Mergers and acquisitions are today recognised as one of the key ways in which to promote a business's growth. Dealmakers have learned from the mistakes of those involved in the high profile M&A casualties of the late 1990s, and both sides of the table are conducting increasingly thorough and sophisticated due diligence before the deal goes through. However, what is often neglected is the consideration of how the brands of both the acquiring and the target company will fit together once the deal is done.
It has been proven that brand decisions made - or indeed avoided - can affect the long term ability of a company to achieve its strategic objectives, and this is also the case when considering a merger or acquisition. Inadequate attention to the brand or a failure to understand its strategic role leaves the acquirer vulnerable to integration problems later on, and valuing a brand without considering how it will be utilised within the new business can lead to overpayment.
The importance of brand was never better illustrated than through the sale of Rolls Royce in 1998. While the business itself was purchased by Volkswagen for £430m, the brand with all its visual icons was sold separately to BMW for £40m. While Volkswagen was widely criticised at the time for this apparent error of judgement, the sales figures, five years down the line, told a different story. Crucially, the Bentley brand had been included in Volkswagen's £430m acquisition, and by focusing on the development of this brand with the launch of a new Bentley Continental GT, Volkswagen outsold BMW by 8 Bentley's for every one Rolls in 2003.
This example highlights the importance of forward thinking when assessing a brand's value, rather than relying on past performance, which may not necessarily relate to how the brand will fit within the merged organisation. When caught up in the midst of a deal, it is all too easy to get sidetracked by short-term outcomes, and many acquirers fail to realise that as an intangible asset, a brand's value is extremely volatile and should be thoroughly researched before discussions progress into the final stages of a deal.
Assessing value by demand
When considering the value of a brand, the key question to be asked is: "How can this brand shift demand?" Most often, this question relates to customers, but it can also be applied to the way employees, shareholders and suppliers view the brand. As well as past and projected financial performance, due diligence should incorporate primary research in the market place, investigating issues such as:
Do customers have a preference for the brand within the current market?
Do they pay a premium for it? How much? How is this likely to change?
What would happen to buyers behaviour if the brand were removed from the marketplace?
How much of the brand's perceived value is linked to actual product features or distribution channels?
What benefits or risks exist if the brand were to be dropped? Could its equity be transferred to another brand? How long would this take?
The answers to these questions may well point to a different perception of the brand's value than if balance-sheet-based methodology was used. The recent takeover of Virgin Mobile by NTL is a case in point as a virtual network operator using T-Mobile's phone network, Virgin mobile has few tangible assets, but what it does have is a growing subscriber base, a good customer service team and a strong brand image. By re branding as Virgin Media, NTL hopes to escape its own poor reputation for customer service and cash in on the success of the Virgin brand.
Link brand strategy to business strategy
Mergers and acquisitions are driven by a range of strategic goals, such as achieving operational synergies, increasing the range of products or services on offer, or perhaps gaining access to a different customer profile or a new geographical area. It is important that these goals are compatible with the brand strategies of the merging companies, otherwise the integration necessary to achieve these synergies will prove impossible to achieve.
If the overall strategy is to migrate the company into a single brand, then the acquired brand's reasonable value to the company over time must be factored in well in advance of completion of the deal, otherwise shareholder value will inevitably suffer. If the brand name is not going to play a role in the future of the merged company, think carefully about paying a large premium for it - it is the capabilities that are of interest to the new organisation, not the brand name itself.
Alternatively, if the strategy is to retain individual brand names of acquired companies, consider how this will affect the parent brand. If customers are unable to associate the parent company with the new capabilities it has acquired, then the brand itself will not benefit - not necessarily a problem, as long as the expectation from the deal is not linked to increased brand awareness. At the same time, be wary of sub-branding. Holiday Inn Crowne Plaza failed as a brand name, and eventually changed its name to simply Crowne Plaza, as the new brand was not compatible with Holiday Inn's association with budget hotels.
Plan the brand transition
There is much to be said for an immediate transition to a new brand following a merger. By adopting the new brand name from the outset, the company can capitalise on the publicity surrounding the deal to promote the new brand, and staff within the organisation can be integrated into a single unit with new shared values, rather than attempting to impose one established company culture upon another. Of course, this is not always the case - it may be that a conflict of image between the two brands, or the desire to retain key talent within the merging companies merits a more softly softly approach. Whatever the strategy, the key is to consider it carefully and plan accordingly.
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