An economic model of trademark values and the impact of bankruptcy liquidations

1. Trademark Values in
Corporate Restructuring
Originally presented at the 2007 Western Economics Association International Conference
Fernando Torres, MSc
Chief Economist
ftorres@ipmetrics.net

2. Abstract
Reporting on progress made to date
developing theoretical and empirical
bases for trademark valuation in
corporate restructuring and its
application in several cases.

3. Agenda
1. I. P. and the Bankruptcy Context1. I. P. and the Bankruptcy Context
2. Trademark Value Model2. Trademark Value Model
3. Econometrics of TM values in BK3. Econometrics of TM values in BK
4. Applications and Discussion4. Applications and Discussion

4. IP and the Bankruptcy Context
• Bankruptcy is a set of laws providing for the regulated
transfer of debtors’ assets to creditors in order to settle
claims
• Assets and liabilities must be valued to arrive at the
appropriate transfer ratio
• An administrative process, not negotiated in a market
• Increasingly, intellectual property (IP) represents a
significant proportion of the value to be transferred

5. IP and the Bankruptcy Context
• Generally, IP [especially trademark values (VTM
)] are not
observable
 GAAP does not recognize internally generated IP value, only
acquisitions (since 2001, FASB 141-142)
• When recognized in financial statements, rules of thumb are
typically applied to estimate loss of value (10% or 20%)
• We are building a database of VTM
disclosed in relation to
acquisitions in/out of bankruptcy

6. Trademark Value Model
• Literature uses indicators (registrations, etc.) as proxies
looking to explain stock prices or marginal profitability
as a function of intangibles
• We seek to explain VTM
as a function of the sales the TM
supports, the context in which TM was acquired
(liquidation or going concern), the scope of TM use, and
other exogenous factors
• V™ = f (S, t, GL, LIQ, other factors)

7. Trademark Value Model
• In TM valuations reported, most often ‘Relief from Royalty’
method is applied
• NPV (k) of growing (g) annuity cash flow of royalty (r) on
sales (S):
• A hypothesis is VTM
may be = ρS
α
∫
−
= dterSV tkgTM )(
00

8. Trademark Value Model
• Allowing for the (α) elasticity of VTM
and Sales, the
NPV solution is:
1)(00
−
= −gk
TM
e
SV α
α ρ

9. Econometrics of TM values in BK
• Relative orders of
magnitude of the VTM
/S
ratio, for a 5% royalty
rate in scenarios
combining high and
low risk (reflected in
the cost of capital) and
growth rates:
VTM
/S
Slow
Growth
(g=2%)
Fast
Growth
(g=5%)
High
Risk
(k=30%)
0.15 0.18
Low
Risk
(k=12%)
0.48 0.69

10. Econometrics of TM values in BK
• Estimated log version of model:
Ln(V™) = β0
+ β1
Ln(S) + β2
Year + β3
Liq + β4
Int’l+ ε
Variable Coefficient Std. Error t-statistic p-value
Constant 466.009 255.838 1.8215 0.08006 *
Ln(S0) 1.00563 0.130739 7.6919 <0.0001 ***
LIQ -1.99686 0.490205 -4.0735 0.00039 ***
GL 1.10898 0.580508 1.9104 0.06718 *
t (year) -0.233636 0.127063 -1.8387 0.07740 *
Table 1
General Model: OLS Estimates
Dependent variable: Ln(V™)
Adjusted R2
0.797712
F-statistic (4, 26) 30.5759 (p-value < .0001)
Log-likelihood -45.2518
Akaike information criterion 100.504

11. Econometrics of TM values in BK
• Estimated reduced version of model (β1
=1):
Ln(V™) - Ln(S) = β0
+ β2
Year + β3
Liq + β4
Int’l+ ε
Variable Coefficient Std. Error t-statistic p-value
Constant 471.398 219.006 2.1524 0.04046 **
LIQ -1.99523 0.479619 -4.1600 0.00029 ***
GL 1.10641 0.566665 1.9525 0.06132 *
t (year) -0.236271 0.1093 -2.1617 0.03967 **
Table 2
Reduced Model: OLS Estimates
Dependent variable: Ln(V™/S)
Adjusted R2
0.511644
F-statistic (3, 27) 11.4768 (p-value < 0.0001)
Log-likelihood -45.2529
Akaike information criterion 98.5057

12. Applications and Discussion
• The liquidation trademark value is only 13.58%
of the going concern value
• The interquartile range for this ratio {exp(β3
) } is
from 8.84% to 18.54%
• International trademarks are more valuable per $
of sales
• Applied in IBC, MM Chapter 11 reorganizations

13. Scattergram
Going Concern and Liquidation Trademark Values
$1
$10
$100
$1,000
$10,000
$100,000
$1,000,000
$10,000,000
$100,000,000
$1,000,000,000
$10,000,000,000
$100,000,000,000
Kraftpurchase
ofN
abisco
G
eneralM
ills
purchase
ofPillsbury
C
oors
purchase
(m
erger)ofM
olson
Kellogg
purchase
ofKeebler
Sara
Lee
purchase
ofEarthgrains
C
hiquita
purchase
ofFresh
Express
Sm
uckers
purchase
ofIntlM
ultifoods
XO
C
om
m
.purchase
ofAllegiance
Pinnacle
Foods
purchase
ofVlasic
H
orm
elpurchase
ofC
laugherty
C
am
pbellpurchase
ofEurope
C
ulinary
Brands
Lance
purchase
ofTom
's
Foods
Terabeam
purchase
ofProxim
Sara
Lee
purchase
ofButter-Krust
JJ
Snack
Foods
purchase
ofC
ountry
H
om
e
Bakers
M
cC
orm
ick
purchase
ofC
.M
.van
SillevoldtB.V.
Flow
ers
purchase
ofD
erst
R
alcorp
purchase
ofM
edallion
Arisoftpurchase
ofC
om
dial
Flow
ers
purchase
ofBishop
Baking
H
orm
elpurchase
ofArriba
IC
EE
purchase
ofSlush
Puppies
Flow
ers
purchase
ofIdealBaking
TrademarkValue
GC LQ GC LQ

14. Additional Application
• Investment fund client, IP asset backed securitization for
$5M need 3x coverage
• Conventional direct analysis:
GC: $44.7 Liquidation: $6.72 (15%)
Trademark Value
Year Scope Sales (M) % GC % of sales LIQ % of sales
Domestic 377.0$ 78% 23.22$ 6.2% 3.15$ 0.8%
International 106.0$ 22% 19.65$ 18.5% 2.67$ 2.5%
Total 483.0$ 100%
TOTAL 42.87$ 8.9% 5.82$ 1.2%
Proportion 100% 13.58%
Liquidation valuation range:
Upper 7.95$
Central 5.82$
Lower 3.79$
2007

15. Thank You
For Questions and Related Materials, please contact the author at:
Email ftorres@ipmetrics.net
Twitter @FTorresMSc