CHAPTER 12
The Value of Intangibles
Itishumannaturetodrawadistinctionbetweentheassets
thatwecanseeandfeelandtheassetsthatwecannotandto
feel a littlemoresecure abouttheformer.Included in the
latter,though,areassetsasdiverseasgoodwill,brandname,
loyal employees, and technological prowess. A common
critique of valuation approaches in general and financial
analysts in particular is that we pay little attention to
intangible assets and consequently undervalue them.
In this chapter, we confront this criticism by looking at
intangibleassetsacrossthespectrum.Webeginbylookingat
intangibleassetsthatstandbythemselvesandgeneratecash
flows—commercially developed patents, copyrights,
trademarks, and licenses—and argue that conventional
discountedcashflow(DCF)modelsdoamorethanadequate
jobinvaluingthem.Wefollowupbylookingatintangible
assets such as brand name and corporate reputation that
generatecash flowscollectively forthebusinessthatowns
them, but are more difficult to isolate and value
independently.Nevertheless,wewillarguethatconventional
discounted cash flow valuation models can capture their
valuesand that adding a premium forthem afterward can
resultindoublecounting.Inthelastpartofthechapter,we
lookatthemostelusiveintangibleassets(i.e.,thosethathave
thepotentialtogeneratecashflowsinthefuturebutdonot
rightnow).Includedinthisgroupwillbeassetsasdiverseas
undeveloped patentsand operating flexibility, and theyare