Valuing Pure Plays

What makes some Web companies--almost invariably in the red--attractive to investors? In a nutshell, intellectual property.


What makes some Web companies–almost invariably in the red–attractive to investors? In a nutshell, intellectual property.

Putting a value on knowledge assets is tricky, although some, including CFO magazine, have taken a stab at it (see “A Knowing Glance,” February). Now, a Pasadena, Calif., company thinks it has a way to monitor and measure intangible assets, and it has established an index to do it.

The Patent & License Exchange (P&L) has set up the Intangible Asset Market Index (IAMX) to track the progress of patent, copyright, and trademark values in five sectors, including advanced materials, information technology, and health technology.

The index, which is posted on the Internet at, tracks the “enterprise value” of 30 public companies in each sector. Enterprise value is determined by subtracting the book value of the company from its market capitalization.

That formula is “very crude,” says Baruch Lev, professor of accounting and finance at the Stern School of Business at New York University, who provided the data for CFO’s recent report.

“The difference between the market and the book value includes other things that have nothing to do with intellectual capital,” Lev says. “Market values are affected by many things. Many of those we don’t even understand. So to base an estimate on market value is very hazardous. It assumes that the market is perfectly efficient.”

P&L chairman and CEO Nir Kossovsky concedes the method for computing the IAMX may not work for large, established companies, but it does work for the kinds of concerns chosen for the index. Those “microcap” companies are “pure- play” technology firms with minimal revenues and earnings.

Most microcap technology companies “don’t have much else other than the technology with which these companies are building some value,” Kossovsky says. So by subtracting a microcap’s book value from its market capitalization, he reasons, “you’re basically measuring the market’s assessment of what the present value is of that company’s technology.”

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