MISSION INTANGIBLE

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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Eastman Kodak: Not a pretty picture

C. HUYGENS - Wednesday, October 26, 2011
Ever since Stone v. Ritter sensitized corporate boards to the risks of not protecting a firm's intangible assets, there has been a progressive growth of intangible asset monetization programs. These have been recently supplemented by nascent reputation risk management programs.

From time to time, a booster has enhanced that sensitivity. Today we have a good example of that.The disposition of Kodak's (NYSE:EK) patent portfolio is exemplary.

As reported by Bloomberg (10/27, Keehner, McCracken, and Saitto), "Eastman Kodak Co.’s lenders sent a letter to the board of directors reminding the company of its fiduciary duty to sell its patent portfolio for fair market value. " In case you are missing the punch line, the article explains that "'Kodak’s board has been put on notice by lenders, who are saying ‘If you destroy value, we will sue you,’' said Amer Tiwana, an analyst at CRT Capital Group LLC in Stamford, Connecticut."

The reputation metrics, as we noted earlier, reflect low expectations and suggest progressive value destruction of the likes that moved Johnson & Johnson's equity holders to sue last December.


Over the trailing twelve months, the Steel City Re Corporate Reputation Index ranking for Kodak decreased from the 12th percentile to the lowest rank of zero (0) among the 29 firms comprising the Electronic Appliances sector. The exponentially weighted moving average of the volatility of the reputation index was most recently under 7%, and the twelve week trailing vector and velocity were most recently -55% and -7%. The corresponding return on equity over the trailing twelve months has been a dismal -44% relative to the median of its peers.

The company's intangible asset fraction is now in excess of 500% of enterprise value which would indicate to some that the patent portfolio is worth more than $1.25 billion. The creditors would like to get their hands on that value. The company's equity value is around $250 million. The equity holders are loathe to surrender that excess intangible value. The board is between the two, and that is not a pretty picture.

Eastman Kodak: No expectations

C. HUYGENS - Wednesday, October 05, 2011
Reputation is a consequence of corporate behavior that motivates stakeholders to behave in ways that either reward or punish the corporation. This is how.

Reputation is a stakeholder’s expectation of behavior. Stakeholders include customers, vendors, employees, creditors, equity investors, and regulators. Reputation is an expectation stakeholders form based on how a company manages six key areas of business: ethics, innovation, quality, safety, sustainability, and security.

Reputation also drives stakeholders’ behavior. In the glow of a superior corporate reputation, customers are more willing to accept higher prices, vendors and employees offer better terms for their services, creditors and equity investors offer better terms for capital, and regulators tend to be more forgiving. These are all value-creating behaviors. And they are not present in Eastman Kodak's (NYSE:EK) stakeholders.

Excluding the momentary surge of optimism associated with the prospects of wholesale intellectual property monetization, Kodak's key reputation metrics have been steadily working their way down. As the Steel City Re Corporate Reputation Index shows, over the trailing twelve months, Kodak's index ranking slipped from the 12th percentile to the bottom among the 29 peers in the Electronics/Appliances sector. Reflecting the slow and steady decline, the exponentially weighted moving average volatility has only been 7.5%. More recently, over the trailing 12 weeks, the reputation velocity has been -7% and the reputation vector has been -32.6%. Last the economic return has been 40.4% lower than the median of its peer group.

Looking at the sector as a whole, the mean reputational values and spreads have been largely the same over the past year. As to Kodak's balance sheet, the intangible fraction is now at nearly 450% indicating an unsustainable level of debt.

As a group, stakeholders appear to have thrown in the towel. There are no expectations.

Kodak: Patently optimistic

C. HUYGENS - Thursday, August 25, 2011
ZD Net greets readers to Larry Dignan's 17 Aug blog, Between the Lines, with the banner, "Welcome to the patent valuation bubble." In this patent bizarro world, Kodak looks like a screaming buy and no-names like InterDigital get tech giants to drool. You can thank Google’s Motorola Mobility purchase and the Nortel patent auction for this nonsense...Simply put, any company with a significant technology patent portfolio will be in play. The patent arms race is on and now the valuation for patents has been set at “ridiculous” cash-rich companies have the go-ahead to gobble up portfolios that would have tanked stocks just a few years ago.

Let's cut to the metrics, shall we? The Steel City Re Corporate Reputation Index rankings for Kodak (NYSE:EK) reflect a company whose reputation, primarily for innovation, is not quite there anymore. Among the 30 peers in the electronics/applicances sectors, Kodak began the trailing twelve months ranked in the 6th percentile and wrapped up on the 18th of August in the 3rd percentile. Its reputational exponentially weighted moving average volatility is 7.3%, its velocity is -8%, and its 12-week vector is -13%

The stock price surge commensurate with the large patent transactions, to a level that still represents an underperformance relative the mean of its peers by 7.86%, implies an enterprise value floated by intangibles to the extreme - nearly 400%! Meanwhile, the balance of the sector appears non-plussed.

The surge implies something -- but what? ZD Net sees a bubble; an alternative explanation is that the patent portfolio comprises a sleeping asset that investors did not expect Kodak management to monetize either by developing or selling. The former is evidenced by experience, and the latter is not being challenged by management's own declarations, giving hope to value release?

To test the latter premise, we surmised that other firms known for their patents might be experiencing a surge. Which brings us to the Guggenheim-sponsored OT 300 Index and fund, an equity strategy driven by algorithms that are said to expose superior patent portfolios. We show below the returns for three equity indices, RepuStars representing a reputation strategy, OT300 representing a patent strategy, and the S&P500, representing the market. We look at returns these past few weeks during which patents have been making the news.



Comparing the relative returns over the past few weeks starting 30 June and ending 18 August, the S&P 500 lost 13.63%, RepuStars Variety lost 14.52%, and the patent-driven OT300 lost 17.36%. Which brings us to the overall conclusion that if there is a widespread patent bubble, it is not yet manifesting in the OT300 patent-driven equity fund.

But before we walk away confident that another asset bubble isn't brewing, take note. Over the trailing week ending 18 Aug, when even with a flight to quality, the S&P500 dropped another 2.7%, the OT300 Patent Index lost only 2.0%. Moreover, since 15 December 2006 with the patent index was first launched, the OT 300 Patent Index is down 4.89% while the S&P500 is down more than 20% (RepuStars Variety is up 26%). Cutting to the chase, maybe there is some additional alpha in them-there patents.

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