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UK Companies needlessly at risk of takeover and exploitation

By CreditMan Tuesday, April 14, 2015

The world’s most extensive research of intangible assets was revealed this morning at an event featuring Business Secretary, Vince Cable and Newton Investment Management CEO, Helena Morrissey. The Value of UK plc event, hosted by CIMA and leading valuation consultancy Brand Finance, saw the launch of Brand Finance’s Global Intangible Finance Tracker (GIFT™) report with CIMA.

The comprehensive annual study of 58,000 companies across 120 stock markets, highlights how a collective blind spot for business decision makers and policy makers has been allowed to develop. The report reveals that since 2012 undisclosed intangible value has grown 50% to $27 trillion. It now accounts for more than a third of the average firm’s enterprise value, rising as high as 70% in sectors such as pharmaceuticals and advertising. It also shows that failing to account for intangibles favors short-term economic gains over long-term value and undermines service-sector dominated economies such as the UK. According to the report, failure to effectively account for intangibles risks the undervaluation and acquisition of strong brands such as Cadbury’s or Astra Zeneca threatening jobs, government income and the success of the government’s ‘long-term economic plan’.

The UK is particularly good at creating strong brands and is a centre for industries that are heavily reliant on intangible assets such as pharmaceuticals, luxury, aerospace and engineering, making Britain the fourth most ‘intangible economy’ behind only the US, Denmark and Belgium. Brand Finance’s research shows that intangible assets account for two thirds (64%) of the true, total value of UK companies, a growth of 17% since 2012.

Over $1.58 trillion (£1 trillion) of those intangible assets are ‘undisclosed’ on balance sheets and are all too easily overlooked by those who should be protecting them, whether at the corporate or government level. There are many keen to exploit this lack of vigilance. There is currently high demand for UK businesses whether from growing Asian, Russian or Middle Eastern companies seeking to acquire established brands and from companies in developed markets looking to minimize tax. Markets are erratic and a dip in share price leaves companies open to opportunistic bids. Ownership, profits and expertise may flow out of the UK as a result or worse, the acquisition may be by asset strippers with no concern for the long-term interests of the business, its employees or the country. Regular valuation of intangibles ensures that the true value of a company is known, affording protection against underpriced bids. Pfizer’s controversial and ultimately aborted attempt to acquire UK success story Astra Zeneca, might have been rebuffed much sooner had all intangibles been accounted for.

David Haigh, CEO of Brand Finance comments: “This report challenges those leading the debate on our national economic policy. This is an issue which needs a speedy resolution to avoid further national treasures like Cadburys being left to the mercy of foreign buyers and taken over for less than they are worth.”

“The issue of inaccurate intangible asset value reporting rose to prominence in the M&A boom of the 1980s. After 30 years of arcane debate among accounting standard setters, and despite huge strides being made in valuation techniques and standards, we enter the next great M&A boom, of which the huge BG, Shell deal is just the latest example, with financial accounts which still fail to explain intangible asset values to stakeholders.”

Charles Tilley, CEO of CIMA adds: “This report raises a very important question around the strategic imperative for organisations to tell the whole story. While undervaluing intangible assets and as a direct result their companies appears to be a particular issue for emerging markets, the UK must also continue to improve upon its intangible asset valuation and reporting. It is time for the implicit acknowledgement of intangible value to be made explicit and to address the questions raised in CIMA’s previous work with the IIRC and Tomorrow’s Company on the importance of reporting in an integrated way. Value is worth that can be exchanged, this depends on a fair exchange of information between the two parties leading to fair valuation for buyers, sellers, investors and wider society. The new global management accounting principles provide a framework for communicating an organisation’s true value and consequently they help UK businesses get a fair deal at the negotiating table.”

The report finds that undisclosed intangible value is higher for the world’s most valuable companies, with the firms generating the most enterprise value, doing so through the management and creation of intangible value, highlighting the need for business decision makers to take note too.

Bryn Anderson, COO of Brand Finance comments: “With almost half of the UK corporate enterprise value not being recognised on the balance sheet it is about time management took notice. This equates to a staggering $1.58 trillion or £1 trillion worth of internally generated brands and other IP that obviously needs to be understood, managed, nurtured and leveraged by all stakeholders. It makes strategic, operational and common sense that assets of this importance be managed, and valued in order to drive economic and shareholder value into the future. After all, what gets measured gets done!"

Despite moves in 2001 by the then Department of Trade and Industry that identified seven sources of intangible value, until late last year no effective method of accounting for intangible economic value existed. In 2014, CIMA and the America Institute of Certified Public Accountants (AICPA) published a set of global management accounting principles to address the issue and to safely move beyond the Historical Cost Convention (HCC). The HCC, created at a time when economies were dominated by physical assets, prevents creative accounting and the distortion of reported assets, it fails however to recognise the market value of the majority of intangible assets.

Noel Tagoe, Executive Director of CIMA concludes: “Taking well informed decisions requires fit for purpose management information. This is as true for a country as it is for a company. Best practice in management accounting makes the intangible tangible, giving decision makers the right information when taking crucial judgment calls on the future prosperity of the UK.”

Source - press release