The Age from Melbourne, Victoria, Australia on December 18, 2000 · Page 28
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The Age from Melbourne, Victoria, Australia · Page 28

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Melbourne, Victoria, Australia
Issue Date:
Monday, December 18, 2000
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Page 28
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MONEY & INVESTMENT THE HE AGE 7 NDAY DECEMBER 18, 2000 ING NEWS'ipKage.com.au What's in a name? Plenty The stockmarket becomes agitated by changes to the Prozac patent, highlighting how companies are increasingly rated by their intangible assets. DAVID M.WALKER reports. A i n the past, companies usually measured their worth' by the value of tangible assets buildings, vehicles and machinery - things you could touch. Combine these with product sales and you had, more or less, the overall value of a business. ; Then technology businesses such as Sun Microsystems, Microsoft and pharmaceutical companies such as Glaxo Wellcome found themselves being valued at prices far higher than the book value of their tangible assets. The new valuations ot these so-called new-economy companies came largely from intangiDle assets, non-pnysical possessions including brand names, intellectual property that comes from research and development, copyright, trade secrets and employee expertise and patents. ;. A recent example of shareholders abandoning a Company whose intellectual property - in this case a patent - was under threat was US pharmaceutical giant Eli Lilly, which owns a patent over and makes the anti-depression medicine Prozac. Prozac comprises about 26 per cent of Eli Lilly's annual revenue, and in early August a New York court ruled in favor of Eli Lilly's rival, Barr Laboratories, in a challenge of Eli Lilly's Prozac patent, which would have expired in 2003. On the day the court ruled Ban-Laboratories should be allowed to sell a generic rival to Prozac by August 2001, Eli Lilly's share price fell by up to 30 per cent, and Barr Laboratories rose by up to 66 per cent. In effect, shareholders were saying almost a third of Eli Lilly's worth relied not only on one product, but on a legal document protecting Eli Lilly's exclusive rights to market Prozac. Anthony Cross, a London fund manager incusing on small companies with strong intellectual property, says shareholders in listed companies should ask management whether they have strong patents in place that can stand up in court. Broker research, particularly from analysts that are not the company's house brokers, may provide information on patent strength. IP Australia cites an Australian example of a company's failure to protect its intellectual property - a failure that cost the company dearly. In 1972, the electrical goods company Kambrook developed the electrical power board but did not patent it. "I've probably lost millions of dollars In royalties alone (by not patenting the design)," Kambrook managing director Frank Brannigan told IP Australia. "Whenever I go into a department store and see a wide range of power boards on offer, it comes back to haunt me." Shareholders might not lose money, but they could miss out on sizeable gains. Giant multinationals such as Mars patent brand names. The company says its brand names, packaging design and advertising to build intangible goodwill all require and deserve protection. Intangibles can be a key driver of long-term share price growth, Mr Cross says. "The great thing about intellectual capital is that it's very difficult for companies to imitate," he says. You can quite easily go out and buy tangible assets, but it's very difficult to imitate somebody else's culture, brand (and) customer relationship strengths. Because it's difficult to imitate, companies are able to sustain growth for quite a long period of time if it's properly in place." Caspar Rock, fund manager with London's Framlington Investors, says consumers can measure a brand name's strength largely by using common sense. He cites Heinz and Ford in America, British Telecom in Britain and Volkswagen in Germany as strong brands. Investors need to ask, if they were shopping, what name would they think of first, because impulse purchases and so profitability often follow the name first thought of. Companies that fail to find out whether names and designs are already held by competitors in foreign countries can pay neavuy in product recalls and redesigns II the competitor pursues legal action over patents or copyright, potentially sapping shareholder returns and damaging reputation. Buying or licensing brand names tor second companies can also prove expensive. One wav of valuing a businesss intellectuaiproperty is to spin off a division that owns the brand names or patents, and see how the market values it. Another is to dig out research and development that might not have been commercialised within the organisation after merger or acquisition, or when staff depart. This can be worth millions of dollars if commercialised or sold. Mr Cross says the ability of consumers to buy products from around the world has put pressure on companies to concentrate on adding value to products and services rather than merely cutting costs. People are very brand aware. Companies have to be aware of this and add value to their basic production to attract customers; in other words, the intellectual capital. It's no longer about the ownership of physical assets. Mr Cross says that because staff create intellectual capital, conduct R&D, draw up patents to protect products from competition and organise marketing for brand names, investors should ensure companies motivate and keep staff through remuneration and well-structured share and option plans. He says investors should compare a company's expenditure and return on R&D compared to its competitors, which should be available in annual reports as well as the average cost of retaining employees, which should be available from broker reports. The latter figure, he adds, is quite a good indication that there are skilled individuals operating within that business who are providing the company with intellectual capital. The end of secret intellectual capital? Microsoft has become a multi-billion-dollar company by keeping secret the underlying programming, or source code, on which its proprietary software is based. Trade secrets have made Microsoft rich. But In the past five years, software developers rivalling Microsoft have emerged writing software based on Linux source code. One stipulation of using Linux is that software-design companies that use it, such as America's Red Hat, make public the source code they have used for their software. In Linux, no programming secrets involving intellectual property are withheld from competitors. The theory runs that the more people scrutinising the programming underlying a product, the quicker any faults can be ironed out and improvements offered. Share prices of some businesses with Unux-based products have grown almost as quickly as Microsoft's. But can it continue) With Microsoft's pending break-up in the US, Linux could emerge as a new programming force, without the trade secrecy based on intellectual property of its Seattle competitor. M Q. I am looidng to buy a new car, whkh wif coat me about $13,000 after trade-: In I hws Mout moiMy to psy ciurfi buc rBJitovtng thst Amount of monoy from nifbfomccounthmtotmduntkg.l hftvo money In two Accounts ono -account pays 04 par cant and anothar wMt me) nm HHmey mi rej.pays 5.2 par cant, b there any benefit in only using $13,000 of my own money and making up the difference with a perianal bank loan of (ay $10,000 at J I per cent over say three years? The car will be for personal use only. A. When you take into account the fact that the $10,000 loan should cost you only $1,650 Interest over three years, it makes good sense to leave your capital Intact However, I suggest you talk to an adviser about makingoetter use of the money you have in the bank, because in the long term, bank deposits give the worst returns. Q. Can you please confirm whether . Interest charged on an Investment property loan b a tax deduction? A.' All expenses including interest, rates, and insurance incurred bom an income producing property are tax deductible, lust appreciate that It is the purpose of the loan that counts. For example, you. could not borrow against a rental property to buy your own residence and claim a tax deduction, as the purpose of the loan is a private one. Q. I am 26 and single, a professional earning between $60,000 and $80,000 a year, debt free with no real assets and rent a home for $70 a week. I have $1800 a month In disposable Income, , about $35,000 In a bank account paying S per cent interest, and would like to Improve this return. I was looidng at using between $10,000 and $15,000 of my savings for managed share fundi and the remaining $20,000 as a deposit on an Investment property of about $ 1 50,000. 1 hope these will reduce some of my taxable Income. Does this plan sound reasonable or would I be better looidng at other tax-effective Investments such as some of the agricultural schemes. I am happy renting and being mobile with my lifestyle and work. I do not want to accrue or rent household furniture, which I would need In a nous of my A. Your goal should be to increase your net worth and the way to do this is to invest In assets with strong potential for capital gain. From the tone of your letter, . you are over-focused on saving tax and I suggest you concentrate on what asset class will give you the highest returns. I ' strongly believe that this is Australian industrial or international shares and you can access these easily through many trusts. You are ideally suited to undertake some conservative margin lending and I recommend you talk to an adviser about putting a strategy in place. Q.You often suggest Investing bi share trusts. Some years ago, I took your advice and bit year incurred a tax liability on $8000 income (earned by the trust) with no cash distributions to pay for It. As the fond builds up, the Income Increases and more taxable Income is generated. Unless I have a . good Income from other sources there will come a time when I cannot put more into the share trust as I must save It to pay for the tax liability that this Investment creates! Do you have a solution? I am now looking at selling these units (for whatever taxable gain) and putting the money Into my super fund along with the regular contributions that I previously made to the share trust account. Is this a good , ideal This wM be an undeducted . CMitrfiHitlon.WHI the Income the super fond generates be taxed at IS percent,' and on retirement can I withdraw the lot, tax free? I Intend to rattrsi in about ; nve years and need to ntaxftrftbo my - leuiemefitfuno as t wm do too rich for the pension, but : to live comfortably off my own . resources. . . . A. What you say highlights one of the - problems with managed funds but fund -managers justify it on the grounds that . they can maximise returns by taking profits when they believe a particular stock has reached its potential Don't forget that since the capital gains tax rules have changed you pay CGT on only SO per cent of capital profits, provided the asset has been held for at least 12 months. Therefore you can expect future distribution statements to show two types of capital profits - less than 12 months and more than 12 months. I -believe the fund managers will try to maximise over- 12-months profits with -the aim of reducing your tax liability. It is possible to redeem the investment and invest the money in superannuation as an undeducted contribution but be aware that the money is inaccessible until you reach 55 and retire. Noel Whltaker is a Brisbane-based financial adviser and author of five books on personal finance. Send personal finance questions to: Money & Investment The Age, PO Box 257C, Melbourne 300 1 , or e-mail them to moneymeage.falrfax.com.au OPEN TO OFFERS. IPI Advantage BAM CKBDIT UNION MORTGAGE SOLUTIONS AUSTRALIA With over 350 home loans to choose from don't waste your time ringing one lender after another Call (03) 9890 4254 Australia's leading mortgage advisory organisation Classifieds Online I www.theage.com.au v Whether it's a computer or a rare coin, you'll find there's no limit to the things that can be bought and f ayeav sold on SOLD.com.au, Australia's biggest online auction site. 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