The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition

15. Invisible Investments: Firms with Intangible Assets

In the last 20 years, we have seen a shift from manufacturing firms to service and technology firms in the global economy. The change has been greatest in the U.S. As we value more and more pharmaceutical, technology, and service companies, we are faced with two realities. The first is that the assets of these firms are often intangible and invisible—patents, know-how, and human capital. The second is that the way in which accounting has dealt with investments in these assets is inconsistent with its treatment of investments in tangible assets at manufacturing firms. As a result, many of the basic inputs that we use in valuation—earnings, cash flows, and return on capital—are contaminated. ...