyrights, patents, products and tools owned by a

corporation

Internal assetsSystems, technologies, methodologies, processes and tools

specific to organization

External assets Examples : customer loyalty, brand value

INFOSYS


LEV & SCHWARTZ MODEL

Projects the direct & indirect benefits enjoyed by the employee till retirement

Discounts CTC at the WACC to arrive at the present value.

HUMAN RESOURCES VALUATION


2009 2008

Employees no.

Software professionals

97349 85013

Support 7501 6174

Total 104850 91187

Value of Human Resources

Software professionals

95600 92331

Support 6533 6490

Total 102133 98821

HUMAN RESOURCE VALUATION AT INFOSYS

Assumption : cost of capital 12.18%

(Rs. in crores)


Brand earnings multiple model

Brand Strength multiple Brand Earnings

Brand Value = Brand Strength multiple X Brand earnings

BRAND VALUATION


2009 2008 2007

Profit before interest and tax

6907 5344 4245

Less: non-brand income 426 634 335

Adjusted profit before tax 6481 4710 3910

Inflation factor 1.0000 1.092 1.192

PV of brand profits 6481 5142 4660

Weighted factor 3 2 1

Weighted avg profits 5731 - -

Remuneration of capital 801 - -

Brand related profits 4930 - -

Tax 1676 - -

Brand earnings 3254 - -

Brand multiple 9.94 - -

Brand value 32345 - -

INFOSYS-BRAND VALUE Rs. in crores


2009

Total Assets 152732

Intangible assets

Brand value 32345

Human Resources 102133

135478

Infosys : Intangible assets

Intangible Assets / Total Assets = 88.7%

In Rs. in crores


Conclusion



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