For the past two years. companies have hunkered down and hoarded equity capital and cash on their balance sheets, bringing mergers and acquisitions to a virtual halt. With dealmaking reviving, bidders would be wise to stop, catch their collective breath and ask, "Am I buying what I think I'm buying?" That's the message from Mary Adams, co-author, with Michael Oleksak, of a new book, Intangible Capital. In it, they argue that many mergers and acquisitions come unglued because the customary methods of valuing a target company's intangible assets fail to tell the full story. While no finance executive would disagree that putting a number on an intangible asset like goodwill is more art than science, in a transaction where shareholders are scrutinizing every dollar spent, a better way is surely needed.

If intangible assets were only a small fraction of a company's value, they might not make much of a difference in whether a deal succeeds. But according to an Ernst & Young survey of 709 M&A transactions in 2007, intangibles essentially are the company. The survey indicates that a mere 30% of the average purchase price of a company could be allocated to tangible assets, while 23% could be allocated to identifiable intangible assets like customer lists, contracts and intellectual property. That leaves a whopping 47% in goodwill–the extra value ascribed to a company by virtue of its brand and reputation.

"Goodwill is basically a fudge factor," Adams asserts. "This means that the acquirers were unable to identify the source of roughly half of the value of the acquired company. This is not something that management teams or investors should continue to tolerate. It's a failure of the accounting system to provide helpful information on intangibles."