Understanding Brand Value Differences 2016

Table 1BrandAcquirerCommentsVirgin MobileSprint Nextel2009 10-K not available on websiteBezeqB Communications2010 10-K not available on websiteGrupo Pão de AçúgarCasinoCouldn’t find financial statementsVolvoGeely Sweden ABCouldn’t find financial statementsMobilNilFrance TelecomFinancial statements in FrenchSchneider ElectricSchneider Electric SASCan’t find reference to any “acquisition”ClearwireClearwire CorpCan’t find reference to any “acquisition”Banca PopolareBanca PopolareCan’t find reference to any “acquisition”For these reasons, purchase accounting can beconsidered to be the most accurate and reliablemethodology for the valuation of brands as of today.”MARKABLES’ White Paper set us thinking about manythings: Was MARKABLES’ analysis and conclusions right? Are PPAs, as currently reported in financial statements,useful to investors? Are brand valuation standards good enough to becredible? Should internally-generated intangible assets beincluded in financial statements?MARKABLES Analysis:We attempted to review the transactions which related tobrand league table valuations performed by BrandFinance (fifty nine) by accessing the financial reports fromthe internet, principally through the Investor Relationssection of the acquiring company’s website.Of the 59 acquisitions, we could not find financialstatements for four of them, one of the financialstatements found was exclusively in French which we didnot attempt to translate, and for three of them we couldfind no reference to any acquisition in the financialstatements (see Table 1).6.Understanding Brand Value Differences January 2016One of the transactions was a transfer of the asset only(IKEA trademarks) between related parties, and was notreported as part of a PPA. Since the transfer was betweenrelated parties, we’re not entirely certain that thisrepresents an arm’s length price for the IKEA brand, andshould probably not have been used as part ofMARKABLES’ survey.Definite-lived assets versus indefinite-livedassetsOf the fifty nine acquisitions analysed by MARKABLES,twenty six brands were reported as definite life assets.In its analysis MARKABLES had attempted to produce alevel playing field by inflating the brand values, which hadbeen reported on a definite-life basis in the publishedaccounts, to an indefinite life, because as MARKABLESstated the “three brand valuation firms generally assume[an indefinite life for brands].” To do this, MARKABLESapplied a set uplift factor to convert the reported brandvalues to an indefinite life.In separate correspondence MARKABLES informed usthat they had calculated the uplift factors using a 30% taxrate, a 12% discount rate and a 2% terminal growth rate(‘TGR’). This assumed that all reported brands had beenvalued on an income basis. In the absence of directionfrom MARKABLES we assumed a growth rate equal tothe TGR for periods before the terminal growth rate wasapplied. Our calculations were marginally different fromthose determined by MARKABLES (See Table 2).uplift from a definite life to an indefinite life (See Table 3).However, in the absence of details of the discount ratesused in the PPAs, and the TGRs that the valuers wouldhave used if they had decided that the brand had anindefinite life, we believe that the assumptions used (andhence the answers derived) are a bit of a guess.DiscrepanciesWe calculated the uplift factors that we considered shouldhave been applied using different discount rates andTGRs, and these are presented in Table 3.Some of the variances are sufficiently material to causeus to be sceptical of the conclusions reached byMARKABLES. Only one of the transactions wasaccompanied by an explanation of what discount ratehad been used (ABSA’s acquisition by Barclays),therefore there is no indications as to how MARKABLESderived its assumptions in determining its uplift factors.Ernst & Young, in its study entitled “A global survey ofpurchase price allocation practices”, dated February2009, stated that “discount rates used were disclosedonly in 10 annual reports [out of 709 analysed]” Thereforeit appears to be a common trait that discount rates arenot disclosed in the vast majority of cases, and hence thisadds an even greater level of scepticism of MARKABLESWe were unable to verify some of the data provided byMARKABLES. Some of the differences may relate toforeign exchange rates used by MARKABLES. Weselected the exchange rate reported by www.xe.com asat the date of the change of control of the acquiredbusiness as reported in the financial statements of theacquiring entity.Table 2MARKABLESuplift from finitelife to indefiniteBrand Finance uplift fromfinite life to indefiniteperMARKABLES'analysis model12%discountrate, 2%TGRMARKABLESpossibleover/(under)statement1 yearx 9.6842x 11.2000(13.5%)5 yearx 2.4533x 2.6773(8.4%)10 yearx 1.5862x 1.6460(3.6%)15 yearx 1.3285x 1.32610.2%20 yearx 1.1833x 1.18210.1%35 yearx 1.0396x 1.03940.0%Finite lifeTable 3MARKABLESuplift fromfinite life toindefiniteFinitelifeBrand Finance uplift from finite life to %MARKABLESMARKABLES' under)rate,over/(under)rate,over/(under)4% TGRstatement3% TGRstatement1% TGRstatement0% TGRstatement1 yearx 9.6842x 27.0000(64.1%)x 15.7143(38.4%)x 8.769210.4%x 7.250033.6%5 yearx 2.4533x 5.8151(57.8%)x 3.5691(31.3%)x 2.202011.4%x 1.908828.5%10 year x 1.5862x 3.1811(50.1%)x 2.0753(23.6%)x 1.424411.4%x 1.293122.7%15 year x 1.3285x 2.3134(42.6%)x 1.5948(16.7%)x 1.328511.2%x 1.121018.5%20 year x 1.1833x 1.8872(37.3%)x 1.3670(13.4%)x 1.18337.8%x 1.054212.2%35 year x 1.0396x 1.3641(23.8%)x 1.1113(6.5%)x 1.03962.5%x 1.00563.4%Understanding Brand Value Differences January 20167.

The differences between the MARKABLES analysis andthe Brand Finance analysis fall into the followingcategories:a) Reported life of the brandb) Brand valuationsc) Brand value not reported.a) Reported life of the brandc) Brand value not reportedWe were unable to identify any separately reported brandvalues in the following acquisitionsBrandMARKABLES ( m)MARKABLES (life of brand)Vivo Movél 984m20 yearsSofora 436m20 yearsPTCL 70m15 years3Com 31m4 yearsBrandMARKABLES Value/life of the brandBrand Finance Value/life of the brandKabel Deutschland 28m/7 years 29m/undisclosedCable & Wireless Worldwide 86m/10 years 85m/undisclosedMetroPCS 236m/8 years 235m/undisclosedABSA 313m/15 years 300m/10 yearsHughes Communications 32m/10 years 32m/1 to 2 yearsHochtief* 308m/15 years 222m/5 to 10 years. 64m/indefiniteHBOS 934m/37 years 318m/10 to 15 years. 222m/indefinite* included in the acquisition were indefinite-lived trademarks (Turner, Flatiron, EE Cruz and Devine Ltd ( 49.7 million) plus definite-lives trademarks( 171.3 million)b) Brand valuationOther intangible assetsMARKABLES made two points that appeared to indicatethat the three brand valuation companies (Brand Finance,Interbrand and Millward Brown) do not take into accountthe other intangible assets that would be included in thePPA valuations performed during a BusinessCombination. In contrast to a standalone valuation of a particularasset, purchase accounting has to fit into the 100% cap ofthe purchase price. The sum of all individual assets maynot exceed total enterprise value. All different assets arenot only valued individually, but also relative to eachother. This relative valuation provides for an additionalquality check. Business valuation professionals deal with any type ofBrandReporting currencyMARKABLES ( m)Brand Finance ( m)PAETECUSD 12m 15mNAVTEQEUR 84m 90mCapitaliaEUR 451m 610mSt George BankAUD 746m 410mDeutsche PostbankEUR 545m 511mIberiaGBP 426m 489mGVTEUR 170m 182mIKEAEUR 11,563m 11,688mMANEUR 2,266m 2,213mBulgariEUR 2,923m 3,051mPorscheEUR 17,760m 17,003mEdisonEUR 1,214m 1,189mMerrill LynchUSD 1,515m 1,500mTripAdvisorUSD 1,830m 1,800mHVB Hypo-und Vereinsbank*EUR 999m 963mSprint**USD 6,455m 5,935m* two acquisitions (HVB and Bank Austria Creditanstalt) were reported together, and we are unaware whether the reported value of the trademark( 803 million) relates to HVB, Bank Austria Creditanstalt or both.** The reported valuation of the trademarks of 5,935 million covered the Sprint and Boost Mobile trademarks. As far as we could see, no separatevaluation for each individual brand was provided8.It is possible that MARKABLES’ forensic accountingexpertise exceeds our own. However, there are sufficientdifferences to cause us to believe that a certain amount ofMARKABLES’ analysis is potentially flawed, and hencetheir conclusions might similarly be potentially suspect.Understanding Brand Value Differences January 2016(intangible) assets being part of a business. They areimpartial with regard to particular types of assets. Incontrast, brand valuation specialist might tend to bepassionate for the value of brands.If MARKABLES had made the effort to review BrandFinance’s sister website (www.brandirectory.com) itwould have discovered that we had issued, in 2007, astudy entitled Global Intangible Tracker 2007, which quiteclearly demonstrates that we are well aware of the typesof assets that comprise the intangible value ofcompanies, the requirements of the internationalaccounting standards relating to intangible assets andthe inter-play of the intangible assets between the varioustypes of business.If MARKABLES had made any enquiry of us, we couldhave enlightened them that we have performed in excessof 100 PPAs since the mid-2000s. We believe that thiswould have demonstrated that we are equally impartial asto the extent of potential intangible assets that exist withinthe organisations of which we value the brands in ourleague tables. We may be passionate about the power ofbrands, and the value that we believe they command, butwe are not blind to the existence of, and potential valueof, the other intangible assets that may exist within theorganisations that we review.We have repeated a similar exercise in 2015 in our reportentitled “Global Intangible Financial Tracker 2015” (GIFT2015), which was published in partnership with theChartered Institute of Management Accountants /)Expert valuersMARKABLES implies that all PPAs are performed byexperts. Purchase accounting is performed by specialized andexperienced valuation professionals. Such professionalswork in the valuation and forensic accounting branches ofaccounting firms, or in financial advisory and valuationfirms. The business valuation profession is organized inprofessional associations which organize education,examination and credentials of valuation professionals.There are close to 20,000 trained business valuationprofessionals worldwide holding credentials like ASA BV,CPA ABV, CICBV, IACVA, NACVA, CBA and others. Business valuation professionals are independent –from both the owner of the valuation subject and from thechartered auditor of the financial statement.Under the provisions of IFRS3 there are no conditionsimposed that the PPA need be performed by third parties,qualified or not. The company’s management are entitledto perform the PPA, or use experts as they deem fit. Theonly thing that is understood is that the company’sauditors and other divisions within the audit firm (taxation,valuation, consultancy etc.) are disallowed fromperforming the PPA, on which the auditors wouldultimately have to conclude in their audit.It is not impossible that the auditors could provideUnderstanding Brand Value Differences January 20169.

working papers to the management of the acquiring, oracquired, company for their review, which managementwould then present, adjusted or unadjusted, to theauditors as part of the working papers for the year-endfinancial statements. For the record, the auditors are notdisallowed from performing the impairment reviews infuture years relating to the goodwill, indefinite-livedintangible assets, and, if necessary, for the definite-livedassets.Of the allocations of intangible value that we reviewedfrom MARKABLES’ sample, we found that only fourreferred to the use of experts in the allocations of value onwhich they were reporting. Therefore we find it difficult tonecessarily agree with MARKABLES that all PPAs areperformed by qualified experts; Banco Pastor, 3Com,Digitel and Vivo Movél, being the four instances where anindependent expert was referred to regarding theperformance of the PPA in the financial statements.Ernst & Young, in its study entitled “A global survey ofpurchase price allocation practices”, dated February2009, stated:“Even though our experience is that many companiesrely on an independent valuation expert to perform theirPPAs, they do not mention it in their annual reports.[information only disclosed for 23 transactions out of 709analysed] The experts most often quoted (sic) were largeaudit firms and companies specialising in the valuation ofreal estate and capital equipment.”Gold standardMARKABLES implied that PPAs were the gold standard ofvaluations because they were prefaced on real fair valuetransactions that were valued accordingly. “Purchase accounting is based on a real transaction,thus a managerial decision and a real willingness to pay.We are uncertain whether the following constitute “realtransactions” on which a fair value of the intangibles,including residual goodwill, was being allocated. Theparticular conditions are primarily distressed sales,10. Understanding Brand Value Differences January 2016particularly in the banking and financial sector, for whichthe value of individual assets may have been suppressedso as to remain within the intangible value “attributed” bythe transaction.First Republic Bank- associated with Merrill Lynch, Bankof America, and buy-back ofassets from BoAMerrill Lynch- allied to First Republic BankFairpoint- emergence from Chapter 11 ProceedingsFortis Banque - acquisition arising out of the credit crisisHBOS- bargain purchase (negative goodwill)Edison- bargain purchase (negative goodwill)Cable & Wireless Worldwide- bargain purchase(negative goodwill)IKEA- inter-company asset transfer“Before deciding a bargain purchase has taken place, theacquirer must double check their measurement of theacquiree’s identifiable assets, liabilities and contingentliabilities. This is because bargain purchases are so rare,they need to be double checked. Once rechecked, thenegative goodwill may be added to the consolidatedprofit figure for the period.” g-goodwill-andbargain-purchase-acca-p2/Because of these stringent requirements, it is possiblethat the valuer, whether it be management or anindependent expert, may seek to limit the amount of thebargain purchase by reducing the value of the tangible orintangible assets, in order to avoid tensions with theauditors in the justification of a bargain purchase. In somecases the valuer may be tempted to undervalue theintangible assets acquired.Our analysis revealed that a sizeable number ofacquisitions were reported where residual goodwill was asignificant amount of the overall transaction, and ouranalysis is included in Appendix 2.The range of residual goodwill as a percentage of totalintangible value (‘IV’) was as follows:Residual GoodwillResidualgoodwill as %of IVNumber ofacquisitionsResidualgoodwill as %of IVResidualgoodwill ( )IV ( )Residualgoodwill as %of FVFV ( )90% to 100%296.0% 2,740 2,85570.4% 3,89480% to 90%886.6% 25,184 29,08564.7% 38,94970% to 80%775.2% 35,205 46.79851.3% 68,62060% to 70%664.9% 14,799 22,81256.5% 26,17950% to 60%853.1% 60,394 113,79259.3% 101,78540% to 50%446.3% 20,048 43,32033.2% 60,47230% to 40%238.4% 748 1,94725.7% 2,90620% to 30%125.1% 1,260 5,01858.2% 2,16310% to 20%311.6% 7,639 65,98221.9% 34,8580% to 10%16.0% 248 4,10819.9% 1,248Total4450.1% 168,264 335,71749.3% 341,076The proportion of goodwill to IV is generally very high,and implies two things; either the acquiree has not drilleddown far enough in the recognition of the intangibleassets acquired, or has, either deliberately or throughinadequate due diligence, overpaid for the acquisition.The accounting standard IFRS3 requires that the acquireeexplains the nature of the goodwill acquired. In thesample of 44 that we could analyse from MARKABLES’selection, 22 did not provide any explanation of whatconstituted the goodwill arising out of the acquisition. Ofthe remaining acquisitions goodwill was principallydefined as the synergies expected to arise out of thebusiness combination and other intangibles that do notqualify for separate recognition. With the large amount ofgoodwill being reported, some of the descriptions ofgoodwill appear to be inadequate. The descriptions ofgoodwill acquired are included in Appendix 3.Intangible Business, in its report entitled “An Analysis ofthe International Application of IFRS3, BusinessCombinations”, published in August 2008, stated that itssurvey found that the standards (IFRS3 and similar) werenot being fully adhered to, determined that too muchintangible value was being allocated to inadequatelyexplained goodwill and not enough to identifiableintangible assets, and summarised that there were manydisturbing examples of how the standards were beingignored. It provided the statistics in the table to the right .UKUSROW87212118Identified intangible assets1114573Goodwill19245105Total intangible value30390178Net tangible assets612648Total consideration36516226Tangible assets17%24%21%Identified intangible assets30%28%32%Residual goodwill53%48%47%Identified intangible assets37%37%41%Residual goodwill63%63%59%Number of business combinationsReported values (in billion)Percentage of total considerationPercentage of total intangible valueQuality of description of goodwillGood description of goodwill28%Limited description of goodwill15%No description of goodwill57%notrequired31%16%53%Understanding Brand Value Differences January 2016 11.

In its key findings Intangible Business stated that:was critical of the paucity of explanations of goodwill infinancial statements.“Goodwill is too HighIn common with our findings for UK and US companies,we believe that there is a widespread tendency tounderstate the value of identifiable intangible assetsthrough a failure to identify assets separately at all andundervaluing those that are identified. In addition, there islikely to be an element of goodwill that relates tooverpayment for acquisitions, although it may be sometime before it becomes apparent when this has happenedin specific cases. However, readers of the reports do nothave sufficient information to form a view on this.”This conclusion was supported by KPMG in itspublication “Intangible Assets and Goodwill in the contextof Business Combinations. An industry study” publishedin 2010, where it said:“The high portion of goodwill is also one of the key resultsthat is reflected by this study. This may be due todiscretionary decisions that allow to allocate purchaseprice rather towards goodwill than intangible assets, asthis affects the amortisation charge which will be spreadover the remaining useful economic life of the acquiredintangible assets and thus negatively impact earnings.This effect may be a concern for company managementhoping to report improved earnings within the enlargedcompany after a business combination. In terms ofunanticipated effects on earnings, the risk of goodwillimpairment is often smaller than that associated with theamortisation of intangible assets, especially during timesof strong economic growth. Across all industries, thepercentage allocation of a purchase price to intangibleassets has generally been less than that allocated togoodwill. This trend might well be driven by the lessstringent disclosure requirements associated withgoodwill recognition compared to other intangible assetsand as part of an attempt to avoid a significant futurenegative earnings impact resulting from the amortisationof intangible assets.”Ernst & Young, in its survey “A global survey of purchaseprice allocation practices”, published in February 200912. Understanding Brand Value Differences January 2016“Our survey shows that residual goodwill correlates to theimportance of intangible assets in a given transaction

2. Understanding Brand Value Differences anuary 2016 Understanding Brand Value Differences anuary 2016 3. Executive Summary A recent research study was undertaken by MARKABLES, comparing brand values published by the principal brand valuation firms with the values reported in audited financial statements when the brand had been acquired by way of