Tax savings, legal implications, and financial prosperity are typically at the forefront of corporate decision-making, yet almost 70% of mergers and acquisitions fail to generate long-term value for shareholders. According to a report published by Lippincott, failure to consider branding in the due diligence process or during post-merger integration activities will eventually shortchange shareholders. Throughout the high pressure bidding phase, it is easy for executives to focus on short-term indicators without considering the post-transaction impact of branding on a company’s strategic objectives. Lippincott’s report provides companies with three main guidelines:
1. Determine value by analyzing how the brands will impact demand
When valuing the assets of a company, due diligence requires more than a mere balance-sheet approach to quantify the static dollar value of a brand. If a buyer simply accepts as true the figures provided by the seller, the buyer risks overpaying for an asset which, in the future, may result in a significant write-down or place constraints on business strategies going forward. Brands are volatile and can easily lose their appeal. It is critical to analyze how the brand will shift customer demand and the brand’s ability to drive business objectives after the transaction concludes. Lippincott suggests that due diligence requires answering the following questions:
- Considering the market as a whole, do customers prefer this brand over others?
- What premium are customers paying for the brand? Has this changed over time?
- If the brand was to exit the market, how would this impact buying behaviour?
- How much of the brand’s value is derived from distribution channels and product features?
- If the company was to abandon the brand, what are the associated risks and benefits? Would it be possible to transfer brand equity from one brand to another? How easily could this be done?
2. Link brand strategy with business strategy
Whether the business strategy behind the merger or acquisition is to expand geographic scope, target a broader customer segment, or eliminate a competitor, a company must consider whether its business strategy is at odds with its brand strategy. If the company’s vision involves migrating to a single brand, it is recommended that the company evaluate the “brand factor” when assessing the sustainability of a brand and its value to the organization in the future. The brand portfolio’s vision should be communicated throughout various levels of the organization to provide clarity to employees and other stakeholders.
3. Design and implement a brand transition plan
When well-known brands migrate to a new brand, companies have an opportunity to capitalize on the publicity surrounding the M&A process to transition to the new branding. By leveraging media attention, a company is able to accelerate the transition process both within an organization and externally. Internally, employees will identify with the new combined entity; questioning old practices and procedures. Externally, a company can leverage the free publicity as a marketing tool if it chooses to immediately adopt the new brand.
Assessments of a company’s brand during the diligence process and after the transaction concludes should no longer be an afterthought but a critical component of decision-making. A basic assessment of brand reputation, awareness, and image for the purposes of financial statement asset valuations will compromise long-term shareholder value. Thought should be given to how the brand will impact demand, customer preferences, brand premiums, consumer buying behaviours, brand equity, the interplay between business strategies and brand strategies, and the brand’s transition process.
The author would like to thank Victoria Riley, articling student, for her assistance in preparing this legal update.