How To Monetize Your Brands

Over the past 20 years, the value of the stock market has soared, even as the

assets of its compenent companies have grown much less quickly. If you work

in the intellectual-property world, this is something you see in a different

way: you see that as much as 80% of the value of the S&P 500 is made up

of something known as "intangible assets", such as patents, brands,

copyrights, trademarks, and the like.

Now the problem is that it’s all but impossible to put a dollar value on these

intangible assets. You can put a dollar value on tangible assets, and then subtract

tangible assets from total enterprise value to get the value of intangible assets.

But if you walk into a bank brandishing a trademark or a patent, you’re not

going to find it very easy to take out a loan against it.

Slowly, that’s changing. At a panel today I learned about this fascinating

story in BusinessWeek, talking about the financial engineering going on

deep in the bowels of Sears. (By the way, does anybody know how to find a byline

on a BusinessWeek story? I’d love to credit the author.) Sears is owned by financier

extraordinaire Eddie Lampert, and he’s done something rather

interesting: he’s transferred ownership of the brands Kenmore, Craftsman, and

DieHard to a Sears subsidiary in the Bahamas. Sears then pays its subsidiary

royalty fees to license those brands. And the subsidiary, in turn, has securitized

those royalty fees, creating $1.8 billion in bonds. The only thing which hasn’t

happened – yet – is the actual public sale of the bonds, which still

reside deep in the Sears accounting empire.

All of this looks for all the world like money going around in circles. But

in fact it’s much more profound than that, because Moody’s rated the bonds –

and it gave them an investment-grade rating of Baa2, four notches better than

Sears’ junk rating of Ba1.

It’s worth noting that bondholders have no right to the intellectual property

in question: they have a right only to an income stream from Sears, which you

might think would be rated the same as any other income stream from Sears. But

evidently Moody’s determined that a company will nearly always pay for the right

to use its brands, even if it has defaulted on its own bondholders.

We’re at the beginning, it would seem, of a world where companies can begin

to unlock the value in their brands. At the moment, if you want to buy Coca-Cola

the brand, say, the only way you can do that is by buying Coca-Cola the company.

Eddie Lampert, as well as the people behind the new Intellectual

Asset Finance Society, would like to change that.

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