Corporate Failure Is a Valuable Asset That’s Hard to Protect

The fraction of enterprise value of large US companies represented by tangible assets — things like real estate and inventory — has fallen from 50% to 20% over the past 15 years. Moreover, only about 25% of enterprise value is in identifiable intangible assets such as patents, copyrights, trademarks, customer lists, and data files. The remaining 55% is in assets too intangible to even identify clearly — things like technical knowledge, corporate culture, going-concern value, and customer relationships.

A recent article in Business Law Today calls attention to something less tangible still — the economics of negative information assets. How do you assess and safeguard corporate know-how about products that didn’t work, dead-end research, or failed experiments at a time of heightened staff mobility?

For companies with little in the way of tangible assets or recurring revenue — ones valued primarily on expected future products and services — gauging the worth of what a company knows is key, and much of that knowledge is about approaches that don’t work. Moreover, that knowledge only has value if the company can protect it.

Just as normal matter exists in a sea of dark matter and dark energy that makeup 95% of the universe, positive business information (such as product specifications) exists in a much larger sea of negative information (such as ideas that don’t work). Advertisers work to create brand names — positive information assets — but also to warn against an innumerable list of dangers from head (dandruff) to toe (athlete’s foot) or make “where’s the beef” criticism of competitors’ products. Such negative information assets increase the value of a product by making the alternative seem worse. Employee handbooks list a few positive admonitions and much longer lists of what not to do.

Not only are intangible assets — especially negative information assets — growing rapidly in economic value, but they are also getting harder to protect. Employee mobility has grown since 2008, especially in technology fields; and the government is working to increase it further with Federal Trade Commission efforts to ban non-compete clauses and the proposed Workforce Mobility Act of 2023. Courts are getting more reluctant to grant patents and other intellectual protection, especially on software. Work-from-home means information spills out to uncontrolled locations, and of course, the Internet makes transmitting information far easier than in the past.

From an investors’ perspective, this means that only about 20% of what you pay for an average stock covers assets that can be easily insured and protected against theft or damage; and that creditors can seize and sell in bankruptcy with some hope of recovery. Stock investors are hoping for future cash flows to be generated mostly by intangible assets, in many cases assets that cannot even be identified clearly and may be negative. Creditors can look to only a small portion of enterprise value to secure loans.