Article originally published on Forbes.com
CIOs unwittingly may be the caretakers of their company’s most valuable asset: its data. Unfortunately, most CIOs and their CFO counterparts continue to take their cue about valuing their company’s data from antiquated GAAP and IFRS accounting regulations. Instead, they should have a heads-up and proactive awareness of contemporary market forces, the art-of-the-possible with data, and investor exuberance about data-savvy companies.
Customer Data Cushions Emergency Landings
Recently, with their businesses stricken by the Covid-19 pandemic, both United Airlines and American Airlines have secured multi-billion dollar loans by collateralizing their MileagePlus and AAdvantage customer loyalty programs, respectively. The third-party appraisals of their data suggest that it is worth two to three times more than the market value of the companies themselves. United’s customer data was valued at $20 billion while its market cap at the time was about $9 billion. Similarly, American’s data was valued at a minimum of $19.5 billion and up to a jaw-dropping $31.5 billion, whereas its own market cap was hovering at less than $8 billion.
In previous years as investors clawed for scraps at Sports Authority’s and Radio Shack’s “going out of business” sales, the highest bidders were not interested in their inventories of jockstraps and joysticks, but rather in their customer data. And in Caesar Entertainment Operating Corp’s bankruptcy proceedings, creditors cashed in its Total Rewards customer loyalty database for over $1 billion—more than any other Caesars property.
Notice a trend? These pre-digital businesses were compelled to appraise and leverage their data in new ways only once they were in deep trouble. Thankfully today, United Airlines and American Airlines haven’t had to wait until the point of no return and a resultant fire sale. They may be able to pull-out of their stalls on the winds of 1s and 0s. A fast-emerging appreciation of data’s value and liquidity has enabled these companies to collateralize their data, whereas just a few years ago this would not have been an option for companies like Sports Authority and Radio Shack.
No Accounting Recognition? No Problem
But why wait until your business is in a nosedive to have its data appraised? The reason (or rather the excuse) somewhat lies in a set of archaic accounting standards with their roots in the 1930’s Depression era that disallow businesses from recognizing and reporting on the value of their data. In this time before computational ubiquity, all data whether in books, magazines, ledgers and even Hollerith punch cards, was of a physical nature. Yet here we are in the midst of the Information Age and the thing that gives this age its moniker still is scantly acknowledged by “modern” accounting practices.
Enter the investors. As much as accountants are pragmatists, investors are opportunists. The latter in their never ending quest for alpha have come to favor digital, data-rich, and even merely data-savvy businesses—not just for their multiples, but for their data itself. Microsoft’s $26 billion acquisition of LinkedIn wasn’t for its 1990’s-style web app or the hardware that hosts it. Nor was Facebook’s nearly $22 billion acquisition of WhatsApp. While some experts contend that these stratospheric acquisition price tags were to “get their customers”, customers and their loyalty resulting in future cash flows must be earned and cannot be bought. Nor can customers themselves be considered actual assets since people cannot be owned or controlled. On the other hand, customer data—including their transactions, interactions and profiles—can be owned and controlled, notwithstanding more recent right-to-be-forgotten privacy regulations like those in the California Consumer Privacy Act (CCPA) and the EU’s General Data Protection Regulation (GDPR). Therefore data itself was the asset central to these corporate acquisitions.
Data-driven premiums are not only the provenance of the deep-pocketed digerati, however. The market in general favors data-savvy companies. A recent study by Gartner found that on average the ratio of market value to tangible asset replacement cost (known as Tobin’s q), even for pre-digital companies, is nearly two times greater for those that demonstrate certain data-savvy behaviors.
“Data-focused companies increasingly comprise large components of client investment portfolios,” says financial advisor Steve Galminas. “Even though these companies are prized by investors, the lack of public disclosure about their wealth of data assets may still make them undervalued in many cases.”
The Case for Proactive Data Appraisal
As the saying goes: You can’t manage what you don’t measure. Accordingly, you can’t monetize what you don’t manage. Unlike with their other assets, this vicious cycle persists in most companies when it comes to their data. A failure to quantify the actual and potential value of your company’s data can lead to complacency in the way it is governed, integrated, transformed and made accessible. And this in turn results in a diminished ability to generate economic benefits from the data.
If these above examples of distress-induced data valuation teach us anything, it’s that it is high time to reverse this cycle into one that is virtuous and proactive. Appraising your data before creditors compel you to do so can engender new and innovative data-driven value streams that keep the vultures from circling at all.