Trademark Values in Corporate Restructuring

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An economic model of trademark values and the impact of bankruptcy liquidations

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Trademark Values 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 ftorres@ipmetrics.net
  2. 2. Abstract Reporting on progress made to date developing theoretical and empirical bases for trademark valuation in corporate restructuring and its application in several cases.
  3. 3. Agenda 1. I. P. and the Bankruptcy Context1. I. P. and the Bankruptcy Context 2. Trademark Value Model2. Trademark Value Model 3. Econometrics of TM values in BK3. Econometrics of TM values in BK 4. Applications and Discussion4. Applications and Discussion
  4. 4. IP and the Bankruptcy Context • Bankruptcy is a set of laws providing for the regulated transfer of debtors’ assets to creditors in order to settle claims • Assets and liabilities must be valued to arrive at the appropriate transfer ratio • An administrative process, not negotiated in a market • Increasingly, intellectual property (IP) represents a significant proportion of the value to be transferred
  5. 5. IP and the Bankruptcy Context • Generally, IP [especially trademark values (VTM )] are not observable  GAAP does not recognize internally generated IP value, only acquisitions (since 2001, FASB 141-142) • When recognized in financial statements, rules of thumb are typically applied to estimate loss of value (10% or 20%) • We are building a database of VTM disclosed in relation to acquisitions in/out of bankruptcy
  6. 6. Trademark Value Model • Literature uses indicators (registrations, etc.) as proxies looking to explain stock prices or marginal profitability as a function of intangibles • We seek to explain VTM 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 • V™ = f (S, t, GL, LIQ, other factors)
  7. 7. Trademark Value Model • In TM valuations reported, most often ‘Relief from Royalty’ method is applied • NPV (k) of growing (g) annuity cash flow of royalty (r) on sales (S): • A hypothesis is VTM may be = ρS α ∫ − = dterSV tkgTM )( 00
  8. 8. Trademark Value Model • Allowing for the (α) elasticity of VTM and Sales, the NPV solution is: 1)(00 − = −gk TM e SV α α ρ
  9. 9. Econometrics of TM values in BK • Relative orders of magnitude of the VTM /S ratio, for a 5% royalty rate in scenarios combining high and low risk (reflected in the cost of capital) and growth rates: VTM /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 • Estimated log version of model: Ln(V™) = β0 + β1 Ln(S) + β2 Year + β3 Liq + β4 Int’l+ ε Variable Coefficient Std. Error t-statistic p-value Constant 466.009 255.838 1.8215 0.08006 * Ln(S0) 1.00563 0.130739 7.6919 <0.0001 *** LIQ -1.99686 0.490205 -4.0735 0.00039 *** GL 1.10898 0.580508 1.9104 0.06718 * t (year) -0.233636 0.127063 -1.8387 0.07740 * Table 1 General Model: OLS Estimates Dependent variable: Ln(V™) Adjusted R2 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 • Estimated reduced version of model (β1 =1): Ln(V™) - Ln(S) = β0 + β2 Year + β3 Liq + β4 Int’l+ ε Variable Coefficient Std. Error t-statistic p-value Constant 471.398 219.006 2.1524 0.04046 ** LIQ -1.99523 0.479619 -4.1600 0.00029 *** GL 1.10641 0.566665 1.9525 0.06132 * t (year) -0.236271 0.1093 -2.1617 0.03967 ** Table 2 Reduced Model: OLS Estimates Dependent variable: Ln(V™/S) Adjusted R2 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 • The liquidation trademark value is only 13.58% of the going concern value • The interquartile range for this ratio {exp(β3 ) } is from 8.84% to 18.54% • International trademarks are more valuable per $ of sales • Applied in IBC, MM Chapter 11 reorganizations
  13. 13. Scattergram Going Concern and Liquidation Trademark Values $1 $10 $100 $1,000 $10,000 $100,000 $1,000,000 $10,000,000 $100,000,000 $1,000,000,000 $10,000,000,000 $100,000,000,000 Kraftpurchase ofN abisco G eneralM ills purchase ofPillsbury C oors purchase (m erger)ofM olson Kellogg purchase ofKeebler Sara Lee purchase ofEarthgrains C hiquita purchase ofFresh Express Sm uckers purchase ofIntlM ultifoods XO C om m .purchase ofAllegiance Pinnacle Foods purchase ofVlasic H orm elpurchase ofC laugherty C am pbellpurchase ofEurope C ulinary Brands Lance purchase ofTom 's Foods Terabeam purchase ofProxim Sara Lee purchase ofButter-Krust JJ Snack Foods purchase ofC ountry H om e Bakers M cC orm ick purchase ofC .M .van SillevoldtB.V. Flow ers purchase ofD erst R alcorp purchase ofM edallion Arisoftpurchase ofC om dial Flow ers purchase ofBishop Baking H orm elpurchase ofArriba IC EE purchase ofSlush Puppies Flow ers purchase ofIdealBaking TrademarkValue GC LQ GC LQ
  14. 14. Additional Application • Investment fund client, IP asset backed securitization for $5M need 3x coverage • Conventional direct analysis: GC: $44.7 Liquidation: $6.72 (15%) Trademark Value Year Scope Sales (M) % GC % of sales LIQ % of sales Domestic 377.0$ 78% 23.22$ 6.2% 3.15$ 0.8% International 106.0$ 22% 19.65$ 18.5% 2.67$ 2.5% Total 483.0$ 100% TOTAL 42.87$ 8.9% 5.82$ 1.2% Proportion 100% 13.58% Liquidation valuation range: Upper 7.95$ Central 5.82$ Lower 3.79$ 2007
  15. 15. Thank You For Questions and Related Materials, please contact the author at: Email ftorres@ipmetrics.net Twitter @FTorresMSc

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