About one year ago, Heartland Payments Systems (NYSE:HPY) reported a record-breaking security breach. We reported previously on this event and its economic consequences. In today's note, we look quantitatively at the reputation effects of this breach and contrast them with two of Heartland's customers, Mastercard (NYSE:MA) and Visa (NYSE:V), who sued Heartland for damages. The intangible asset financial management point we wish to make is that there are useful financial metrics to help executives manage risk and reputation to create value from their intangible assets.

Let's begin with the Steel City Re Corporate Reputation Index. The fall in Heartland's reputation in January 2009 exhibits the typical cliff effect associated with events that speak to the heart of a company's intangible asset value -- in Heartland's case, data security. Contrast Heartland's reputation with Mastercard, a firm whose Steel City Re Reputation Index standing is pegged at the 100th percentile for most of the past year. Not surprising, Mastercard rewarded its stakeholders during this period with an above average 76% return on equity relative to both the S&P 500 index (20%) and the median return of the 72 companies in the IT Services sector (60%). Visa, with a public offering less than 2 years old, shows a climbing reputation index with values in the high 90's percentile, but its return is slightly less that the median of its peers. We'll call this less than above average performance the results of the hangover from Visa's IPO.



Let's look quickly at the book values. Heartland booked its loss in intangible asset value at the end of March, about 10 weeks after the equity markets panicked. Its intangible asset value dropped from around 100% of enterprise value to 70%, but has been climbing since. In contrast, Mastercard's intangible asset value has been climbing steadily to the 100% mark, while Visa showed some volatility over the year and ended up in the mid 90's.