How much is that Big Data in the window?  Big Data decisions impact Business Valuations

As both digital and traditional companies become more and more dependent on data to compete in today’s information economy, data is starting to have an irrefutable impact on companies’ valuation and reputation. The decisions companies make about how to use data can have an enormous impact on the success of modern enterprises, as well as on their image, their public perception, their competitors, and regulators.

According to recent research, companies must recognize this new reality in which corporate reputations may be negatively impacted by decisions they make concerning data within their control. As companies are incurring significant costs to capitalize on the enormous amounts of data – so-called Big Data – constantly generated by the Internet of Things (IoT), social media platforms, websites, and other sources, they must appreciate that their use, misuse and governance of data can have a direct impact on their goodwill and ultimate valuation.

I.  How Modern Corporate Enterprises are Valued

The calculation of a modern company’s valuation extends beyond the sum of its tangible assets. Goodwill, an important component of any company’s valuation, has no physical component and qualifies as an intangible asset rather than tangible brick and mortar assets. Valuing goodwill is the difference between the purchase price of a company and the fair market value of the tangible assets involved in the acquisition.

Goodwill is comprised of subjective elements such as reputation, the value of a company’s brand name, customer lists, and positive customer interactions. Since there is no separation between goodwill and a business itself, goodwill has no expiration date and cannot be sold or transferred separate and apart from the entire business.

Intangible assets in the modern corporate environment can sometimes substantially trump the value of tangible assets and have a crucial impact on a company’s successful future. A company’s reputation cannot be treated as an inconsequential and undefined metric but must be acknowledged as a critical component of a company’s overall valuation.

Modern industries typically allocate more than 50% of the purchase price of a business to goodwill. Internet and E-commerce companies reflect even higher allocation percentages. Indeed the 2014 Reputation Institute’s Annual Reputation Leaders Study noted that number one of the top 10 questions asked by the Reputation Leaders Network Membership was: “How do we measure the business value from improving our corporate reputation?” The study emphasized that one of the four critical competencies necessary to manage corporate reputation is “Intelligence & Strategy,” which features the analysis of Big Data at its crux and the development of business strategy based upon research identifying public views of a corporation.

Therefore, companies today cannot ignore the inevitable risk of losing control of their reputational branding on both internal (employee-based) and external levels, especially because of social media’s omnipotent role in shaping public perception at lightning fast speed.

II.  Valuing Today’s Most Data-Dependent Companies and Ever-Growing Digital Enterprises

Pursuant to Generally Accepted Accounting Principles (GAAP), data has no value. In stark contrast, however, Wall Street values data in the trillions of dollars. Although data may be difficult to value under current accounting principles, Wall Street has figured out that there is real value attached to being well-versed in selling or utilizing data to make better business decisions, inform business intelligence, create additional revenue channels, or form more personal connections with consumers.

Not surprisingly, then, data is now being seen as an important component in the valuation of modern corporate enterprises, especially for social media companies. Goodwill is at the forefront of factors affecting valuation, while others include the number of users, revenue (including advertising), and ability to capture market share. According to Appraisal Economics Inc., the value of a user of a social media website constitutes a “unique valuation” derived from the “worth of virtual goods and services.” The Average Revenue per User (“ARPU”) for companies like Facebook, Twitter, LinkedIn, and Pandora, is tied directly to the amount of data these sites acquire from and maintain about their users, such as, location, credit card information, relationships, and personal preferences.

The translation of the importance of data in the valuation of modern enterprises is well illustrated by Facebook’s IPO – the largest opening valuation for an American tech company. Its startling and consistently high valuation is inextricably linked to how valuable its users are to advertisers and companies, particularly as to how they “like,” “share,” and respond to various sources of data.

III.  Legal Implications Regarding Data Use, Misuse, and Governance

Even though accountants view Big Data as too intangible to value, it is now well appreciated that data mishaps, including data breaches, compliance violations, and mismanagement can generate very tangible liabilities such as damages, fines/penalties, and heightened storage and litigation costs. Moreover, as a result of data misuses or mishaps, corporate boards have been the subject of lawsuits, executives have lost their jobs, customers have moved to competitors, and companies have been deluged with bad press.

Companies are urged to undertake a thoughtful analysis of the legal and reputational issues that are implicated by their potential use of data. Depending on the data at issue and its location, a variety of laws and regulations impact how enterprises collect, store, and use data. The issues are even more complicated for multinational companies. Further, in addition to international laws, a patchwork of US laws, including 47 different state breach notification laws, need to be evaluated in the event of a data breach. The sale and resale of data can also trigger various laws.

Even if the company’s intended use of data is compliant with law, it also should consider how customers and the public at large will react to disclosure of the company’s data practices. Intrusive, unethical or “creepy” uses can result in bad press. For example, Facebook’s manipulation of news feeds to ascertain the impact on users’ moods and Uber’s collection of suspected “one night stand” data, its so-called “Rides of Glory” research, generated negative headlines. Facebook and Uber apologized following public outcry. In today’s data-driven environment, it is very possible that customers will eventually refuse to entrust their data to entities that will use it in ways that might anger or embarrass them. Today’s companies should ensure — before Big Data projects are undertaken — that their use of data is consistent with how they want to be viewed in the marketplace and with their “brand.”

IV.  Conclusion

Modern companies need to heed the wake-up call to evaluate the legal and reputational issues associated with their use of data, before engaging in any Big Data project. Proactive management of data should be incorporated in the arsenal of corporate best practices and dictates the development of thoughtful policies, processes, and procedures that are consistent with corporate goals and ensure compliance.


Co-Author:  Melissa Kosack, Counsel at BakerHostetler 



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