The sources of value creation in acquisitions of intangible assets

All of us know it: intangible assets create higher growth and and higher profits than tangible assets. Recently I came across new research that provides impressive evidence. Researchers studied the three-day cumulative abnormal returns of acquirers after the announcement of acquisitions, depending on the level of intangible assets of the target (the targets intangibility). The higher the intangibility, the higher the returns at the acquirer level. The results are significant.

The researchers measure intangibility from the purchase price allocation data reported in the financial statements of the acquirer many months after the announcement of the deal and the CAR. The funny thing is: analysts and equity investors get to see only the acquisition announcements in the press. From here, within a few hours, they develop their views on the potential benefits of the acquisition, and take their acquisition-related investment decisions accordingly.

All of us know such acquisition announcements and their typical content. There is not that much about the target. All the same, analysts derive significant and consistent conclusions from this limited information on intangible assets of the target, and how these intangible assets create value for the acquirer or not.

In valuation, we call out for more data and information to be reported on intangible assets. In accounting and in the investment community, one half would like to see more of it, the other half says it doesn’t help. The funny thing is: intuitively, and without detailed reporting, investors develop strong gut instincts about the intangible assets of a target firm.

The conclusion is: investors care about intangible assets, eventually more than they would confess. And more detailed intangible asset reporting would be helpful to reduce the wide bandwidth of their gut feelings and their mishits.

Another finding is: among all different intangible assets, technology– and marketing-related intangibles create the highest abnormal returns.

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