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Like humans, a company is often worth more than the sum of its parts. It is not uncommon for a company to be valued for more than it is worth on the books. Goodwill refers to the intangible value of a company -- things like patents, copyrights, and royalties are considered intangible assets. In an acquisition, if the acquiring company pays more than the company is worth on the books, also known as "book value," the difference is considered goodwill. One component of goodwill is brand, and Brand Finance is a brand valuation consultancy that helps companies determine their brand worth. The firm recently published a study of the most valuable brands in the world for 2014.
Brand Finance used the Royalty Relief method to determine the value that a company would pay for licensing its own brand. It applied a Brand Strength Index, or BSI score, which measured things like financial performance, sustainability, and even emotional connection. Brand-specific revenue was then calculated by estimating the percentage of revenue attributable to each brand, and the royalty rate was applied to forecasted revenue.
Who made the list?
Apple (NASDAQ: AAPL ) tops the list for the third year in a row with a brand value of $104.7 billion; Samsung (NASDAQOTH: SSNLF ) came in second with a brand value of $78.8 billion, followed by Google (NASDAQ: GOOGL ) at $68.6 billion.
Among the three, Google comes in first for stock price returns, followed by Apple, then Samsung. Samsung actually has a negative one-year price return. Clearly, brand isn't everything when it comes to investment decisions. Like GE, Samsung has the ability to establish a brand presence in several industries, but the bulk of the value for the brand, according to Brand Finance, is derived from the consumer electronics division.
IBM has come down considerably in rank this year, from No. 6 to No. 10, and Wal-Mart -- the only non-tech company on the list -- also lost ground, dropping from No. 5 to No. 9. Verizon and AT&T made the biggest leaps up, with Verizon climbing from No. 10 to No. 5 and AT&T climbing from No. 11 to No. 7.
While Apple owns the most valuable brand, the consultancy has another measure of power, or brand strength, that is assigned a rating of AAA+ or lower; AAA+ is the highest rating. Accordingly, Ferrari is the world's most powerful brand. David Haigh, Chief Executive, had this to say:
The prancing horse on a yellow badge is instantly recognizable the world over, even where paved roads have yet to reach. In its home country and among its many admirers worldwide Ferrari inspires more than just brand loyalty, more of a cultish, even quasi-religious devotion, its brand power is indisputable.
Other brands awarded a AAA+ rating include Google, Coca-Cola, Disney, and Rolex.
When comparing the difference between Apple's value and it's more powerful counterparts, Haigh points to Apple's ability to pull value out of the brand, saying:
Apple also has a powerful brand, rated AAA by Brand Finance. However what sets it apart is its ability to monetize that brand. For example, though tablets were in use before the iPad, it was the application of the Apple brand to the concept that captured the public imagination and allowed it to take off as a commercial reality.
While Apple has dominated the brand value charts for three years, Samsung, the only company on the list not based in the U.S., is slowly gaining ground. This South Korean behemoth's brand value increased from $59 billion last year to $79 billion in 2014.
Netflix debuted on the list for the first time at 468th. The company's brand value increased 93% to $3.2 billion last year.
The value of goodwill is directly connected to the value of the company and a large component of goodwill is the value of the brand. If a company's brand is tainted, the stock price will fall, and vice versa. Brand isn't everything, especially for companies that leverage volume over price, like discount retailers. Therefore, brand is important when assessing risk or credibility, but the degree to which it may affect the stock price depends on the company's overall sales strategy.
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