The valuation of brands and other significant intangibles has been controversial since the 1980s when international businesses started to buy national or regional brands and extend them globally. That process made it clear that some companies had significant assets whose value was not shown in the balance sheet and was not reflected in share prices either.

The value of brands - BA and Virgin airlines.

A number of competing models have been advanced to grapple with the measurement problem. A simple one would be to assess the ‘rent’ that can be earned from a branded good. This asks how much the consumer would pay for a branded good, say a Philips long life light bulb (€8 in my supermarket) as against the supermarket’s own brand (€5). The €3 difference, after adjusting for the retailer’s margin, is the rent. You then multiply this by the expected volume over a forecasting period (say five to ten years) and discount to get a present value.

Another way of getting at it is to look for an independent lamp-manufacturing business within Philips (a cash generating unit in the jargon) and look at its income and expense. Once you have deducted direct costs, depreciation for equipment and cost of capital for the tangible assets involved, whatever margin is left can be considered to be the brand value. As before, this needs to be forecast for a period ahead and discounted to give a capital value.

Both of these are approximations, and assume that what is left after deducting observable inputs to the model can only be the brand, whereas a more sophisticated analysis would suggest that there are a number of other potential contributors to this difference.

Brand valuation models look at the current value of the brand, and approximate what it would cost to buy the brand at that time. However, most elements of company balance sheets reflect the cost of acquiring assets at the time they were bought (i.e. ‘historical cost’), not at their current value (known as ‘fair value’ in accounting).

This causes an inconsistency in accounting because only the brands a company acquires in the market place appear in its balance sheet. A brand the company has itself built up over time is not reflected. Its costs have been expensed as incurred and so there is nothing to put in the balance sheet. You will look in vain for Cadbury or Nestlé in their owners’ balance sheets.

Is this a problem? Arguably this is where analysts earn their money, by pointing out value drivers not visible in the balance sheet. Also the balance sheet is not expected to show the current value of the company’s assets. Standard-setters see it as an inconsistency, but have more important inconsistencies to occupy their minds.

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Professor Peter Walton is a member of the Accounting & Finance Unit at the Open University Business School. His research interests are in comparative international accounting and financial reporting in an international context.

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Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

According to the French anthropologist Claude Levi-Strauss, we cook to show we are civilised. So the rise of the Superchef must say something about how much we value the idea of civilisation. Whether on television, web, books or gadgets, they inspire us to see the preparation and presentation of food not just as a necessary chore, but a potential pleasure and focus for friendship, family life and fun.

Collins English Dictionary’s listing of ‘doing a Delia’ (meaning to cook ‘properly’) demonstrates just how engrained the Superchef has become in contemporary British culture. However much we love take-aways and convenience foods, our fascination with these gastronomic gurus reveals a profound desire to connect with each other via the kitchen.

The link between cooking and our desire to be civilised is not just about throwing chic dinner parties, of course. Food is a deeply political issue, raising all sorts of moral and ethical questions. It’s interesting to note how several celebrity chefs have stepped out of the kitchen and on to the campaign trail to back causes from animal welfare to healthy eating.

Consider Jamie Oliver, whose 2005 efforts on behalf of the nation’s school-dinner eaters (however reluctant some of them might have been!) prompted pledges by the UK Government to invest in the quality of school food. More recently he has campaigned to spread basic cooking skills amongst the population. The better we are at cooking, the more choices we have about what we eat – which must be a good thing if we want to move towards healthier or more sustainable diets.

Food is a deeply political issue, raising all sorts of moral and ethical questions

Campaigning and social marketing (i.e. using marketing techniques to further socially desirable objectives) are important areas of teaching and research at the Open University Business School and our partner organisation the Institute for Social Marketing. I thought it would be instructive in this blog to analyse Jamie Oliver’s work in the light of some of the theory we profess.

For example, the Campaign Diamond (Baguley, 2007) is a simple model which can be used by organisations and individuals to gauge how likely a campaign is to succeed before they commit valuable time and resources to going public with it. The model depicts the ‘space’ available for an effective campaign as dependent on four ‘facets’ of a diamond. A balanced profile across each facet is a good indication that your campaign will fly.

The first facet is the problem underlying the campaign. This has to be something significant you can articulate clearly and unambiguously, or you risk demotivating distortion as the campaign develops. For example, some critics accused Jamie Oliver of selectively stereotyping ‘unhealthy eaters’ in his recent campaign.He’s hit back that he was presenting a balanced snapshot of a the issue of poor diet which affects people from all sorts of backgrounds, and that perhaps his detractors just don’t want to admit it. This kind of single-minded focus on a problem can appear simplistic, but has the long-term benefit of maintaining clarity of message.

Jamie Oliver tasting a cocktail.
[image © copyright BBC]

The second facet is social authorisation. This is to do with judging the zeitgeist relative to a particular issue. Mounting concerns about the future health of the nation because of diets high in fat, salt and sugar (mainstays of the processed food of which the UK is disproportionately fond) have led to public anxiety about nutrition. Social authorisation is essential to a campaign’s credibility with news media and decision makers. The political impact of the school dinners crusade is testimony to Jamie Oliver’s good judgement in this respect.

The third facet is operational capacity. This means the ability to convert the enthusiasm generated by the campaign into action. It’s hardly worth firing people up about an issue if you then can’t give them the opportunity to do something about it. Here Jamie Oliver scores a blinder – harnessing the power of social networking so that those reached by his recent campaign share their cooking skills with others. The internet is a powerful tool in this respect, and has the further advantage of popularity with groups that more staid calls to action might not reach.

The final facet of the diamond is the opportunity for social value. This boils down to how big a difference you think the campaign will make. It helps to be as sure as you can about what a campaign will achieve before you launch it, and to have an evaluation method in place in advance so you can see if and when it’s worked. This is where many worthy initiatives come unstuck.

On the other hand, the precise effect of ventures such as Jamie Oliver’s cooking campaign must be hard to calculate in advance simply because of the potential numbers involved. It may be that the most lasting impact lies beyond the relatively straightforward metrics of participation or media coverage in long-term political effects (witness the Essex Superchef’s influential audience with the Commons Health Select Committee in November 2008).

There’s a lot to be learned from these examples, even for those of us without access to the impressive resources which Jamie Oliver has exploited so imaginatively. Articulating a compelling case, making sure it resonates with people, having systems in place which can convert sympathy into action, and being clear about what you are trying to achieve, are as important to someone campaigning for a new zebra crossing as they are to a Superchef bent on changing the nation’s eating habits.

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Credit Crash Britain

In a series of special reports the Money Programme team investigate the issues that are affecting all of our bank balances: Credit Crash Britain.

Of all the UK casualties of the ‘Credit Crunch’, HBOS (Halifax Bank of Scotland) is to date the biggest and most significant. The planned takeover of HBOS by Lloyds TSB, announced to stunned financial markets on Tuesday 16th September, marks the demise of two giants that have dominated the UK financial sector for centuries. The Bank of Scotland was formed in 1695 and was the first commercial bank in the UK. The Halifax Permanent Benefit Building and Investment Society was founded in 1853. Prior to its demutualisation and conversion to banking status in 1997 the Halifax was, by some distance, the largest building society in the country.

We are too close to these amazing developments to understand exactly how the Bank of Scotland and the Halifax, united by the merger to form HBOS in 2001, found themselves being forced into a rescue by Lloyds TSB – a rescue that the Prime Minister himself took a central role in instigating.

Much has been made in the media that HBOS was a victim of ‘short selling’ by City traders. This practice which involves selling stocks that are not currently owned with the view of buying them back in the future at a lower price is a common trading strategy. The view held by some commentators is that aggressive short selling of HBOS’s shares drove down the share price to the point where public perception was that the bank was in trouble. With the Government and the Financial Services Authority  not wanting a repeat of a ‘run on the bank’ that we saw with Northern Rock in 2007, with savers queuing to get their cash out, the authorities acted swiftly to end HBOS's independent existence.

By placing it in the ownership of Lloyds TSB, the hope was that some semblance of confidence in the banking system would be restored. Given the size of HBOS – at £681 billion of assets it is seven times larger than the Northern Rock was when its problems surfaced in September 2007 – the Government simply could not contemplate a nationalised solution to the problem. Given the perceived impact on HBOS’s share price of the alleged short-selling the Government and the FSA also moved quickly to outlaw the short selling of the shares of other financial institutions.

Was HBOS a victim of short selling or rather an institution that weakened itself through its impaired business strategy?

But was HBOS a victim of short selling or rather an institution that weakened itself through its impaired business strategy? Many observers have pointed to HBOS’s growing reliance in recent years on wholesale funding from the world’s capital markets which made it, like Northern Rock, vulnerable to the illiquid conditions we have seen in the wholesale markets since the emergence of the US sub-prime mortgage crisis in summer 2007. Additionally HBOS was active in enlarging its share of the UK mortgage market just at the point that house prices peaked. The subsequent marked fall in prices has left HBOS vulnerable to bad debts as borrowers with negative equity default. There have also major losses in treasury assets – investments in asset-backed and other securities which have fallen in value in the wake of the sub-prime collapse.

Given the business backcloth it was perhaps hardly surprising that the process of raising more capital by the £4 billion ‘rights’ issue of new shares in HBOS was troubled with many investors refusing to take up their rights to further shares. This also was a factor which placed doubts in the minds of investors about the worth of HBOS’s stock - doubts that became reinforced by the reduction in dividends being paid out.

So was the reality that it was investors - particularly the fund managers - who brought on HBOS’s demise simply by dumping an increasingly unattractive stock? This seems more plausible than simply blaming the bank’s demise on ‘short sellers’.

The bank will be a colossus in the retail financial market with 142,000 employees and a 28% market share

Whatever the cause the outcome and consequences of the takeover by Lloyd TSB are huge in more senses than one. The bank will be a colossus in the retail financial market with 142,000 employees and a 28% market share - in fact if it had not been for the crisis conditions competition law would not have allowed the takeover to take place. The risk of such dominance is that Lloyds TSB will now have greater power to set the prevailing levels of mortgage and savings rates in the UK.

A further consequence is that there will be substantial job cuts given the overlaps between the two banks - for example in the branch networks and in the ‘back-office’ processing businesses.

For Scotland the blow is potentially substantial - both economically and to the country’s self confidence since, with the Royal Bank of Scotland, the Bank of Scotland dominated the Scottish banking industry. Lloyds TSB has, though, pledged to keep jobs in Scotland, retain the use of HBOS’s headquarters in Edinburgh and continue to print Bank of Scotland bank notes.

HBOS building.
[image by JohnConnell, some rights reserved]

Additionally the disappearance of the Halifax - predating by just a few days the rescue of the Bradford & Bingley - represents the failure of the demutualised building society business model. All those societies that converted to banks amidst much heralded plans to grow their businesses and explore new avenues for making money have now, within a handful of years, lost their independent existences.

At the time of writing, however, the approval for the takeover by the shareholders of Lloyds TSB has still to take place. In the light of the further collapse of the share price of banks globally in late September and October, and the move by the UK government to recapitalise the banks, a renegotiation of the original terms of the takeover inevitably had to take place. Under the revised terms made public on 13th October HBOS shareholders will receive 0.605 Lloyds TSB shares for each HBOS share. Additionally up to £17 billion of capital may be invested in the combined institution by the Government.

The amount of State finance will be determined by the shortfall in the demand by existing shareholders for further shares in the banks offered to them via forthcoming ‘rights’ issues. Given the distinct possibility that a substantial proportion of HBOS could end up being owned by the Government - making Lloyds TSB itself partially nationalised if it absorbs HBOS - there remains the risk that Lloyds TSB’s shareholders may not have an appetite for the takeover.

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About the author

Martin Upton is lecturer in finance at the OU Business School. Previously he spent 20 years in treasury management, including 12 years as Treasurer of Nationwide Building Society. Martin's particular interests are financial services, the housing market, financial markets and risk management.

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