Service Merchandise had been a leader in retail and direct response consumer goods sales for a number of years. In fact at one time they were perceived as a threat to what was then the world’s largest retailer, Sears Roebuck and Company. Obviously, times have changed dramatically.
The demise of Service Merchandise is a result primarily from the rise of the Internet and the increasing availability of goods through a variety of media and retail outlets. In 2002, the company went from Chapter 11 to a plan to liquidate the assets. Service Merchandise had done an internal inventory and audit of their intangible assets prior to retaining a team of professional intangible asset/intellectual property valuators. While an incidence of bankruptcy, the main lessons we wish to illustrate here concern the large number of diverse assets included in the case.
The principal task was to confirm the results of the internal inventory and analysis done by Service Merchandise management. It was also important to identify other assets to be added to that inventory and to analyze all of the intangible assets as to their value and commercial marketability. The end goal, of course, was to derive maximum potential liquidation value from the Service Merchandise family of intellectual property and intangible assets. Onsite reviews and external research were performed and an investigative audit was organized by asset grouping and ranking of relative value. The assets discovered during the audit consisted of the Service Merchandise information technology assets, trademarks, domain names, databases, and other assets.
Examples of the auditing process include the following: In the case of the information technology assets, selected sample contracts and license agreements for those assets were reviewed, and the inventory of assets bundled into logical groupings. For the trademarks and other marketing assets, historical financial statements were reviewed and trademark registrations and status reports were examined in detail to evaluate the past history of use of the trademarks and the revenue generated by each of them. As a result of this work, the assets were grouped into six areas:
- IT software assets;
- Trademarks and associated brand names;
- Ecommerce Assets;
- Databases and customer lists;
- Farberware license; and
- 1-800 Jewelry assets.
All of the intangible assets of Service Merchandise were divided amongst these six bundles, valued and readied for sale. The result of that work is summarized below.
IT software assets and domain names : The in-house systems were developed to a high standard, but were considered to be legacy technology at the time. In other words, they were not leading-edge software systems. After detailed analysis of the vendor software contracts to determine which items might be saleable and which were not, a value range was established for these third party IT assets. The IT assets were divided into three groups:
- Integrated systems that were designed for specific purposes within Service Merchandise;
- Major third-party applications consisting of off-the-shelf software and associated licenses for main frame systems; and
- OS and utility third-party applications, which were primarily off-the-shelf operating systems from companies like Microsoft and other PC-based suppliers.
The total value of these assets as a group was determined to be between $210,000 and $420,000.
Trademarks and associated brand names : The Service Merchandise trademarks and house brands were bundled together for sale in whole. The intangible asset team further divided the trademarks and brand assets into three different groups:
- Core brands, which included Service Merchandise, as well as two other closely related trademarks: At Your Service and Service Select;
- Key concept brands including Kids Central, Designed Just for Kids, and the Royal Symphony Diamond Collection; and
- Product-based brand groups, from the company’s private label brands including Preferred Stock, Destinations and Regency.
These groupings of trademarks and brand names represented the best opportunities for monetization in the then-current marketplace. The assets appeared to have above-average consumer awareness and some consumer loyalty. The value of the assets was estimated to be between $800,000 and $2.3 million.
E-commerce Assets : The e-commerce Assets consisted of the core website and the Service Merchandise dot-com domain names. The value attributes were the technology, the website content and the goodwill associated with it. The technology being used was outdated at the time, but still functional. However, there would have been minimal interest in the technology alone. The website was generating sales well into the eight figures and was an attractive asset with an estimated value of between $150,000 and $400,000. The e-commerce assets and website were sold in their entirety including the Service Merchandise dot-com name.
Database and Customer Lists : The Service Merchandise database was composed of approximately 12.5 million names compiled from customer lists and customer contacts over the prior three years. The lists were extremely well managed, clean and usable by a wide variety of retailers. In addition, extensive product purchase history was available with the database, which qualified the asset as one of the higher quality customer lists available at that time in the marketplace.
The value of any customer database or customer list is, of course, directly correlated to the age of the customer data. Therefore, the most current customer data commands a price nearing the upper end of the valuation range. As a result, the team recommended the outright sale of the database should be conducted as quickly as possible. To maximize value, the customer lists were made available for one-time rentals in the immediate near term to take advantage of high volume sales events at that time. In addition, the greatest value was realized in an outright sale of the customer database to other retailers. The estimated value of the customer database was approximately 10¢ per name for a total of roughly $1.25 million. However, ultimate value depended on a thorough analysis of the aging of the database.
Farberware License : In an unusual twist, it was discovered that Service Merchandise had an apparently transferable license from Farberware (the cookware and kitchen accessories company). If the license was indeed transferable and saleable, value was estimated between $550,000 and $850,000. The license also included rights to certain other names, including Salton and Windermere. It must be remembered, and has been discussed earlier in this handbook at length, that the transferability/sale of licenses is problematic at best in a bankruptcy or reorganization. In the final analysis, however, the Farberware license was ruled not transferable and, therefore, no value was realized and the license reverted to Farberware.
1-800 Jewelry Assets : This bundle of assets was unique in that it cut across several intangible asset types or classes including trademarks, domain names and communication assets such as telephone numbers. Service Merchandise traditionally had a very strong position in jewelry sales and was probably the number one online jewelry sales outlet. In addition to being one of the dominant national players in jewelry retailing, they engaged in online support for their jewelry operations. As a result of management’s emphasis on jewelry, the company had assembled a bundle of assets related to its 1-800 Jewelry business and these had a great appeal to regional and national jewelry retailers. The assets were as follows:
- Two federal trademarks for 1-800 Jewelry;
- 10 domain names for 1-800 Jewelry and related domains;
- More than 20 other domain names registered for Jewelry Expert, Jewelry Authority, etc;
- The rights to the 1-800 telephone numbers; and
- The rights to the customer list of jewelry purchasers.
The valuation of the assets had to take into consideration the liquidation context in which the company found itself. In a non-liquidation scenario, disposal of these assets in an orderly manner might have brought a cash sale well in excess of $500,000. However, the deep discounts brought about by liquidation reduced the valuation results to approximately $125,000.
The intangible asset team, after the inventory and valuation was complete, then moved to assist in the disposition of the assets. Over the following year, many of the assets described were sold, and the company was able to generate substantial value from them.
There is a unique lesson to be learned from this case study: A company that actively manages its intangible assets will, in fact, help to maximize that value. In the case of Service Merchandise, management had the good sense to perform its own inventory of intangible assets and then used an outside team to verify the inventory, value the assets, and design and implement a disposal process. In sum, the full range of intangible assets was identified early and handled professionally and maximized value.