GM's intangibles

Yesterday, General Motors filed for an IPO . As the Wall Street Journal notes, “The 734-page document is the most detailed portrait yet of GM post-bankruptcy.” (See also stories in the New York Times and the Financial Times.) For those interested in how company’s report their intangible assets, GM’s Form S-1 filing with the SEC makes interesting reading. Summary:

At December 31, 2009 Intangible assets, net were $14.5 billion. In connection with our application of fresh-start reporting, we recorded Intangible assets at their fair value of $16.1 billion at July 10, 2009. Newly recorded identifiable intangible assets include brand names, our dealer network, customer relationships, developed technologies, favorable contracts and other intangible assets.
. . .
At June 30, 2010 Intangible assets, net of $12.8 billion decreased by $1.7 billion (or 11.9%), primarily due to amortization of $1.4 billion and foreign currency translation of $0.3 billion.

Here are the details:

Intangible assets
We recorded Intangible assets of $16.1 billion at their fair values. The following is a summary of the approaches used to determine the fair value of our significant intangible assets:
• We recorded $7.9 billion for the fair value of technology. The relief from royalty method was used to calculate the $7.7 billion fair value of developed technology. The significant assumptions used included:
      • Forecasted revenue for each technology category by Old GM’s former segments;
      • Royalty rates based on licensing arrangements for similar technologies and obsolescence factors by technology category;
      • Discount rates ranging from 24.0% to 26.0% based on our WACC and adjusted for perceived business risks related to these developed technologies; and
      • Estimated economic lives, which ranged from 7 to twenty years.
• The excess earnings method was used to determine the fair value of in-process research and development of $175 million. The significant assumptions used in this approach included:
      • Forecasted revenue for certain technologies not yet proven to be commercially feasible;
      • The probability and cost of obtaining commercial feasibility;
      • Discount rates ranging from 4.2% (when the probability of obtaining commercial feasibility was considered elsewhere in the model) to 36.0%; and
      • Estimated economic lives ranging from approximately 10 to 20 years.
• The relief from royalty method was also used to calculate the fair value of brand names of $5.5 billion. The significant assumptions used in this method included:
      • Forecasted revenue for each brand name by Old GM’s former segments;
      • Royalty rates based on licensing arrangements for the use of brands and trademarks in the automotive industry and related industries;
      • Discount rates ranging from 22.8% to 27.0% based on our WACC and adjusted for perceived business risks related to these intangible assets; and
      • Indefinite economic lives for our ongoing brands.
• Our most significant brands included Buick, Cadillac, Chevrolet, GMC, Opel/Vauxhall and OnStar. We also recorded defensive intangible assets associated with brands we eliminated, which included Pontiac, Saturn and Oldsmobile.
• A cost approach was used to calculate the fair value of our dealer networks and customer relationships of $2.1 billion. The estimated fair value of our dealer networks of $1.6 billion was determined by multiplying our estimated costs to recreate our dealer networks by our estimate of an optimal number of dealers. An income approach was used to calculate the fair value of our customer relationships of $508 million. The significant assumptions used in this approach included:
      • Forecasted revenue;
      • Customer retention rates;
      • Profit margins; and
      • A discount rate of 20.8% based on an appropriate WACC and adjusted for perceived business risks related to these customer relationships.
• We recorded other intangible assets of $560 million primarily related to existing contracts, including leasehold improvements, that were favorable relative to available market terms.

So, the bottom line for GM’s intangible value:

Technology and related intellectual property: $7.889 billion (5 year amortization)
Brands: $5.476 billion (38 year amortization)
Dealer network and customer relationships: $2.149 billion (21 year amortization)
Favorable contracts: $543 million (28 year amortization)
Other intangible assets: $17 million (3 year amortization)
Total intangible assets $16.074 billion

Beyond the numbers, the MD&A section includes information on operating strategy and utilization of intangibles. For example, it specifically talks about brand rationalization. It also goes into some detail on their R&D activities – including the OnStar communications technology. One interesting note — the “old GM” spent about $8 billion on R&D in 2008; the “new GM” will spend about $6.5 billion.
However, one glaring point is the absence of any discussion of human capital.
So — an interesting case study in how companies report their intangibles today. But clearly not complete. As such it may serve as pointer to how they should report their intellectual capital and intangible assets in the future.
UPDATE: The NY Times DealBook column has an interesting take on another set of intangibles that are covered in GM’s SEC filing: risks. Included in that — the risks due to the change in G.M.’s management.

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