Brand, goodwill, and the balance sheet: More than just a feeling

$104 billion. An impressive value for just about any organization. A company with $104 billion in revenues would rank 16th in the Fortune 500, between General Motors and AIG.

But this $104 billion doesn’t represent a particular company’s revenues; it equals the difference between Procter & Gamble’s (P&G) market capitalization ($150 billion) and its book value ($46.6 billion). According to P&G’s 2009 annual report, “The difference is the value P&G shareholders place on the Company’s brands, the earnings and cash these brands generate today, and the confidence that these leading brands will continue to grow in the future.”

$89 billion is another impressive number. It represents the value of net goodwill and other intangible assets on P&G’s balance sheet. These facts raise questions for brand marketers: Why are there tens of billions of valued intangible assets on the balance sheet, and what does this mean?

London-based consulting firm Brand Finance teaches us that brand valuation and other “intangible assets” began to figure more prominently on balance sheets over 20 years ago when, “the corporate raiders and asset strippers of the 1980s who targeted brand rich companies and paid significantly more than their net asset value. This resulted in huge ‘goodwill’ values that had to be recognized.” All of a sudden, companies realized that they needed legitimate means to account for brands so that the true value of a company was recognized on the balance sheet.

CoreBrand is another company specializing in brand valuation; others include Interbrand and Millward Brown. CoreBrand defines an intangible asset representing, “the reputational portion of goodwill.” (CoreBrand published the CoreBrand 800 that tracks top brands. P&G ranked 50 in the Q4 2009 rankings. CocaCola ranked first. According to its 2009 annual report, CocaCola’s combined goodwill and intangible asset value was $6.6 billion.)

For P&G, its $89 billion net goodwill and other intangible asset value has been built over decades of investing in research to deliver innovative products, and well-executed, highly strategic marketing and branding initiatives. The company puts it pretty simply, “P&G’s billion-dollar brands are platforms for innovation. They are global leaders. Consumers want them in their homes. Retailers want them in their stores. They enable us to bring innovation to consumers around the world effectively, efficiently and profitably. They make consumers’ lives a little better, every day.”

Numbers like these clearly have the attention of company CEOs and CFOs, as evidenced by their appearance on balance sheets. However, brand values have further financial implications for annual reports. First, brand valuation plays a critical role when a parent company moves to sell or divest a brand. The purchase of Pabst Blue Ribbon at $250 million is a good example of brand valuation driving a sale. Second, brand strength is a key factor in stock price. We’ve already discussed the $104 billion gap between P&G’s market capitalization and its book value, but also take a look at this interesting story about company stock performance following appearances on this spring’s successful Undercover Boss. Each public company’s stock was higher since the episode aired.

$104 billion and $89 billion – these numbers are more than just a feeling, they are real numbers vital to a company’s financial health. How does your branding strategy fit into your company’s financial strategy? We welcome your thoughts.