Вы находитесь на странице: 1из 8

An Invitation to Great Minds:

Is There Motive for


Corporate Social Capital Valuation?

Issued by:
Michael Cayley
APMCP, BPR
McRae-INSEEC MBA Candidate
July 11, 2007
Is There Value in Getting Involved?

This paper is an invitation to great minds from a rough and tumble practitioner of
business. Criticize, collaborate, pontificate; choose your course, but please provoke
the next step for this nagging collection of thoughts. Shall we put them away and
get back to the real (read: cynical) world or dedicate our life to them?

The basic idea is that a new form of social capital1 has emerged as a semantically
distinctive contributing factor to corporate valuation and this will change the way
business is practiced. It will change decisions that management makes and how
investors choose to place their money. Over the last twenty five years markets have
come to accept that the sexiest part of corporate valuation – the premium that
acquirers are willing to pay over market trading value - is largely attributable to
brand.2

However, since Interbrand Corporation, a leading proponent of brand valuation


technique since the late 1980s, began publishing its list of the world’s most valuable
brands in 2001, two distinct groups of valuable brands can be observed in the top
100 – “marketing made” brands and brand valuations that are “social network made”
(this later category employing powerful network technology).

Great minds will ask: Is this distinction important? And if so, what valuation
techniques should be employed to “social network made” companies vs. “marketing
made” brands? (Hint: that is the part where you are supposed to jump in with
brilliant suggestions!).

It’s the Social Capital, Stupid

If you have not already done so, read the definitions of brand and social capital that
are offered below in the footnotes. As you think about this, it is important that you
begin with the conclusion that the concepts of brand and social capital are
fundamentally different. Brands are intangible. A corporation is a form of individual
and its social capital is a collection of the benefits that evolve from its social networks
1
Social capital – “the core idea of social capital theory is that social networks have value.” … “social
capital refers to connections among individuals – social networks and the norms of reciprocity and
trustworthiness that arise from them.” Putnam, Robert D., Bowling Alone, The Collapse and Revival of
American Community, (Simon & Schuster Paperbacks; New York, 2000) pp.19
2
Brand – “The intangible sum of a product's attributes: its name, packaging, and price, its history, its
reputation, and the way it's advertised.” David Ogilvy, “The father of advertising”
<http://whatis.techtarget.com/definition/0,,sid9_gci211703,00.html>

2
(i.e. its connections or relationships with its customers, employees, suppliers,
investors and other publics including analysts, the media, governments and the
public at large) which are tangible, particularly when embodied/empowered with a
corresponding telecommunications network.

A Google search reveals countless definitions of brand. There are certain instances
when the word brand is equated with a product, as in Kleenex equals tissue paper.
However, in all definitions of brand that this examination discovered, more than 80%
of each entry is dedicated to describing the symbols that characterize the word.
Today’s concept of brand evolved from the practice of literally burning a symbol into
the side of a barrel or beast to identify the commodity by its owner or manufacturer
(branding). Legal instruments such as copyright and trademarks have been
developed to codify the owner’s exclusive use of brand symbols (i.e. graphic logos or
words, slogans, etc.) and these rights are tangible yet the brand in total is a
sublimation of a product or company’s values, slogan, pricing, stories, personality,
tastes, smells, sounds, appearances, emotional and physical benefits. Once
considered, it is clear that Kleenex does not equal tissue paper. Kleenex is a name
that a specific manufacturer has given to the tissue paper it sells. It is tissue paper
plus an abstraction designed to signify any of the attributes that are unique to this
tissue paper. Brand is essentially intangible.

On the other hand, corporate social networks clearly fit into the broad class of
transactions that the International Accounting Standards Board Framework defines as
an asset. They are “a resource controlled by the enterprise as a result of past events
and from which future economic benefits are expected to flow to the enterprise”3.

Cost/benefit transactions are at the heart of all social networks. The corporation is
built by employee time and expertise in exchange for wages, products & services for
customers’ payments, stock for investor’s cash, etc. The sum of these transactions is
the tangible enterprise. In this sense, the products and/or services (or at least the
margins on sales) that a company produces can be conceived of as very tangible
forms of corporate social capital. In fact, most of these transactions are already
systematically accounted for within the corporation and reflected in traditional
corporate valuations.

3
IASB Framework, paragraph 49, <http://www.iasplus.com/standard/framewk.htm>

3
What is new is that technology has recently emerged that enables corporations to
leverage their social networks as brand platforms4. Concurrently, the mass
communications formats that were the cornerstone of brand value creation are taking
on a much different role in the marketing communications mix. A combination of
social and technological factors has conspired against broadcast formats (television,
radio, print, and packaging) and they are losing their uncontested power to carve out
and sustain meaningful placement for corporate messages (logo, slogans,
advertising, etc.) in the minds of consumers. In the past, broadcast platforms carried
the loudest signal, had the most reach, and delivered the highest frequency. Today, a
corporate social network that is enabled with the right combination of web
applications, broadband internet connections and content can be more powerful than
any broadcast.

In the cases of Google and Amazon, two brands that are among the world’s most
valuable according to Interbrand’s top 100 survey5, despite having invested
dramatically less in traditional brand building over relatively short periods of history,
the social networks that have been unleashed are awesome considering that they
have achieved valuations in the same league as Coca-Cola or AOL-Time Warner which
have been built by marketing over generations with billions of US dollars invested.
Think of a broadcast transmission tower, satellite or cable network as a
communications distribution node. Then consider that each individual customer,
employee, supplier or investor of a corporation properly equipped with a cheap
computer, web apps and internet access can, under the right conditions also be a
communications node with equal potential and you will understand the newly
emergent form of social capital that is considered here.

Interbrand Google Amazon AOL GAP


Rank
2001 0 76 58 31
2002 0 80 63 36
2003 0 74 64 36
2004 0 66 82 38
2005 38 (debut) 68 0 40
2006 24 65 0 52

“May 1997 – with less than two years of operating history and no profits in site,
online bookseller Amazon.com goes public at US$18 per share and the dot com boom

4
And in many instances, as is the case for Amazon, a sales and distribution platform as well.
5
Best Global Brands 2006. A Ranking By Valuation. July 28, 2006.
<http://www.ourfishbowl.com/images/surveys/BGB06Report_072706.pdf>

4
is born. Shares later reach a high of US$106, forever changing our notion of what it
takes to build a dominant brand.”6 That was 2001 and Amazon was described as a
loser because it had just experienced a 31% drop in its brand value over 12 months
as the dot com bubble burst. Nevertheless, not only did Amazon hang in there with
the top 100 brands in the world, it moved from 76 to 65 in ranking. It accomplished
this during the same period that GAP, a clothing retailer with over 3,100 retail outlets
globally, celebrity endorsements and an annual marketing spend well over US$100-
million dropped in ranking from 31 to 52. In 2005, Google debuted in the brand value
ranking at number 38 and in the next 12 months rose to 24 surpassing decades old
enterprises like Sony (26), Budweiser (27) and Kellogg’s (40).

Power to the People

Technology that enables consumers to participate in value creation on behalf of the


company is what distinguishes these “social network made” brands from the
“marketing made” ones. There are great traditional marketing brand stories over the
2001 to 2006 period like Samsung that increased its brand valuation by 22% from
2000 to 2001 and then moved up the rankings from 42 to 20 over the next five years,
but it spent over US$150-million alone on its sponsorship of the 2002 Sault Lake City
Winter Olympic Games, something is different with Google and Amazon. It is not
even technology alone that is the key. AOL emerged in the 1990s as one of the
hottest technology companies in the world. Through the course of its business it was,
along with Netscape, one of the most important forces in spreading network
technology to mass consumers. However, it had a traditional marketing approach.
While it made moves towards empowering its social networks with features like
instant messaging, it never innovated in a way that empowered its social networks to
create value for the company.

Amazon empowers its customers to help sell books with applications that enable
them to rate and review the merchandise they buy and anytime a customer makes a
purchase a referencing engine automatically suggests additional books that other
customers who bought the same book also selected. Google has a search product
that actually leverages the social capital of the entire internet. Every hyperlink (a

6
The 100 Best Global Brands by Value 2001. August 6, 2001.
<http://www.ourfishbowl.com/images/surveys/IB_SV_BW_8_6_01.pdf>

5
form of social network connection) on the World Wide Web impacts its search results.
The more connected a piece of content is, the more relevant it becomes in search
results. In addition, each time a consumer enters a search term both the collective
search result and the individual results that that consumer receives in the future are
impacted with the intention of delivering a higher value search experience.

Are those barbarians at the gate?

Brand, in and of itself, is a good example of an emerging force that contributes to


corporate valuation. “On the evening of October 18, 1988 Philip Morris offered to
purchase all Kraft common stock at $90 per share in cash. The offer represented a
50% premium over the $60.125 closing price on October 18. At $11 billion in total
value the bid, if successful, would have been the second largest acquisition ever
completed,”7 It was a period where “the food industry was undergoing a major
restructuring and revaluation. Grand Metropolitan PLC (British) began a hostile bid
for Pillsbury (USA) on October 4, 1988. … The $5.2 billion Grand Met bid was a 53%
premium over the previous market price – about 25 times Pillsbury’s net earnings and
about 4 times the book value of common equity. …
The developments over at RJR were more startling (and became the plot of
“Barbarians at the Gate”). Management, in partnership with the investment banking
firm of Shearson, Lehman, Hutton, had proposed a $17 billion leveraged buyout … on
October 20, 1988.”8

In 1988, London’s Interbrand conducted the world’s first valuation for RHM Group in
the UK9, a food company fighting off a hostile takeover bid. A year later Interbrand
was hired to conduct a valuation of the Pillsbury brand portfolio for Grand Met. “It
was the wave of brand acquisitions in the late 1980's that exposed the hidden value
in highly branded companies and brought brand valuation to the fore. … An
Interbrand study of acquisitions in the 1980s showed that, whereas in 1981 net
tangible assets represented 82% (on average) of the amount bid for companies, by
1988 this had fallen to just 56%..”10 “Since 1988, Interbrand has conducted over

7
Ruback, Richard S., “Philip Morris Companies and Kraft, Inc.” revised October 20, 1994, copyright 1989, President and Fellows of
Harvard College, Harvard Business School Publishing, pp. 2
8
Ibid, pp.3-4
9
Interbrand Corporation History: 1980s. < http://www.interbrand.com/history_1980.asp>
10
Brand Valuation and its Applications. Spring, 1999, Jane Yates,
<http://www.poolonline.com/archive/iss6fea5.html>

6
4,000 brand valuations … (and) … intangible assets now comprise the majority of the
valuation of a company.”11

A market that is awash in private equity, dominated by mergers and acquisitions at


previously unheard of valuations for the companies involved? Does this sound
familiar?

In July 2005, News Corp. bought Intermix Media, the owner of MySpace.com for
US$580 million. “In less than 3 years time, MySpace ha(d) become one of the top 5
most visited sites in the US, racking up 48 million unique visitors and 27.4B page
views in June 2006 … The market cap for Intermix at the time was about US$100
million”.12

“YouTube, one of the most successful exits of the Web 2.0 era, needs little
introduction. YouTube’s single biggest contribution is that it brought into the
mainstream the concept of sharing videos online. (Founded in February 2005),
YouTube shot into the limelight when Google acquired it in Oct 2006 for $1.65B (in
stock), the largest exit for a consumer Internet company in 2006 and Google’s
biggest acquisition to date. On a typical day, over 100 million video streams are
watched on YouTube.”13

By any existing definition, the premium valuations paid for MySpace and YouTube and
many other companies including EBay’s US$2.6 billion acquisition of Skype (since
written down by US$900-million, an interesting move worth further study), are not
attributable to brand. YouTube and MySpace do not really have logos or distinctive
colors. The website design is minimalist, conforming rather than differentiating from
the design hundreds of similar sites from this period. Even the values of the
communities that they represent are so novel and have changed so much in their
short histories that brand value can not be authentically derived on this basis.

These are companies who valuation is social network made. They are pure systems
for servicing social networks that have converted social capital into incredible
corporate valuations in remarkably short periods.

11
Best Global Brands 2006. A Ranking By Valuation. July 28, 2006.
<http://www.ourfishbowl.com/images/surveys/BGB06Report_072706.pdf>
12
MySpace Case Study: Not a purely viral start. September 10, 2006, Nisan Gabbay, <http://www.startup-
review.com/blog/myspace-case-study-not-a-purely-viral-start.php>
13
YouTube Case Study: Widget Marketing Comes of Age. March 18, 2007, Deepak Thomas and Vineet Buch,
<http://www.startup-review.com/blog/youtube-case-study-widget-marketing-comes-of-age.php>

7
So, what valuation techniques should be employed to “social network made”
companies vs. “marketing made” brands?

Interbrand’s brand valuation methodology14 does not seem to delve into the issue of
social capital or social networks.

Is the distinction between valuations attributable to corporate social capital vs. brand
important?

Consider that Corporate Social Responsibility is a key tactic for generating corporate
social capital. What would it be like if companies had clear and present motivation
for reinvesting in employee loyalty? If companies come to value social capital with
the same enthusiasm that they have embraced brand, are there huge profits to be
made in advancing social capital in parts of the world where foundational social
capital elements such as democracy and rule of law are underdeveloped?

The call for action from great minds is authentic. If only as mentor to complete an
MBA thesis to pursue these questions; your involvement is personal and in this era
we can hope for exponential effects. If we can contribute to motivating capital
markets to invest in social capital and redirect the efficiencies of the corporation as a
form of economic organization then we can hope for more.

The alternative of getting back to the real world is not that appealing. Choose hope.

14
Best Global Brands 2006. A Ranking By Valuation. July 28, 2006. p. 9-10
<http://www.ourfishbowl.com/images/surveys/BGB06Report_072706.pdf>

Вам также может понравиться