Trademark Value in Corporate Restructuring


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Econometric analysis of the shift in the value of a typical B2C trademark sold in/out of the corporate restructuring context.

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Trademark Value in Corporate Restructuring

  1. 1. Trademark Values in Corporate Restructuring Originally presented at the 2007 Western Economics Association International Conference Fernando Torres, MSc Chief Economist [email_address]
  2. 2. Abstract <ul><li>Reporting on progress made to date developing theoretical and empirical bases for trademark valuation in corporate restructuring and its application in several cases. </li></ul>
  3. 3. Agenda 1. I. P. and the Bankruptcy Context 2. Trademark Value Model 3. Econometrics of TM values in BK 4. Applications and Discussion
  4. 4. IP and the Bankruptcy Context <ul><li>Bankruptcy is a set of laws providing for the regulated transfer of debtors’ assets to creditors in order to settle claims </li></ul><ul><li>Assets and liabilities must be valued to arrive at the appropriate transfer ratio </li></ul><ul><li>An administrative process, not negotiated in a market </li></ul><ul><li>Increasingly, intellectual property (IP) represents a significant proportion of the value to be transferred </li></ul>
  5. 5. IP and the Bankruptcy Context <ul><li>Generally, IP [especially trademark values (V TM )] are not observable </li></ul><ul><ul><li>GAAP does not recognize internally generated IP value, only acquisitions (since 2001, FASB 141-142) </li></ul></ul><ul><li>When recognized in financial statements, rules of thumb are typically applied to estimate loss of value (10% or 20%) </li></ul><ul><li>We are building a database of V TM disclosed in relation to acquisitions in/out of bankruptcy </li></ul>
  6. 6. Trademark Value Model <ul><li>Literature uses indicators (registrations, etc.) as proxies looking to explain stock prices or marginal profitability as a function of intangibles </li></ul><ul><li>We seek to explain V TM as a function of the sales the TM supports, the context in which TM was acquired (liquidation or going concern), the scope of TM use, and other exogenous factors </li></ul><ul><li>V ™ = f ( S , t , GL , LIQ , other factors ) </li></ul>
  7. 7. Trademark Value Model <ul><li>In TM valuations reported, most often ‘Relief from Royalty’ method is applied </li></ul><ul><li>NPV (k) of growing (g) annuity cash flow of royalty (r) on sales (S): </li></ul><ul><li>A hypothesis is V TM may be =  S  </li></ul>
  8. 8. Trademark Value Model <ul><li>Allowing for the (  ) elasticity of V TM and Sales, the NPV solution is: </li></ul>
  9. 9. Econometrics of TM values in BK <ul><li>Relative orders of magnitude of the V TM /S ratio, for a 5% royalty rate in scenarios combining high and low risk (reflected in the cost of capital) and growth rates: </li></ul>V TM /S Slow Growth (g=2%) Fast Growth (g=5%) High Risk ( k =30%) 0.15 0.18 Low Risk ( k =12%) 0.48 0.69
  10. 10. Econometrics of TM values in BK <ul><li>Estimated log version of model: Ln (V™) = β 0 + β 1 Ln (S) + β 2 Year + β 3 Liq + β 4 Int’l + ε </li></ul>Table 1 General Model: OLS Estimates Dependent variable: Ln ( V™ ) Adjusted R 2 0.797712 F-statistic (4, 26) 30.5759 (p-value < .0001) Log-likelihood -45.2518 Akaike information criterion 100.504
  11. 11. Econometrics of TM values in BK <ul><li>Estimated reduced version of model ( β 1 =1 ): Ln (V™) - Ln (S) = β 0 + β 2 Year + β 3 Liq + β 4 Int’l + ε </li></ul>Table 2 Reduced Model: OLS Estimates Dependent variable: Ln ( V™/S ) Adjusted R 2 0.511644 F-statistic (3, 27) 11.4768 (p-value < 0.0001) Log-likelihood -45.2529 Akaike information criterion 98.5057
  12. 12. Applications and Discussion <ul><li>The liquidation trademark value is only 13.58% of the going concern value </li></ul><ul><li>The interquartile range for this ratio {exp( β 3 ) } is from 8.84% to 18.54% </li></ul><ul><li>International trademarks are more valuable per $ of sales </li></ul><ul><li>Applied in IBC, MM Chapter 11 reorganizations </li></ul>
  13. 13. Scattergram
  14. 14. Additional Application <ul><li>Investment fund client, IP asset backed securitization for $5M need 3x coverage </li></ul><ul><li>Conventional direct analysis: GC: $44.7 Liquidation: $6.72 (15%) </li></ul>
  15. 15. Thank You