For the past two years. companies have hunkered down and hoarded equity capital and cash on their balance sheets, bringing mergers and acquisitions to a virtual halt. With dealmaking reviving, bidders would be wise to stop, catch their collective breath and ask, “Am I buying what I think I’m buying?” That’s the message from Mary Adams, co-author, with Michael Oleksak, of a new book, Intangible Capital. In it, they argue that many mergers and acquisitions come unglued because the customary methods of valuing a target company’s intangible assets fail to tell the full story. While no finance executive would disagree that putting a number on an intangible asset like goodwill is more art than science, in a transaction where shareholders are scrutinizing every dollar spent, a better way is surely needed.

If intangible assets were only a small fraction of a company’s value, they might not make much of a difference in whether a deal succeeds. But according to an Ernst & Young survey of 709 M&A transactions in 2007, intangibles essentially are the company. The survey indicates that a mere 30% of the average purchase price of a company could be allocated to tangible assets, while 23% could be allocated to identifiable intangible assets like customer lists, contracts and intellectual property. That leaves a whopping 47% in goodwill–the extra value ascribed to a company by virtue of its brand and reputation.

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