Intangible Assets Plus Hard Numbers Equals Soft Finance

Things used to be what chief financial officers, merger-and-acquisition strategists, bankers, and fund managers were paid to keep track of: tangible assets that determined a company's value. Those things were, quite literally, things: plant and equipment, factories and machinery, buildings and inventory. They were assets that determined a company's value, assets that could be measured and used to calculate return on investment. Those assets were solid, and so were the financial decisions based on their value.

But in the world of finance today, things aren't what they used to be. In the new economy, the most valuable assets have gone from solid to soft, from tangible to intangible. Instead of plant and equipment, companies today compete on ideas and relationships. Assets come in the form of patents, knowledge, and people. These kinds of assets are soft and squishy, and number crunchers and bean counters hate them. How do you assign a dollar value to an engineer's startup experience? How much is a personal network worth? How do you decide whether to finance a new internal project when its only assets are an idea and a team?

Hard questions about soft assets are driving finance professionals to develop new measurements, new reporting forms, new tools and techniques for an economy based on intangibles.

At Macromedia Inc., for example, a San Francisco - based Web-software company, CFO Betsey Nelson finds herself calculating value based on how close the company can get to its customers. "We're looking at the value over time of a relationship," she says.

At Silicon Valley Bank, in Santa Clara, California, Ken Wilcox leads his loan officers in equating company value with the value of people networks inside and outside the company: "A management team that can change fast is of the greatest importance," says Wilcox, SVB's president, chief operating officer, and chief banking officer.

At Nortel Networks Corp., a Brampton, Ontario - based maker of gear for voice and data networks, Klaus Buechner, the company's mastermind of merger-and-acquisition strategy, assigns a high value to any acquisition that promises to accelerate Nortel's entry into markets for Internet-protocol networks. "The driving motivation in this new dynamic is time to market," Buechner says.

At California Public Employees' Retirement System (CalPERS), in Sacramento, Bob Boldt, who is in charge of investing more than $140 billion in retirement money, finds value in companies that can motivate individuals. "As the external owners of a company, we want to know that the guys who are in there making decisions for us on a day-to-day basis -- the engineers, the managers -- have the same interests as we do," says Boldt.

What emerges from these people's experiences are valuation methods that mix the traditional and the new: cash-flow analysis and scenario analysis, discipline and experimentation. Together, they are setting the standards of soft finance.

The Value of Relationships

Betsey Nelson, 38, knows all about intangible value. As CFO of software maker Macromedia, she lives in a world of soft finance. Her number-one worry: "people assets" -- the engineers who help Macromedia create some of the favorite tools of Web-page designers, including products like Director, Flash, Fireworks, and Dreamweaver. About the only tangible asset on Nelson's balance sheet is the structure that houses her company, a modern office building in Silicon Valley.

"Everything we do is intangible," she laughs. "The top line, the bottom line, everything is intangible. We are the poster child for intellectual property." Macromedia, a high-tech oldster formed in 1992, has 550 employees and an executive team made up of baby boomers. Publicly traded on NASDAQ, the company thinks of its job as "adding life to the Web." Other Internet outfits offer customers the tools they need to load Web pages onto their PCs. Macromedia offers customers the software they need to make those pages dance, to get letters to hop, to enable cartoon figures to sing -- the kind of performance pizzazz that lights up a Web surfer's glazed eyes.

In a company that runs on techie know-how and intellectual property, Nelson fits right in: She may hold the title of CFO, but she is no narrow-minded bean counter: She speaks French, Portuguese, and Spanish, she studied at the Wharton Business School at the University of Pennsylvania, and she has worked for the World Bank.

Among Nelson's biggest leadership challenges: assessing the value of projects like the New Way, an internal-investment strategy aimed at shifting much of Macromedia's business onto the Web. Of course, the company is already all over the Web, where it mounts an awesome presence. But despite the company's Web-savvy tools, it has yet to apply all of the Web's most powerful lessons to its own business practices. Even today, 75% of Macromedia's sales flow through distributors, dealers, and other indirect channels. So the company has set about building a new neighborhood in cyberspace, where business -- everything from creating customer awareness to making sales to offering technical support -- will flow through macromedia.com. The New Way, Nelson says, is just that, a whole new way of dealing with customers on the Web.

The potential benefits are huge -- and the potential costs of doing nothing, or doing the wrong thing, or of doing the right thing but doing it poorly or too slowly, are enormous. Fine. But what are the stakes exactly? In other words, when you're a CFO in cyberspace, how do you do the math?