Damodaran on Valuation

12.1. IMPORTANCE OF INTANGIBLE ASSETS

The first publicly traded firms that grew out of the industrial age derived the bulk of their value from physical assets. These early corporate giants, which included General Motors, Standard Oil, and AT&T, owned land, buildings, and factories that lent themselves easily to accounting measures and valuation. The past half-century has created a new generation of firms, such as Coca-Cola, Microsoft, Intel, and Pfizer, that get most of their value from assets that have no physical form. These intangible assets vary across firms from brand name (Coca-Cola) to patents (Pfizer) to technological expertise (Intel, Microsoft) but they do share some common features. The first is that traditional accounting rules either understate their value or completely ignore them; the balance sheets of these companies show little evidence of their value. The second is that a significant portion of the market values of these firms comes from these intangible assets; there is evidence, for instance, that brand name alone may explain more than half of the value in many consumer product companies. Finally, the failure to value these intangible assets distorts both accounting measures of profitability such as return on equity and capital and market measures of value such as P/E ratios and EV/EBITDA multiples.

In one study, Leonard Nakamura of the Federal Reserve Bank of Philadelphia provided three different measures of the magnitude of intangible assets in today's economy: ...