Last week, IAM highlighted details from Apple’s 10-K form for the end of its fiscal year. The filing with the Securities Exchange Commission indicated that the company spent more than $5 billion on intangible assets over the preceding 12 months, up from around $3.5 billion at the end of September 2011.
Facebook’s recent 10-Q filing for the three months ending 30th September tells an even more astonishing story. Though it has spent nothing like the dollar sums that Apple has, the net value of goodwill and other intangible assets on the social networking company’s balance sheet leapt from $162 million as of the end of December 2011 to $1.423 billion at the end of September this year. That’s a whopping 778.4% increase in just nine months.
Of that $1.423 billion, $633 million was expenditure on IP rights – with the vast majority accounted for by the 615 or so patents that the company purchased from Microsoft (and which, prior to that, were owned by AOL) for $550 million.
Facebook’s other major acquisition of 2012 has been Instagram. The mobile photography app developer may not have a single patent to its name, but its value is almost completely made up of intangible assets according to Facebook’s filing with the SEC. Instagram’s amortisable intangibles, including ‘acquired technology’, ‘tradename’ and ‘other’, have an estimated fair value of $86 million with goodwill valued at $435 million.
The rest of the intangibles on Facebook’s SEC filing consist of a number of lower-value acquisitions, presumably including the buying of patents from IBM as revealed in March.
The challenge that Facebook now faces is translating all of that intangible value into returns for its shareholders. The company has travelled a somewhat rocky road since its much-hyped IPO back in May, drawing criticisms that its shares were overvalued and doubts about the efficacy of its advertising business. Not uncoincidentally, its market cap has steadily declined since its stock market debut. Shareholders will be especially keen to get assurances that the big ticket buys of Instagram and patents from Microsoft are worthwhile.
Patents, trademarks, goodwill in the marketplace and the knowhow to use certain technologies can only create value if they are managed diligently, leveraged effectively and are backed up by a solid IP strategy that complements the business’s overall goals and objectives. Facebook built its early success largely without patents, and its primary motivation in acquiring IP may be to protect itself against infringement suits like that brought by Yahoo! earlier this year (which subsequently settled). But there are plenty of ways in which Facebook could use its IP and other intangible assets to mitigate such attacks and create extra value for its business. Shareholders should be demanding that the Mark Zuckerberg and the rest of the company's senior management is clear about the next part of its plan. Whether they will or not, of course, is another matter entirely.
IP management, Brands, IP litigation, IA management, Patents, IP business, IP finance, IP valuation
This post demonstrates the confusion surrounding the accounting treatment of intangible assets. This is probably one of the financial issues least understood by senior management and market analysts. Given the space limitations of a blog comment, I would just like to point out my top 3 comments regarding the analysis above:
1. Facebook's own internally-developed intangible assets are not even on the books of FB, based on current US GAAP accounting rules - what you see on the balance sheet are only acquired intangibles, ie, intangibles that FB paid for that were created by others. So FB's intangible book value increasing over 700%, as the reporter states, is not really the right interpretation. A more accurate header would be something like: "FB spent 7 times more on buying intangible assets this year than it had cumulatively spent through the beginning of the year". That's not really an attention grabbing title, but it's a more accurate way to describe that increase in the balance sheet value of FB's intangibles.
2. Facebook is almost entirely ALL intangible assets, all tens of of billions of dollars of its market value. The fact that it did not have patents, does not mean that it built itself without intangible assets, and that those assets suddenly showed up with the new acquisitions. Like any other tech company, FB is mostly composed of intangible assets. Some are marketing intangibles (trademark, brand, users), some are technology intangibles (IP-protected or not). The real value of that is not publicly disclosed in the financial statements, but that is the actual value of what the FB management needs to protect and grow, not the $435 million coming from Instagram.. That's only a small part of it, however, that's the part that you see due to accounting transparency of acquisitions.
3. If Facebook fails to manage a return on the Instagram acquisition that is at least on-par with the expectations at the time of acquisition, there's an immediate accounting penalty through the writeoff of goodwill, which can happen as early as the year following the acquisition. This particular IP will be carefully monitored by the company's auditors through the annual impairment analysis. For anyone following the LivingSocial story lately, that company just wrote off $500 million in goodwill from failed acquisitions, dragging Amazon's earnings (investor in LS) along with it...
I have much to say about the Apple analysis too, and will be happy send my comments offline to anyone interested in reading them.Efrat Kasznik, Foresight Valuation Group LLC on 16 Nov 2012 @ 00:43