It is Friday the 9th of August 2019. My name is Jeremy Martin and welcome to episode 52 of the Stock Market Movers podcast. Just a quick reminder that nothing that I say today should be considered Financial advice. And if you looking for financial advice, I recommend that you speak to an authorised financial advisor. So just before we get into the main content for the episode, I'm just going to do some off-the-cuff stuff about what's happened in the markets and the last week or so and what's happened in the markets. You know, you've hit your head Donald Trump tweeting. Obviously, there'sI think unusual but more has been some reaction to the interest rate decreases in the United States and everyone else around the world seems to be jumping on that bandwagon and following up with their own interest rate decreases as well. As you know, and that in the past, I've said that I find interest rates virtually impossible to predict and it seems the rest of the market is feels the same way because I guess if you think about the narrative and interest rates throughout the year, I remember back in December and January the narrative was the interest rates are definitely increasing then it was it is interest rate so you can a decrease and then they got they got cut back a little bit and and then it was all now maybe that was a one and done and we're going to get back to increase in so figuring out what happens there is This is pretty difficult. Obviously typically interest rate decreases are good for stocks. I think what you what you saw in the markets was the pricing in of that hit Nina was a typical buy the rumor sell than used type situation in after it happened. The stocks pulled back a bit. It is an interesting one the interest rate thing. I mean, we're getting pretty low. I guess the concern for me regarding the interest rates is that you know, the economy has Down there's no doubt about that, but it's not like we're in a recession or anything like that. So I guess my concern is if we do get to a situation where something did something major happens to the economy. Then the Reserve Bank might not have any strength left in its bow in terms of levers that can pull because we're already at one percent or whatever we are. So I guess that's my concern. I suppose the second thing. Is that what we did seem to be reactionary to what happened in the United States and in the other countries that followed suit So I guess if we're going to be reactionary about things, I guess the Warriors what would happen if the United States started? Significantly increase the interest rates and then we would we go for the old we would we would we be forced to be reactionary as well. So those are some some concerns that as I said, I don't think too much about interest rates. So for today's episode, we're doing an interview really interesting interview. I hope you enjoy it as with the CEO of a company called every Edge Global. They are a company that's based in New Zealand. I interview the chairman and CEO Paul Adams what they specialize And is the is basically anything related to business and intangible assets. So they specialize in value intangible assets. They specialize in just just anything to do with intangible assets. So the conversation we have is purely focused on intangible assets. So and we Define intangible assets we have examples of intangible are seriously who Paul talks about how to Value intangible assets the different ways to look at the valuation of intangible asset in tangible assets as a very very interesting conversation. I hope you enjoy and we'll pick up will pick up from where we kicked off the other day. Right. So I'm sitting here with poetic M's the CEO of every Edge, which is a company in Auckland that specializes in the valuation of intangible assets. So I'm just going to start Paul by reading a quote from your website and it goes in 1975 and tangible assets accounted for 17% of company value today at 87% So I guess if you can start off by explaining to people what an intangible asset is and then we can go from there. Absolutely. So intangible assets. I like put in a very simple way intangible assets are all assets and a business you can't drop on your foot. So those includes the things that people typically think of such as patents and trademarks, but they also extend into things like data content Brands Trade Secrets confidential information know how regulatory approvals, you know plan variety Wright's design rights all of those kind of things and what's really interesting. Ting about intangible assets is that they are now most of the value of most companies. So as is the quote say is there in 2015 there were 87 percent of the value of the entire S&P 500 was an intangible assets and distinctly enough of you take the S&P 500 value and you strip out real estate the real estate assets then that figure Rises of intangible asset value Rose to about 96 percent, right? If you look at the top five companies by market cap globally. It's about 98.5 98.6% So you're talking companies like apple Facebook Google. Exactly. Yeah, basically all of your value is an intangible assets. If you look at say your average startup, they're basically all intangible, right? And so you've got these Super Hyper valuable intangible assets that are sitting there. Now. What's also really interesting is that this wasn't always the case if you went back to 1975, for example, 40 years then intangible assets accounted for Billy 17% of company value so over that 40-year period we've had literally a 70% shift in the market from a concentration on tangible assets things like cars trucks planes ships plant and Equipment real estate to 40 years later virtually all value is now in these intangible assets. So there might be a bit hard for some people to get their head around because most people were dealing with the tangible SS day today. What would you say like say like Qantas for example, which would have all the aircraft and it pains and everything like that. So there's obviously still a big tangible asset component in the air. So how does that play out the relationship between tangible and intangible assets? Yeah. So you Qantas is actually really interesting example because or in New Zealand from the Qantas. The reason why Qantas is an interesting example is because in 2015, I think it was Quan has had the value of its data in its Loyalty program valued at four and a half billion dollars, right and Qantas is market cap is about 19 billion dollars exactly a half the value of the airline. Yes, just in the data and if you look at their margins that they earn of the Loyalty program, they make four times the margin on the lofty program data monetization, then they do flying people around the world. So they are actually a lot more about data and all those other intangible assets than they are actually around moving people around the world run. And that's the case what's really interesting about intangibles is that's the case for virtually all companies and even companies that look really big and heavy and tangible actually turn out to be about their intangible assets. So the example I always give is a steel mill steel mills the most big heavy tangible thing. You can imagine, you know, you drop things in there hurts and lands on your foot. Lots of people in blue overall Sparks Etc and very tangible now imagine I gave you a steel mill. So here go have a steal. Well, it's free, but the catch is you don't get to keep any of the intangible assets so you don't get to keep the for example the industrial know how right how to run them all you don't get to keep the customer data. You don't get to keep the regulatory approvals that I will you to run them or you don't get the software that runs at either processes. You don't get the system's the processes the confidential information you get the brand customer relationships customer data supplier relationship Supply data all of those things. Mmm, very quickly becomes apparent. You can't run the mill. All right, and what that means in isn't is that the real value in the mill is the ability to run out to safely and efficiently and all of that is based in the intangible assets which means what generates the Mills value what generates its margins its Revenue all of those things are the intangibles and the assets themselves regardless of what any accountant tells you are actually liabilities. Yeah tangible assets the mill itself the physical buildings and everything else. Liabilities the real value in the mill are the intangible assets, but what how would it work in the situation was if you didn't have the mill itself, you wouldn't have the tent intangible assets, right? Well, yes, there are certain degree or yes, and no because those intangible assets are actually far more flexible and movable and transferable than the mill itself. I can't pick them all up and transfer it. I can pick up many of those intangible assets and move them. Right and this is one of the this is one of the things the things don't exist. Just in isolation but intangible assets are typically far easier to move than tangible ones and that by the way, and it was this is a much bigger conversation off of the side is one of the reasons why governments are increasingly facing big problems with their tax base because dirty little secrets 60% of all international trade is actually in intra-company transfer pricing Arrangements, right? So all of the trade we see happening around the world, you know, whatever it is. Cites a hundred trillion dollars sixty trillion of that is actually an intercompany transfer pricing Arrangements underpinned by intangible assets and by that so just I might not understand you correctly by that. Do you mean Facebook selling to Facebook in New Zealand or exactly right precisely and what that is all ultimately about is about essentially Forum shopping for the lowest tax tax rate, right and that in there only reason that's possible is because of this tremendous shift and frail you from Tangibles turned down jables, right because 40 years ago. When all the value was in the tangible assets. You couldn't pick up the factory and move it around. Right? Whereas now with the rise of the Google's the Facebook's apples of the world. They can move their brand they can move their know how their Trade Secrets confidential information data, wherever they want in the world and park it there. And that means that is a tremendous problem for for tax authorities for start but it has big nor con applications right throughout the economy, but the key point is you know you Money the values ended up in the intangible asset and when you say the government's might have a problem does does that do you mean in the sense? You hear in the news about say Facebook because there's an example might make ex-military many millions of dollars in revenue and New Zealand, but pay zero taxes example. Yeah. Absolutely. Yeah, no question. And this was going to be one of the reasons why you know, it's it's, you know, we don't need to worry about it now, but the cgt was always going to have a problem as well because cgt so much the value in these companies shifted into Angels will what are the intangibles worth? Fortunately Winston killed that for us. So the India get to the situation where you might see government's gift with diversion about here that you might see government's Tax and Revenue as opposed to text and profitability or how will that work? Well because if a I guess Facebook and that situation is just taking the money from New Zealand and out of New Zealand as an example. Yeah, and it actually I mean there are some very big implications and the see this is one of the there's some very big implications of the shift because well the All this value has moved what hasn't caught up. The accounting standards are and what the accounting standards essentially tell you about. The treatment of intangibles is in without boring everybody on this podcast. I know this is a accounting standard one who they can tell you is account extends essentially tell you there are three ways to treat intangibles either number one. They're completely off-balance free as in these literally don't even make a relish a turtle. Yeah none that that would be something like Coca-Cola carrying no value for its brand on the video. See ya. Exactly something along those lines number two. They go on under Goodwill and good will obviously is the price between what the market says the business is worth and essentially it's fixed assets and cash the difference being the Goodwill essential in the business and they don't appear on the balance sheet as Goodwill if it's a takeover exactly, right? And so what you end up with is a scenario where you've got this big sort of rubric there's term Goodwill and you just sweep a whole lot of value in there. And because you don't know what's inside it, right and then the third place Very occasionally find intangible assets is that they go on as cost. Now, the problem with cost is that unlike tangible assets cost of the cost of the intangible asset the the cost of and unlike with with a tangible asset fixed a physical asset. There's typically a correlation between the the inputs and the value of the of the product itself. So the mug that I'm holding here, for example, you know, there's a relationship between the the materials that went into this. In the labor Etc as value at this mug is never going to be worth a billion dollars right the but with intangibles that is very little correlation between cost and value because you can have actually very little and puts into something that ends up being with a huge sum of money. So the classic case I always give is Instagram. So Instagram on the day, it was purchased by Facebook had 12 staff. Basically. No Revenue. Hmm it And essentially no fixed assets couple of laptops and things Instagram. I've hundred million dollars or something was hundred billion dollar bill in Dallas, right? Yeah, but then here's the real kicker. It was only four and a half thousand lines of code and Instagram writing software code to give you an Indian give you a point of comparison the average new car today contains a hundred and ten million lines of code. So there's the the inputs to Instagram or extraordinarily small but its value was a billion dollars, right? So what this tells you if we step back a second. What's the treatment of July sits. Well, they're either off-balance sheet. There are on under good well in which case they tend to get lost or they're on a cost and cost is massively inaccurate as a measure of intangible a survey. So what that essentially all adds up to is it wasn't a problem when intangibles are 17 percent a company value because you can kind of get away with it. But at 87 90% of all of the value as misrepresented on the balance sheet that creates was hugely distortionary effects and how we analyze Lies in understand company value today and that is that has a whole lot of knock on applications because Company accounts Drive company reporting, right? So the accounts and if rescind Gap dry the you know, accounting standards of enforcement Gap Drive Company accounts Company accounts Drive company reporting company reporting in turn drives three key things. It drives management Behavior their drives regulation and it drives Capital flows in all of those things are being distorted by the fact that the intangibles were sure where all the real value is are not accurately reflect in the company accounts. And in fact, there's a there's a very interesting professor at New York's turn University. He's a professor of Finance and Accounting is name is Professor Brooke live and he's written this and his entire area practices are an intangible assets and he talks about the fact that And modern accounting what we call Modern accounting is actually 19th century Industrial Age accounting. It was designed for a time when you made physical objects, and and you shipped physical things around the world and your inventory in stock and a whole bunch of other things that you worried about and he said that that is simply not relevant for many companies today and he wrote a very interesting article in the Harvard Business Review, which you talked about the fact that if you look at most modern digital companies, you know in this part of the world the zero. The alaskans ETC, you know offshore Google Facebook Microsoft Intel Amazon excision their accounts tell you virtually nothing about their performance about the accounts. You mean the balance sheet the valency founded the first standard of first and GAP and he wrote another interesting book for those who are really her Geeks like me and this regard are interested in this kind of accounting and economic theory called the end of accounting and in which he basically outlines that the conventional counting roles are massively distorting how we You companies and that in turn distorts as I said management labor regulation and capital flows. So for me right has a very long way of answering the question that's good. If I'm looking at a company and I'm looking at its financial statements. I don't take any consideration at all into the balance sheet. I'll look at the balance sheet to see if they're going to be solvent and then next year pretty much but in terms of valuing the company, I'll look primarily at what the company is producing or what I think they can produce. Yeah and How if any has the valuation of intangible assets changed? I'm not off-balance-sheet evaluation as far as a different to tangible assets or how do you how do you think about that? So this 2 is really interesting because sometimes people say that's okay. Well, I can understand I get it that it's a problem on the balance sheet, but we only really look towards the p&l. So maybe the p&l save us well, and I'd love to claim this as my example, but it's actually from Barack live. He says look imagine two companies one is company a and Company B. Both companies start out with ten million dollars in cash and they both said they both have an objective of being able to manufacture product X and come be a makes a decision that it's going to take its ten million dollars in spend it on RD and the are the out the outcome of R&D are intangible assets going to generate intangible assets and those intangible assets are going to enable it to manufacture products company be takes a different approach. It says I'm going to take my team. Dollars and I'm going to go by intangible assets or I might buy a company that owns intangible assets that and will enable me to make manufacture product X right because in both cases, they're essentially creating something new that enables them to create product or manufacture products. They both end in the same class. Right? Both of them have taken 10 million dollars it's gone and they now can both manufacture product X, but if you think about it from a p&l perspective company Ace perspective it did the ird that will typically show up as an expense and the pl yeah and that depresses earnings and Company B's case that's going to show up as an intangible asset in this case will actually show up or likely as either good. Well those and make sure intangible asset on the balance sheet and that and that looks like the company is more valuable, right? So in between those two companies, they're identical the boat's been same amount of money the both achieve the same effect, but one looks like it's got depressed earnings one looks as like it as a healthier balance sheet now that right. Large across the economy is actually a massive problem because clearly straight away. You can see what happens. Well, it rewards companies go out and buy other companies for example, and it punishes companies that for example why I want to do R&D. Yeah. And so that's why if you talk to very large companies, for example United States, they go out and buying sprees because it makes them look better. Yeah, for example, there's also if you're saying it creates bed and centers and bad behaviors exactly and that was my point about, you know accounts Drive reporting reporting. Ives management Behavior Capital flows and Regulatory behavior in addition to which you you've then start to draw on tax as well because from one of the reasons why you know companies for example might choose to expend stuff as because it depresses earnings are reduced intensity. Yeah, right. So so there are the this is really problematic. Now the now before I get any irate accountants writing in to me about what your name is the Shoo. It's a really fixed issue for the accounting profession because the problem which they very quickly point out is how do you value this is going to ask them. Right? And and that is that is very very challenging and I can imagine all the Crooked jury that would follow yes from people trying to evaluate themselves. And yeah and for a while in fact there was a period in until the 1990s where for example, you're allowed to do some fairly odd things like, you know, for example put in 10 July sits on the balance sheet and my mastheads people put bought newspapers put mastheads on the balance sheet revalued them up and did all sorts of other quackery the and I can see why the the accountants have taken the position that have the problem that they've got is that it you could again you could get away with that you could get away with essentially saying we're not going to address the issue of intangible assets when it was such a small portion of the economy and we were still flying things around and it was still really about Little stuff but today when it's so dominant and so much economic value is dependent upon it we can no longer ignore the question of what is the value of intangible assets and my answer to the accountants when they say this or we don't know how to Value it is to say if you went back a hundred fifty years. We didn't know how to value a lot of things. Yeah, right. We didn't know any of the multiples and ratios we take for her for granted today PE ratios earnings per share a whole lot of other ratios that today. We just know we should look to could you Get the value in a lot of cases people do there any way through the market cap? Thanks. So you might have the tangible assets of a million dollars, but the market cap might be 10 million dollars and that's the valuation of the that's the really blunt method right and you can get to it that way but the issue is more about where you don't have for example an easily accessible market cap, or you don't have an easily accessible Enterprise value for the private key that kind of thing. You've got more challenges. You've also got challenges if you're dealing with a specific asset like what My data worth. Yeah, so but I guess the point that I make in my robot. Oh, so I get why the accountants are look at this with trepidation. But at the same time I challenge my challenge to them is the following. We solved this problem for many other things. We thought were difficult to value and this is no different. I mean if we went back to 1500 with the essentially the invention of the joint stock company people would have told me you can't Value stock in a company. Yeah, that's impossible. Well now we do it every day. Day, right? Yeah, so and we do it with surprising accuracy without an issue and the same thing is going to happen with intangibles except it's going to happen. So you see it as a change that we forced that would happen. It's like it's like two tectonic plates grinding up against one another the you've on the one hand you have the accounting standards and their remaining fixed in place essentially at the moment and on the other you have the economy, which is rapidly grinding away from it that friction between the two can only last too long before it's gone. Slot and and you can't it can't go on forever something that can't go on forever warned. Yeah. Okay. So when I look around it a lot of companies and some of them might have large intangible asset valuations and yeah, I guess where I'm leading to is I guess just like a tangible asset and intangible asset can be overvalued as well kind of. Oh no question. And that's one of the big issues is that we've gotten really good at valuing tangible assets you and I Sitting at the table, you know, if we took a both had to guess at what this tables value was. We're not going to get it wrong by an order of magnitude. Right? And if we picked out a random piece of real estate around here or car would also both be more or less. Correct? So we got really good at valuing tangible assets what we're not great at valuing right now is intangible assets. And so you end up with a much much bigger the separation between bid and offer and that is a real big problem. If you go back to the Instagram example before I remember people saying that Put core insane. Yes people on Instagram for a billion dollars and I think it's one of the it's in the top few beasts Acquisitions in history. Yeah, absolutely. So the research shows their Facebook made at least seven times as money on Instagram. And in fact if Instagram was separated, it's at least yeah. Well if instant they theorize that if Instagram was separate out as its own business unit, it would be worth about a hundred billion. Yeah, so so there's no questions occur because sometimes people say when I get the example in streams, I was that confirms an idiot. He overpaid Zuckerberg. Did not by me. He's many things. He looks like data of Star Trek, but he didn't overpay for Instagram. If anything. He got a fantastic deal. Yeah, and well, you know, I remind you to all staff no assets are no fixed assets no revenue and four and a half thousand lines of code AS with a billion dollars same day the example. I always give it was with the same as main Freight which had you know, 38 years. I think it was two billion or three billion dollars in Are you know a lot of staff and it calms a you know, a lot of stock company like Mainframe is never going to have the scalability that exactly Graham precise, right? Sorry to interrupt Paul speaking there what he was saying was was really really interesting. It was about here in the recording where we experienced a sudden and unexpected technical difficulty. And what was originally going to do was originally going to edit the went out and make it seamless like I always do and so you wouldn't think there was any issues but I listen back to it what Paul was saying on both sides of the of the technical difficulty was quite interesting. So what I decided to leave it in the apologies for the for the hiccup and what we'll do is we'll pick up the conversation again with Paul talking about Instagram and Main Freight. So just off helium pool. You're comparing Instagram for example to Mainframe. Yeah, so Mine's right here on Instagram on the diet salts worth a billion dollars and it's got 12 staff. Basically zero fixed assets. No revenue and had four and a half thousand lines of code main Freight on the same day is worth approximately a billion dollars. It has I think for memory two billion dollars in assets a billion dollars in Revenue 6800 staff have been around for 38 years. Yeah, and any of the tool with the same and you either have to argue that Again that Zuckerberg night summative horrific mistake and Instagram was not worth that which the research clearly shows is not the case. I'll bring respectively as different other guests exactly or alternatively except that there's something else going on that doesn't fully explain is not fully explained by the Company accounts and it is that is actually what is really happening is that there is tremendous value and these intangible assets but they're off balance sheet. The frequently not captured correctly inside the p&l and therefore their Victor's there. They're like the dark matter. The universe. Hmm, right? That's really what's happening. Most of the most of the mass. We see we can't see but it's there and it affects everything. So main fact by the way is a wonderful company, but that's I guess that's the issue that some people will have is say I'm just theorizing here. If you are looking at Instagram at the time with 1 billion dollar valuation, they would have been very few people in the world. That would have been prepared to pay it someone like Zuckerberg and Facebook for example could see the value. Yeah, but your everyday person might have and probably myself as well at the time would have a better shot at Value in Maine Freight. Yes, for example. Yeah, absolutely. And that's the thing. That's one of the things about intangible assets that people really struggled to wrap their head around is that they can be worth different things to different people. Yeah, and that is very different again that effect. Yes, right. So a fixed asset has is they most of the fix assets operate within more liquid markets and therefore you get reasonably efficient price setting because most people would agree that main thread at the time was with the billion exactly, right? Is intangible I say it's have this unique property right that they're infinitely scalable the knock on consequence of something being infinitely scalable is that it will typically be worth the most to somebody who's capable of scaling it infinitely tell ya so and what that means therefore is that it's going to be worth different things to different people because those who are capable of scaling it will pay more than those who are not capable of selling its own the day Instagram was solved. It was probably worth nothing to you or I are there as well. We couldn't escape in his Gallery other than our ability to resell it to Zuckerberg. Yeah, or somebody like Zuckerberg, right? Probably the next biggest Contender was Google. So there's probably five or six biosphere in the whole world correct to those five or six people who was worth a lot of money. Yeah, right. Hmm. And that's the key point that people that and again it cost basis accounting which basically will accounting really ultimately boils down a cost-based simply does not capture it because it can't deal with the world and what you can take an asset and one day it's with Three months later. It's worth a billion. Yeah, but that's what's going on because there's no way you can take mine Freight and there's no there's no strategy or action plan in the world. There's no Capital plan. There's nothing that takes main Freight from one one day. It's worth a billion and three months later. It's worth a thousand times that amount. Yeah, it's not possible that you would agree that name Frank would be worth a billion to more people. Yes. So main freight train freight is not picking on them for anyway, I absolutely main point is Maura. Accessible to yet more people because it's basically it's got a financial instrument its stock that is traded in a liquid market and what you got efficient price setting mechanisms. Yeah, many intangible assets. Don't fit that criteria yet. Yeah, and that's a key Point as well as that that is going to change. Yeah. Now I saw a stat on Netflix the other day a company with a lot of intangible assets as you know, it's said something that the world's data is now worth more than the world's oil. Yep, as an example. So I'll be interested to hear and I'm putting you on the spot a bit if you had any interesting stat, so any interesting stories or anything, you could say just from your I guess your day-to-day for you. And I absolutely so I Gotta Give a presentation on this exact topic achieve Chief Information officers conference recently and a lot of people have said this what's interesting actually about that quote is that it was first stated back and round. I think it's 2006. How am I to be as early as 2003? Yeah, right, so It's a long time for these things to actually permeate their way into the mass Consciousness data is like oil and a couple of these Arguments for and against right one of the arguments against data being like oil is or any other valuable commodity is that its suppliers Etc essentially unlimited and exhaustible and how can you have a valuable commodity with a suppliers essentially unlimited or inexhaustible right now? There's also the but on the other hand. And data is like all in a couple of key guards number one data only has potential value. Like if you have a piece of land with oil on it, it only has potential value. It doesn't mean just because it's there like the Canadian tar Sands until you develop technology to extract it. Well, there's the world actually that useful or not. Number two. There is a cost of extraction right and there's a cost of extraction of data and monetization data data does not monetize itself. Yeah. It needs to be money needs to be Invested into it in order to get extract value out the third things and I just gave you a whole lot of data. Yeah, it does not make sure you know, exactly but if I gave you 10 barrels of oil, maybe you could go someone's it's just like if you gave me a whole lot of land. Yeah, right. I mean I either have to find somebody else to sell it to or I have to come work at myself and these are cost of working at either in labor or in capital, right? The third issue with Dieter is that you there is a risk associated with it as well and the sense of You can just like with oil you can have you know, Deepwater Horizon the whole thing can blow up. If you're not careful about how you go through your data monetization activities. You can easily blow things up and you can end up with a really severe blow back and consequences on you. I think that's becoming more prevalent these days as people start to become aware of I use Facebook as put it in the news Heavenly about privacy and that's exactly right and people are doing next. Yeah, exactly. People are very concerned about the way that their data. Treated and managed and there are some companies out there who are managing are not doing a good job of managing that stuff for in monetizing it so it is like it isn't it is like oil and my face, I think my preference is to say it probably is more like oil than it's not but you do definitely have to recognize that it doesn't monetize itself. There is a cost of monetization and there is risk associated monetization. And in that respect data behaves like any other asset if I give you an asset and I want to generate an Income stream from it I have to invest into and then investment is going to be in the three fundamental investment any three formal Investments risk resources and time. Yeah, and and I need to therefore doing analysis and we do a lot of this work for clients. For example, now come along and say we've got all this data and we'll say okay. Well the first thing we need to understand is what is its potential value then what is the cost of monetization and what are the risks associated with that monetization how long it's going to take you and then then you can run a return on investment. Hmm and that would be a d Nicole if I'd say to you here's a bezel. And yeah, I think there's some oil under it the questions that you would logically askers. How much oil what's it going to be worth by the time I extractor. How much is it going to cost me to extract? How long is it going to cost me to extract it? What are the risks associated with it? Is there a positive Roi? Absolutely. No different. Yeah, it's Lily. Do you have any other? Sort of good stories and things like that any any good quotes from the what? I didn't enjoy able World I'll give you an example of a piece of work with it because to me it really sums up exactly what's going on here. So we were working with a with a company there was the owner was selling the business after 30 years of ownership and they had a been there at the Investment Bank was an investment bankers managing the transaction and investment. Managing the transaction did the classic thinking thing looked at what the company was doing took its ebitda multiplied it by an industry standard multiplier, which is surprising how often it's between four and six and you know multiplied of Thrones if that's what you're gonna get and we were asked to get involved in this and looked at what they're doing and when a hold on the most valuable asset and this business and case was and this particular case was as data, right, but that data was off-balance sheet and it wasn't being taught. About or discussed in the sales process at all, because as far as the Investment Bank was concerned in the founder was concerned, you know wasn't wasn't there it didn't exist. But it was it absolutely did so we ended up taking over that sales process and we did two things very differently. Number one. We really we really talked about the data and why that data was important number two, we targeted companies who wanted to buy data not who wanted to settle same way as Facebook targeted to buy Instagram. Yeah. And the reason was really simple that the people who want to date her had a much bigger checkbook, right? And so why you know you why do you rob one of them wanted John Dillinger's I rob banks because that's where the money is. So why did you target those companies? Because that's where the money was right? And so long story short. We ended up selling this business for thirty two terms ebitda. Oh, so like the owners get an 800% increase on what they were expecting to get out of that and and it was all about the fact of identifying this valuable intelligence. Tangible assets that nobody realized were there and did have value and extracting that value out of it and sometimes clients say to us all look. You know, what you guys do is you find Rim brands in the attic and that's kind of what we like to think about. What we do is that we go into companies and we find Value there where other people haven't necessarily seen the other side of that equation is also there's also tremendous risk and then that you know, there's another whole discussion there that you can unpack around that most companies are managing the risk to these intangible assets at all, but that's not a one-off result. I mean, that's when you'd Like a good will write down for example all sorts of things. Yeah, you know, we're dealing with our company the other day there was spinning one and a half million dollars a month building its brand for an expansion into the United States and we sat down with them and said, well, is this your brand to show them their brand and they said yeah, that's our Prime symbol that's actually owned by your competitor and the United States. Yeah. So use me in 36 million dollar you've seen one point five million dollars for the last 24 months 36 million dollars building a brand you don't actually own. Yeah because they had received bad advice. Ice around the trademarks and so these guys have literally set fire to 36 million dollars and they got no value out of it and that's an intangible asset risk and it's a real problem because most companies don't deal with that at all. Yeah. Now obviously we use that quote at the start from 1975 to to today. There's been tremendous change that we spoke about. Where do you see things hitting may not have necessarily over the next 40 years, but in the future not just Intel. Bless his butt and general net feel. Well. Obviously, we can't top out at a hundred right we intend devices can't be a hundred percent of the economy because we still need to eat. We still need to consume. We're still going to have for the moment. I suspect physical bodies that we have to move around and we're not going to do. Yeah, we're not going to download ourselves quite yet, right? Yeah. And even when we do something still got to move the bits in the bites around for the moment. So there's always going to be a portion of the economy. That is tangibly based. No question. However, what I think you're going to see is a That's going to get continually squeeze down more and more and more as as people recognize that it's all the intangible assets that enable you to leverage and that old term of the word lever. Those those tangible assets into value, right? You can't extract value from tangible assets without the intangibles. If you've got a bunch of oil sitting under your land, you can't get that out without intangible assets. If you've got a bunch of data, you can't get that out without and Trouble is it's either. So I think what you're going to see is you're going to see the economy will still have these very visible tangible assets big buildings and trucks and plants and cars and so forth, but the value will continue to accrete to and accumulate in the intangibles that enable you to extract the value from those tangible assets. Yeah, and and that is written into the code. That is a one-way Arrow. It is not a trend that is unlike that is likely to unwind itself and sort of swing back. Like a pendulum the economy is only going to get more focus on digital Innovation new technology new business models and all of that stuff is intangible assets. And so you're going to just see a greater and greater concentration or intangibles. Do you think and it's been the intangibles that are causing the disruption we seen at the moment worldwide no question. It's because me think through before us are absolutely couldn't do Uber could not do what it's done 20 years ago. Do this podcast? No, no, absolutely, right. This is simply impossible. So so these no question disruption, you know is the handmaiden of intangible assets right it absolute the two go hand-in-hand. There's those two things are intimately related to one another any time. You hear somebody talking about barriers to entry competitive Advantage unfair Advantage, you know buffets moats intrinsic value Competitive Edge Innovation disruption Rd all of those things. Things are fundamentally intangible eyes. Yes. A lot of people actually must understand that about Warren Buffett. I think he focuses on the tangible assets, but for a long time. Oh, yeah, he's been all about buying businesses with absolutely. He talked about my clients. Absolutely. No question. So Paul were talking off here about macro Trends. Mmm. I know that's something that a lot of listeners will be really interested to hear your views on. So, yeah, absolutely. Well, I think there the first thing is As we discuss there's this tremendous macro Trend towards an ever increasing concentration of intangible asset value and that's going to have a number of different effects. I think first of all conventional stock picking is going to become tougher and tougher and tougher to do solely on the basis of pure financial information. And I think we're already seeing that I mean most basically most funds now are either you happen to get really active weather getting passive. And and there's no place in the middle anymore. So it's so you either have a secret sources of fund manager and I'd say that secret sauce increasingly has to be in your understanding of intangible assets because that's where all of our viewers we have to get really really passive and your costs Etc need to collapse. So I think that's one significant implication. I think number two is that management teams and Boards need to wrap their heads around what intangible assets up because when you know as a director you have a fight Juicery obligation To manage all with the emphasis on all assets under your shirt stewardship and control generator turn on those assets and ensure that they're not exposed undue risk, right? Well I can tell you is that most boards and are focused on fixed assets. Yeah and in they spend an inordinate amount of time to looking at a fixed asset issues ETC and they don't really look at the bigger holistic picture of intangible assets or they divided up and little Right size chunks. I like a lot of boards of you know petrified about cyber but they're not necessarily worried about brand risk, you know what the word about brand risk, but they're not thinking about confidential information loss or they'll think about confidential information lost but they're not thinking about open source code utilisation. Now all of those things actually live under bigger umbrella topic of intangible asset risk. So I think that you can need to see a change in behavior from management teams and boards to Understand what intangible assets are and how they drive company performance and that's going to be driven needs to be driven by realization that what my accounts tell me about how the company is performing is not necessarily accurate. Yeah, so I think that's a key thing. I think there's also a big potentially impact on Capital providers and in particular Banks because the banks are regulated through basil basil for basically and Basil for is devolved out of the accounting standards. And in our part of the world puzzle for devolves down into apra the Australian Prudential regulatory Authority. And in essence what a pro tells you or tells the banks is for example, the risk waiting on property is typically four percent so real estate, so we were four percent risk waiting on intangible assets is typically a hundred percent. Yeah. So Banks basically get rewarded 25 to 1 every time they had the property buzzer and not surprisingly they have the property buzzer all the time. And and that's why in New Zealand. For example, I think the figure is 85 percent of all business lending a secured against the family home. And so we've had this Mass concentration of capital flowing into non-productive fixed assets namely realize that get me started on this and and very little Capital flowing into the productive portion of the economy, which is the inherently more liberal portion of the economy as well, which is all the intangible assets. So you basically Really got a situation. We you're constantly doubling down on fix non-productive. Non-scalable is it's at the expense of non-fixed scalable leverageable intangible ice reductivist. Yeah, exactly. And that's hugely problematic for for the economy. So you see that Less in the United States, for example, because there they have a much deeper and more sophisticated and particular debt Market, but the banks are much more imaginative that has its. Consequences as we saw in the GFC when you get really imaginative Banks, but you know, that's that's another Trend and you know, there's you know, you look at these big macro Trends you can see how it just radiates out in the economy. We were talking about tax before that the you know, the tax authorities are going to have to wrap their heads around the fact that most multinational businesses and now inherently flexible can move their operations around and certainly their intangible assets more or less at will yeah and that Huge implications for how you collect tax how you live e tax how you manage tax all of those kind of things so much as to be a global solution because if one place says we're going to text you and you're saying they can easily move it move it somewhere else. Yeah, well tax authorities. I mean, this is the the dirty secret of tax tax authorities always treat foreigners better than they treat domestic that by definition is started by Jesus to write everything that they have to because the foreigners by definition have an option. Yeah. Go somewhere else. Where as you and I textures we can yeah, we're stuck at we're tied to the land. Yeah, so that's problematic. So all everywhere you look on this it is there's a fundamental change and it radiates. It's like dropping a metal Bowl into the middle of the pond that ripples spread out everywhere throughout the economy. Once you understand that and tangibles, you know, there's this massive unseen portion of the iceberg that nobody's been talking about. Yeah, and I guess for you that is that That services that your company provides tell us a bit more about what you guys do. So what we do is actually really simple so we're intangible assets specialist. So we say, okay, we don't we deal with all of those assets. You can't drop on your foot inside the business. So the data the content the Brand's the code the Trade Secrets confidential question regulatory approvals all that stuff and what we do is we either work with the company itself or the investors and we do for very simple things. They number one. What are you are intangible assets? Well, what is the company's intangible? Assets and oftentimes with a first person who's asked that question. Yeah, a lot of the time the companies are where and should have lie that they have value there, but they cannot tell you what that actually is what it's constituted of. So the first thing is understanding what intangible assets that you have and it's just be a bit like, you know, if you had a great great uncle who died and you took over his property. The first thing you do is you're going to do an order or a stock tag of what the hell you actually have. Secondly the second question we ask is what are the risks to those assets because those risks Limit or reduce failure. So we want to deal with those risks. So for example, if you've got a great brand we want to ensure that it's adequately protected and managed properly Etc. I've got a whole lot of data. Okay, are you at risk when you're collecting this data of violating whole lot of consumer privacy obligations and and so on and so on there's lots of risks associated with intangible assets that my so you're almost like the not handymen but generalists in terms of the intangible. So you'll deal with any sort of the intangible problems or things that need to be Done. So will your clients exactly it right? Yeah, so we're like a man charged a fee precisely. We're management consulting company that specializes in intangible assets. The third thing we then do is a lot of valuation work. So then once you've understood what your assets are in you understand what the risks to the math in the next question that you go to is what are they worth the end, so we'll do a lot of valuation work with intention of trying to figure out what the intangible assets are worth what the company is worth that light of its intangible assets because the conventional way of valuing companies often leads them especially intangible. It was companies often suppresses their value. Yeah conventional valuations will suppress their value. So we do a lot of work about valuing companies in valuing discrete intangible assets. So people come to us and say how much is my pattern worth? And then I guess also I assume you're if they're valuing it for sale within you might be finding the suitable buyer that yeah exactly. It's worth that much to and that's the final step. You've identified the asset you've figured out what the risks are in you reduce those risks are mitigated them or control for them either third Point. What is the asset worth of what's my any worth in light of those intangible assets and then the fourth and final step is now how do I unlock value in those assets and that's coming back to that example to go before the company where we did achieve the 32 times exit was it followed that process exactly. Hey, you've got available a tangible assets, even if they're off balance sheet in this case data weed out with a series of risks around that data and make sure we could actually trade it now that it was not an issue number three. We valued it and made it clear what the value of those intangible assets were made it explicit to the buyers and then number four, uh, Looking the value finding out who the lines likely buyers were running a sales process ultimately selling it at 32 times. Not four times x. Yeah, and and it's obviously a great result for your client. Yeah, absolutely and a good result for the company buying. Oh no question. Yeah. They're they're absolutely wrapped with it. Yeah, so we're we would people go to find out a bit more about you real simple everage Global. So wherever the wood Edgewood global.com fantastic cool, right? That's about Out where the recording ended just before I finish off. Thanks very much to Paul for coming on the podcast for me personally, the the best thing about doing this podcast is when I get to interview guests and and none of the none of the people on the podcast get paid to be on the podcast. So it's essentially people giving up their free time or taking time out of their day or when they could be, you know, pull could be out and valuing intangible assets for example, but instead he's sitting there talking to me on the pole. So always really appreciate when we when we get gifts, and especially Gifts of Paul's caliber on the podcast. So thanks very much for listening and to the podcast is a reminder that nothing that we said today should be considered Financial advice. You've all the information was General by Nature. If you look in to find out more go to www.markzware.com ODOT ins ID or find us and give it a like by searching on Facebook or tweet to us on Twitter. Make sure also to share it with your friends if you want to email me at as Jeremy at stock market mover. Has dot Co dot ends it feel free to send across any questions that you might have. Once again, my name is Jeremy Midland, and this has been episode 52 of the Stock Market Movers podcast for Friday the 9th of August 2019. We'll see you all again next week.
In the latest episode of the Stock Market Movers Podcast Jeremy interviews the CEO of EverEdge. About EverEdge: EverEdge is a global intangible asset advisory, valuation and transaction specialist. Intangible assets account for 87% of company value today. EverEdge helps companies and investors unlock the value of these intangible assets and reduce intangible asset risk by identifying, valuing and monetising intangible assets About Paul Adams: Paul Adams is the CEO of EverEdge, a global advisory and transaction firm specialising in intangible assets. EverEdge helps companies and capital providers convert intangible assets (such as data, design, inventions, brands, software and content) into business impact: increased margins, market share and enterprise value. Paul has been ranked as one of the top intellectual property strategists in the world for the last seven years consecutively, and was the recipient of the Global IP Leader Award in 2012. Prior to EverEdge, Paul served as Intellectual Property Manager for the New York Stock Exchange listed Brunswick New Technologies. He was the founding incubator manager of The Icehouse Incubator, named one of the top 10 technology incubators in the world by Forbes magazine. He has served on the advisory board of the New Zealand government’s commercialisation vehicle Callaghan Innovation and on the Board of Lewis Holdings, a $350M private investment vehicle. Disclaimer: As always, nothing that is discussed in the podcast is financial advice. If you are looking for financial advice please contact an authorised financial adviser. 