"A rose by any other name would smell as sweet" quoted William Shakespeare in Romeo and Juliet; thereby implying that names do not really matter. This could not be farther from truth in the present times, when strategic acquisitions are made with a view to acquire a brand name.
Chatting over a cup of coffee yesterday, a friend brought up the topic of SBC Communication’s acquisition of AT&T in 2005, followed by changing its name to AT&T Inc. SBC CEO Edward Whitacre had mentioned that they had factored the great name of AT&T & its strong worldwide brand in the acquisition decision.
When a company is sold, it seeks to obtain a value over and beyond that of its tangible assets. This is referred to as `goodwill' and can be thought of as a "premium" for buying a business over and above the fair value of the net tangible assets acquired. Firms sometimes pay large premiums for acquiring firms with valuable brand names because they believe that these brand names can be used for expansion into new markets.
Conventionally the value of a brand has been regarded as part of goodwill, which arises only when a business is sold. As a consequence, the value of acquired brands is included in companies’ balance sheets but the value of internally generated brands remains unaccounted for. To do away with this inconsistency, in the recent years some major consumer brands have been capitalised, which means that a value has been put on the brand and included in the balance sheet as an asset of the company.
Like beauty lies in the eyes of the beholder, the value of brands lies in the perception of the people. Building these perceptions can take years but it can be destroyed overnight due to some marketing failure, resulting in the brand worth to fluctuate and erode quickly.
The "Brandz 2011" survey by Millward Brown ranked Apple as the most valued brand at $153bn, up 84 per cent on last year, and Google at $111bn, down two per cent. The McDonald’s brand accounts for more than 70 percent of shareholder value. The Coca-Cola brand alone accounts for 51 percent of the stock market value of the Coca-Cola Company.
Various approaches to measuring brand value have developed, but still the capitalisation of a company's brand value on the balance sheet remains contentious due to problems in a realistic assessment of brand value and the fact that the brand worth can fluctuate quickly.
Nice & simplified article, Somali.
ReplyDeleteAn intangible asset called Goodwill….ahhh….I am reminded of my school days.
For accounting purposes, goodwill is defined as the value of your business above and beyond the value of its tangible assets.
For practical purposes, goodwill is the positive reputation of your business. In other words, if your business is well known, trusted and respected within your industry, then it has goodwill.
There are 2 types of goodwill depending upon the type of business enterprise: institutional goodwill and professional practice goodwill. Goodwill is no longer amortized as per GAAP. Companies are now required to determine the fair value of the reporting units, using present value of future cash flow, and compare it to their carrying value (book value of assets plus goodwill minus liabilities). But when the business is threatened with insolvency, investors will deduct the goodwill from any calculation of residual equity because it will likely have no resale value.
The goodwill value can easily be manipulated & abused. The issue of goodwill has been debated in many countries throughout the world. Despite numerous efforts and the existence of accounting standards and exposure drafts issued by various professional bodies internationally, there is yet to be a universally accepted accounting treatment for goodwill. The opinion on this subject differs and changes frequently. The dichotomy of having to preserve prescribed recognition criteria on the one hand and the need to report useful information on the other has led to the many controversial issues debated on the subject of goodwill. After all, it’s a way to get tax rebate & make larger profits. As they say, the best way to rob a bank is to own it!!
Very nicely explained. Thanks for the effort. Just to add on a small bit- goodwill may be negative too if the cost of an acquisition is less than the fair value of the net assets acquired.
ReplyDeleteI am quite curious as to what would be considered as an optimum level of goodwill / valuation. In case of Macdonald - isnt 70% too high and risky from a valuation perspective?
ReplyDeleteFor a public traded company, subject to a constant process of market valuation, goodwill will be apparent by the difference in the market capitalization and the fair value of the company. Yet a goodwill of 70% could still be high. There is a certain perspective that the company could be projecting a high goodwill value to dodge problems e.g. in case of McDonalds it could be to counter concerns about junk food.
ReplyDeleteThe following articles will throw some insights:
http://www.businessweek.com/magazine/content/06_32/b3996410.htm
http://beginnersinvest.about.com/od/analyzingabalancesheet/a/goodwill-on-the-balance-sheet.htm
This is the typical problem with marketing companies. Goodwill valuation depends a lot on the markets perception of the brand. Apparently most of the value creation is in creating the brand image ie the perceived need of the product for the customer and is captured by the company. For companies like Coke, Adidas etc it plays over and over again.
ReplyDelete