BREDEMA

These enterprises that undervalue their innovative assets

Source: La Tribune
Date: March 23, 2006

By being unable to make its know-how profitable, Arcelor gave a gift to Indian giant Mittal Steel, as explained by the Chairman of Eurotechnopolis Institut. Intangible assets represent a major strength in an enterprise’s wealth creation process.

Beyond the notion of economic patriotism, which is now being rehashed by economic commentators, it is necessary to carefully analyze the issue of undervaluation of the know-how of enterprises at the cutting-edge of research and development (R&D). In an environment where technological battles are increasingly fierce, certain major industrial players risk losing the battle by selling their know-how at a nominal price to large emerging countries such as China and India. This risk is taken seriously by the Finance Ministry which should launch a debate on the weaknesses of economic analysis in this area.

The case of Arcelor is very telling. “It is revealing that Mittal, which only sells basic steel, has a stronger capitalization than Arcelor, which nevertheless produces special steel and high added value alloys.” Denis Ettighoffer, Chairman of Eurotechnopolis Institut, does not mince words. For him, the situation is clear: the Arcelor shares are undervalued on the stock market. “Their price is even ridiculously low,” adds Pierre Breese, industrial property counsel. “Arcelor’s actual capitalization insufficiently reflects its intangible assets (value of trademarks, patents and licenses, etc.), which are much more valuable than Mittal’s assets.” Thus, by acquiring Arcelor, Mittal would seal a very juicy deal.

Eurotechnopolis Institut and Institut de Gestion Sociale conducted a study in order to assess the influence of technological networks as vectors creating combined added value. Part of the questionnaire covered the intangible value issue. Nearly one half of respondent enterprises (48%) claimed that they had “taken steps” in order to value their intangible assets. However, these enterprises were confusing the recognition of their intangible assets and the intangible valuation of their goodwill. “Such ignorance is alarming when it is necessary to value all or part of the enterprise’s goodwill. This image value takes into account the success of their site, the reputation of their brands, the value of their patents, the success of their communication efforts, and the attractiveness of their enterprise for R&D networks,” according to Pierre Breese. In an advanced economy, where knowledge is highly intensive, intangible assets now represent an essential strength for wealth creation in an enterprise.

Many of our enterprises are technological jewels. More specifically, Mittal’s takeover bid for Arcelor would enable the Indian Group to seize technological marvels developed by the French-Luxembourgeois steelmaker. “While Arcelor holds nearly one thousand families of patents, Mittal only owns approximately twenty families of patents, principally originated by French entity Unimetal,” according to Pierre Breese. The Arcelor patents were produced by the following entities: Usinor, Arbed, Cockerill Sambre, Sacilor, Sidmar and Sollac. These plants accumulated a know-how much superior to that of their competitors. According to Eurotechnopolis Institut, challengers ThyssenKrupp and Corus hold ten times fewer patents than Arcelor, but six times more than Mittal.

Has the Arcelor management properly taken into account the IP and innovation issues?” asks Denis Ettighoffer. “We may have doubts about this, as no statement has been made concerning this highly critical issue. A genuine valuation of the intangible assets of Arcelor and Mittal respectively would probably lead to a much more favorable exchange value for Arcelor.”

Denis Ettighoffer and Pierre Breese consider that this imbalance between the intangible assets of Arcelor and Mittal might have severe consequences. First, this might induce a financial loss for the Arcelor shareholders through the undervaluation of the assets in the takeover bid (OPA) because of Mittal’s lack of interest in R&D capital expenditure. This might also entail Arcelor’s weakening in the long run, as compared with competitors which are protecting their innovation capability.

OECD experts agree that the main weakness of many countries, such as France, is to be found in their inability to make their knowledge profitable. The analyses of the profitability of R&D investments also focus on the cost/effectiveness ratio rather than on the economic and systematic impact. “In other words, we receive opinions from experts, while we would need the input of economists,” emphasizes Denis Ettighoffer. One thing is obvious: Arcelor is obviously undercapitalized. “Arcelor’s intangible value has not been recorded on the balance sheet, and this reduces Arcelor’s value in the face of a hostile takeover bid. It is time to remedy this, lest current shareholders become more attracted by a handsome speculative transaction enabling them to get rid of shares whose average return rarely offers exciting dividends. Somehow, we will long for former industrial policies aimed at creating stable groups of shareholders.”

Yan de Kerorguen