The Secret Formula for CocaCola® The secret formula for

| October 22, 2018

Would you be able to help me with this assignment? I need a one page paper that: 1) Describes the factual background 2) describes the choice of valuation methodology and why and 3) Provides your selection of a value for the current formula for Coke Classic with supporting evidenceThe Secret Formula for CocaCola®The secret formula for CocaCola is a legend in the U.S. The CocaCola company likes to get mediaattention for the fact that it keeps the secret formula in a vault and that only two people know theformula. CocaCola recently publicly announced that it had moved the formula and placed it in a newvault:Today, the Company announced that the most closely guarded secret in the history of Americancommerce had been moved from a bank vault in Atlanta to the World of CocaCola.1This is an impressivelooking vault and appears to have cost millions to build. So what is the value of thisformula?CocaCola is an enormously valuable company as of July 2014 it had a market value (total value of allthe outstanding shares) of around $185 billion, long term debt of around $40 billion and book value ofassets of around $90 billion. The difference between the enterprise value (market value + debt value)and the asset value is generally considered to represent the value of the intangible assets of CocaCola.Thus, the intangible assets of CocaCola are worth approximately $225 bn $90 bn = $135 billion. So theintangible assets of CocaCola are substantial and, in fact, worth more than the tangible assets of CocaCola. That intuitively makes sense you would likely rather own the rights to the CocaCola brand,formula, etc. than own all the buildings and plants because you can easily get more manufacturingfacilitites.The intangible assets of CocaCola can be divided into our four categories of intellectual property:patents, copyrights, trademarks and trade secrets. The interesting question is which of these categoriescontains the most value? Patents are an unlikely candidate for CocaCola its product has not changedmuch in years and it is not maintaining its market share through technical innovation in the way that anApple or Intel does. Therefore, it is unlikely that patents are the big source of value for CocaCola.Copyrights also seem to be an unlikely source of value simply because, while CocaCola certainly hascopyrightable works (e.g. all its advertisements) those are not what people are directly purchasing. (Thisis different from a book publisher or a music company in which the sales are of copyrighted material.)1http://www.cocacolacompany.com/stories/2011/12/onmoreoccasionsthanicancountpeoplehavetoldmethatihavethebestjobatthecocacolacompanyforalmostthreea.htmlThis leaves trademarks including the CocaCola and Coke brand names and trade secrets. The secretformula for Coke would be considered a trade secret.2Setting aside the value of the CocaCola brands for the moment because I think wed all agree they arevery valuable; we are interested in the value of the CocaCola secret formula. While lots of companieshave secret formulae (e.g. Pepsi must have its own secret formula, as would Sprite, 7Up, Dr. Pepper,etc.) CocaCola has made a much bigger show about the secrecy and its value than the other companies.So whats it worth? Why build a vault that looks to have cost millions of dollars?Apparently the secret formula story has its start with the first formula for Coke being used ascollateral for a loan. The formula was supposedly written down and given to the bank to put in a safeuntil the loan was paid off. When the loan was paid off, the paper containing the secret formula wasreturned to the company for safe keeping.This story raises an immediate question: how did the CocaCola company produce Coke while theformula was locked in a bank vault? For that matter, how does it produce Coke today if only two peoplecan get into the vault? Clearly the secret formula didnt only exist on a piece of paper locked in a bankvault or else CocaCola could not have produced its product. So there must be multiple copies of theformula. Second, it seems almost impossible that only two people in the CocaCola company know howto mix the formula. This would lead to the impossibility of two people mixing millions of gallons of Cokesyrup in secret. So there must be multiple people who know how to actually make Coke.There is no single formula for even the original Coke. When Coke started, there was a single formulaand it contained cocaine and extract of kola nuts hence the name. Obviously, over time it was thoughtto be a bad idea to sell people softdrinks that contained cocaine so the formula was repeatedly alteredto first reduce the amount of cocaine and then remove it entirely. Precisely when and how thishappened is interesting, but not entirely relevant; the import thing to note is that the formula changedover time. And today if you go to buy coke in the U.S. you are faced with a dizzying number of choices:Coke, Diet Coke, Coke Zero, cherry Coke, CocaCola Cherry Zero and Diet Coke+ to name a few. Butthese arent even all the products sold by Coke, it also sells such products as Dannon, Sprite, Dr. Pepper,Minute Maid and Bacardi Mixers.The task for this week is to estimate the value of the secret formula for CocaCola. (Assume that it iscurrent formula that is used to make Coke Classic. The value of the original formula containing cocainewould be of only historical interest.) Assume that someone has broken into the vault and taken theformula and sold it to Oscars Cola company. The theft is discovered after Oscars Cola company hasbeen manufacturing a Cokelike product for two years that it calls Brown Sugar Water In a Red Can.I am not going to give you any data youre to perform your own research to locate the data you needto estimate the value of the secret formula that is being guarded by Coke. Begin by reading thesurprisingly detailed Wikipedia entry on the CocaCola company. While I am always deeply suspicious ofthe accuracy of Wikipedia, this one is worth scanning to get some idea of how the company runs. Whilethis homework assignment may feel overwhelming, if you spend time thinking before going to find datayou will find that it isnt too hard. Avoid getting bogged down in the neverending research that is2That is, it is something from which CocaCola derives independent economic benefit and that benefit arises fromnot being generally known.possible on the Internet. Just figure out what you need to know and go find that answer. Videos ofkittens drinking Coke, while entertaining, are not actually relevant.Here are things to think about:Trade secrets have the property that you cannot prevent someone else from using your secretyou can only prevent them knowing it illegally.How much of Cokes sales are actually attributable to Classic Coke as opposed to everythingelse?o Are the profits made by Coke using its secret formula the best measure of the value ofthat trade secret?If I really wanted to know the secret formula legally, how could I go about figuring that out?o Has this already been done?o Does this provide a measure of the unjust enrichment to Oscars in the form of avoidedcosts?If I had somehow misappropriated the secret formula, how much profit could I make from itwithout infringing on Cokes trademarks?o And how much of those profits would be due to my own efforts as opposed to the exactformula?How accurate would Oscars formula have to be? Would they need to have the exact recipe forCoke or could they just get the taste close enough?To what extent would Oscars sales diminish Cokes worldwide sales or profits?o This is relevant to the question of lost profits as a theory of damages.In thinking through the theories of damages which theory relies on data that you can most easilylocate and I really mean locate you dont get to make up numbers for Oscars sales?o Cokes lost profitso Oscars unjust profits.o Oscars avoided costs.When youre ready to start committing thoughts to paper, I want you to write a one page report that:Describes the factual background of the assignmentDescribes your choice of valuation methodology and whyProvides your selection of a value for the current formula for Coke Classic® with supportingevidence.

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