How To Monetize Your Brands

Over the past 20 years, the value of the stock market has soared, even as the assets of its compenent companies have grown much less quickly. If you work in the intellectual-property world, this is something you see in a different way: you see that as much as 80% of the value of the S&P 500 is made up of something known as "intangible assets", such as patents, brands, copyrights, trademarks, and the like.

Now the problem is that it's all but impossible to put a dollar value on these intangible assets. You can put a dollar value on tangible assets, and then subtract tangible assets from total enterprise value to get the value of intangible assets. But if you walk into a bank brandishing a trademark or a patent, you're not going to find it very easy to take out a loan against it.

Slowly, that's changing. At a panel today I learned about this fascinating story in BusinessWeek, talking about the financial engineering going on deep in the bowels of Sears. (By the way, does anybody know how to find a byline on a BusinessWeek story? I'd love to credit the author.) Sears is owned by financier extraordinaire Eddie Lampert, and he's done something rather interesting: he's transferred ownership of the brands Kenmore, Craftsman, and DieHard to a Sears subsidiary in the Bahamas. Sears then pays its subsidiary royalty fees to license those brands. And the subsidiary, in turn, has securitized those royalty fees, creating $1.8 billion in bonds. The only thing which hasn't happened – yet – is the actual public sale of the bonds, which still reside deep in the Sears accounting empire.

All of this looks for all the world like money going around in circles. But in fact it's much more profound than that, because Moody's rated the bonds – and it gave them an investment-grade rating of Baa2, four notches better than Sears' junk rating of Ba1.

It's worth noting that bondholders have no right to the intellectual property in question: they have a right only to an income stream from Sears, which you might think would be rated the same as any other income stream from Sears. But evidently Moody's determined that a company will nearly always pay for the right to use its brands, even if it has defaulted on its own bondholders.

We're at the beginning, it would seem, of a world where companies can begin to unlock the value in their brands. At the moment, if you want to buy Coca-Cola the brand, say, the only way you can do that is by buying Coca-Cola the company. Eddie Lampert, as well as the people behind the new Intellectual Asset Finance Society, would like to change that.