Intangible Assets:
A principal reason why it is difficult to value tech investments is that much of their value is represented not by physical assets that accountants show on the balance sheet but by intangible assets such as their capability for innovation. The value of Google’s net tangible assets is less than 10% of its market capitalization. Clearly, the stock market is valuing some assets other than the tangible assets when trading in Google’s shares. A common example of intangible assets is the value of the customer base of a telecom company. Valuations of telecom companies are often justified based on price multiples of number of customers. Implicit in such a simple valuation method is the assumption that the future cash flows depend only on the size of the existing customer base. Important in this calculation are the sustainable future profit margins and the likelihood of retaining the customers, both of which are assumed to remain constant over time. However, these key parameters in the valuation model depend fundamentally on the potential changes in technology, the actions and reactions of the competitors, and the selections made by customers from the choices offered by the competing companies. Would the acquisition of Hutchison’s customers enable Vodaphone to sustain higher margins and dominate the industry or would Vodaphone begin expanding its market share by targeting the more price-sensitive segment of the market? And, what would be the competitive response