More than 70% of M&As end in failure. Dealmakers can tip the balance of success in their favour by having marketers at the table to guide important brand-related discussions earlier and with the required rigour. In this article I explore how brands like Disney, Banco Santander and Lenovo integrate important brand thinking into the pre-deal phase of the transaction to maximize the value of their deals.
Study after study has shown that between 70 to 90 per cent of M&As deals end in failure. One way to manage downside risk is by recognizing the role of brand in the business logic of the deal, with important brand-related decisions made earlier and with the required rigour.
Intangible assets account for 84 per cent of S&P firm value. Of the possible 60 intangibles listed by the accounting standards brand is the most often-cited factor in M&A deals and contribute to a significant portion of a target’s purchase price.
Brand is a prime asset of a business. Built up by a series of marketing investments over the years, it represents the strength of the customer-franchise, and a promise of future cash flows for the firm. Yet too often we see insufficient due diligence given to brand matters in the pre-deal phase of most M&A transactions.
This leads to sub-optimal post-deal economics, including large future write-downs.
Determine which brand helps you sell more - for more
Understanding the health of your brand is essential for accurate deal valuation and for optimizing the new portfolio that will be taken to market.
For all the mystique about brands, they perform two functions. They help you sell more (revenue), by shifting demand patterns in your favour. And they help you charge more (profit), by reducing price sensitivity. Understanding how your brand performs against these critical line items on the balance sheet should be the primary focus of any pre-deal due diligence.
Two useful statistical techniques are Funnel Analysis and Brand-Price Trade Off.
Funnel Analysis shows the efficiency with which a brand creates and converts demand. It's especially useful in revealing brands that are perhaps well known but not actively considered or preferred, and vis versa.
Brand-Price Trade Off is a choice-based survey technique that reveals the price premium customers are willing to pay for your brand relative to your competitors. It can be used to model various pricing scenarios and the resulting tradeoffs in revenue, profitability and market share to determine the optimal pricing strategy for newly launched brands.
By using business outcomes like revenue and profit as a lens to assess brand health, acquirers can reduce the risk of overpaying and more accurately determine which brands in the portfolio are best positioned to drive long-term growth for the new merged entity.
Ensure that evidence, not ego is driving portfolio decision making
Often the default assumption in M&A transactions is that the acquiring brand will play a dominant role in the new merged entity. But that’s not always the case.
An evidenced-based approach to brand evaluation helps remove emotion from the decision-making process and unlock new and innovative configurations for the brand portfolio that best supports the business strategy.
Take the case of France-Telecom. In the early 2000s it embarked on a strategy of international expansion, acquiring the rights to the Orange brand, a successful UK based telecom that pioneered innovative practices like ‘talk plans’ and per second billing. Clear-eyed about potential lingering perceptions that it was a sluggish state operator and facing a crisis of low employee morale, France-Telecom rebranded all its domestic and foreign operations to become Orange SA.
Take Disney. Its ambition to be a ‘cradle-to-grave’ provider of entertainment was the driving force behind its mega-deal acquisitions of Pixar, Marvel, Lucasfilm and, most recently, 21st Century Fox. The acquired studios would allow Disney to offer a more diverse portfolio of content, catering to various age groups and taste segments. To preserve the distinctiveness and equity of each of the acquired businesses, Disney retained the names and visual identities of these studios and only featured a limited link with the Disney brand in the Disney content ecosystem.
Assume that perceptions lag behind reality
While M&As can rapidly provide acquirers with new capabilities or a foothold in new markets, transferring perceptions from the target brand to the acquirer brand takes time and ongoing investment. In cases where there’s a large perception gap between the two brands, the transition from one brand to another should be orchestrated over a longer period.
Lenovo, the Hong Kong-based technology company, was a dominant global player in personal computing, but it was still relatively unknown in the West. To facilitate its entry, it purchased the IBM ThinkPad PC business. Included in that transaction was the right to use the IBM corporate brand for five years. By endorsing their own product with the brandname of another more established firm and with large investments in marketing, Lenovo made itself a credible household name in the West.
Banco Santander, the Spanish financial services company, fueled much of its global expansion through the acquisition of local banks. In doing so, it employs a standardized playbook for market entry. In markets where its own brand suffers from low awareness and familiarity, Santander keeps the name of the local bank, but only changes its visual identity to match that of the global Santander brand. Only later does it introduce the Santander name -- with much fanfare. This slow transition ensures that goodwill is retained, while firmly planting the Santander brand locally.
Many deals leave money on the table by addressing brand matters either too late in the process or without the required rigour. Parties can capture more value by using business outcomes like revenue and profit as a lens to assess brand health; modelling different portfolio scenarios against their ability to drive growth; and by recognizing the time and marketing investments required for brand benefits to fully accrue and plan for it.