10 tips to keep your corporate transaction from becoming a nightmare
14. Oktober 2019 ▪ Reading time: approx. 5:50 min.
Brand integration needs a plan with foresight and sensitivity. You can’t do it with a crow bar.
Every year, over 50,000 companies are bought and sold around the world: 50 % of these transactions fail according to statistics https://imaa-institute.org/mergers-and-acquisitions-statistics/ and 50 to 80 % fall short of expectations. At the same time, the topic "brand" is usually virtually ignored and severely underestimated by those responsible for M&A projects. And above all: it is completely misunderstood. Is that a coincidence? Or is the brand a hugely underrated success factor?
Let's start with a little experiment. Imagine this:
- The energy drink brand Monster takes over its arch rival Red Bull and impales the "red beast" with a clear one-brand strategy.
- Lindt & Sprüngli want to dominate the Austrian sweets market and buy the traditional brand Manner to do it. The products remain, the cult brand disappears.
- VW takes Porsche's takeover attempt personally and "punishes" their employees, customers and fans with a brand integration, because a one-brand strategy also promises additional synergies.
These fictional examples seem unrealistic, and yet decisions like these are - sadly – everyday occurrences in M&A. The general question is: What would be the effect of such strategic brand decisions, for instance on the top line and the future profitability of the target company?
On the one hand, the brand is a fixed and crucial component of every M&A project. On the other hand, there is no standard process for how and where the brand is systematically integrated: as an analytical tool, value driver and strategic management system across the entire process (breadth) and in all work streams (depth). The result: The planned synergies become PowerPoint euros, which massively endangers the success of the project and the future of the company.
This BrandTrust M&A Manifesto is intended to make top decision makers aware of the value of brands for M&A:
1. Not everyone knows brands
Trust nobody who claims that they know "brands" on top of a lot of other competences. A brand needs special tools and skills, precisely because it is an analytical tool, value driver and change management system. The typical M&A team – consisting of M&A consultants and legal and financial experts, as well as in-house experts and agencies – quickly reaches its limits.
Brand integration is a complex and long-term process; it goes well beyond the "look & feel". Subsequently, self-proclaimed brand experts endanger the future of the target company, because they overlook risks and opportunities or misinterpret them. This in turn impacts planning and post-merger integration (PMI).
2. A brand is a means to an end, not an end in itself
Critically examine the added value of the brand integration strategy. About 60 percent of acquired brands – for deals below 100 million euros as much as 80 percent – are eliminated. Not a bad decision per se, provided it is thoroughly thought-out and the best possible option for achieving the defined target. Many integration strategies, however, seem (or really are) arbitrary, when a brand decision is taken for self-realization purposes or is a "quick gut decision".
But the brand strategy must be adapted to match the corporate strategy and consistently considered during the project – from target search to value thesis (determination of the value of the company to be acquired) all the way to the PMI work stream.
3. Integration: Please use sensitivity, not a crow bar
Three of four targets – according to an internal BrandTrust analysis – are either integrated or continued without changes; necessary adaptations are done over night. Such brutal methods can result in additional costs and the loss of synergies. Step-by-step integration and building strategic brand relationships, however, is a rare thing.
The options for the future brand architecture are diverse and go beyond the "look & feel" – and every brand strategy affects PMI differently, which in turn impacts future earning power. It follows that brand integration takes a plan with foresight and sensitivity. You can't do it with a crow bar.
4. It goes for M&A too: Attractiveness beats awareness
Look for brands that are attractive, meaning InBrands. Don't be fooled by the awareness figures of StarBrands or even OutBrands. When targeting, never judge the future earning power of a brand by its degree of awareness alone. It is mainly brand attractiveness that decides whether a company will, for instance, achieve a value premium or attract employees.
Companies with high attractiveness but rather low awareness are InBrands and the most attractive targets. StarBrands also have high added value potential (unlike OutBrands), but takovers of StarBrands bear higher transaction risks, because StarBrands are already firmly embedded in the hearts and minds of stakeholders.
When looking for the right target, it's not just its brand attractiveness that counts. What is crucial is how it affects the attractiveness and added value potential of the entire brand portfolio.
5. "How" beats "Wow"
Identify the "How?", not only the "How much?" of the brand. The purchase premium is 39 % on average. If the target has a good name, there seems to be no limit to the price a buyer is willing to pay. For example, Michael Kors paid 22 times the EBITDA for Versace.
The usual M&A consultants help with purchase price allocation and in doing so indirectly define the brand value. Their lack of brand expertise, however, prevents them from providing the future owner with sound information about the specific value drivers: how the brand has been and will be generating a value premium in the competitive environment.
6. Brand is a management issue – not part of marketing
Control the brand integration yourself; do not delegate it to supposed experts or to marketing. Many top decision makers see the brand as primarily a matter of communication and design – meaning a side issue, not as a key factor for the project and company success. As a result, the brand is not considered until the post-merger integration (PMI) stage and then passed on to marketing. The integration of the brand thus takes place in a work stream instead of company-wide.
In such cases, risks for other divisions that correlate to brand integration are overlooked or underestimated. Efficiency is lost, value adding potential remains untapped. The responsibility for this central value driver of the future earning power lies with marketing, which in turn impacts the transaction risk.
7. Brand integration is culture transformation – not a facelift
Use the brand to shape the identity of the target company, not just the corporate design. Many companies see brand integration as a superficial facelift. But style is only the visual expression of a living corporate identity.
The transformation happens mainly below the surface; just changing the style does not mean the brand integration is completed. As early as during targeting and definitely during due diligence, the brand fit should be checked carefully. In preparation of the PMI, the following should be clearly defined
- What is the target's significance for the company beyond earning money?
- What will the future brand architecture for the portfolio look like?
- What is the shared brand core.
During the integration phase, a uniform brand conscience must be established in the target company. This ensures that every single employee acts with the brand values in mind and makes the brand tangible from the inside out. Everyone works every day toward the same common goal.
8. Brand is a change management system – not an individual work stream
Consider the brand systematically during all phases of the M&A project – from the strategy phase and transaction management through the entire integration phase. Today, top managers of M&A projects are thinking about brand integration and brand management, but not about how they can use the brand as a value driver and strategic management system. If they did, it could reduce costs, reveal additional synergies and thus lower the transaction risk.
9. The brand value does NOT indicate the value of the brand
Evaluate the value of the brand for the target company as a whole; do not trust the determined brand value. Because conventional evaluation methods have a crucial weakness: They all reduce the value contribution of a brand to the customer or to turnover (price & volume premium). Counter to that view, the brand influences the perception and thus the behavior of all stakeholder groups. Accordingly, the determined brand value often does not represent the added value potential of a brand. As a result, brand-induced corporate risk is underestimated and value adding potential is not fully tapped.
10. Brands grow and die from the inside out
Make every employee a proud brand ambassador of the target company. A brand and its value adding potential result from peak performances that are delivered consistently for years and tangible for all stakeholders inside the company and out. That in turn is the result of the actions of all employees and managers.
Brands, when considered a communicative surface, are empty shells that provide neither clarity, unity nor orientation, nor identification for stakeholders. In today's world of overabundance, this makes companies interchangeable; they lose the justification for their existence. At the same time, the lack of clarity leads to interpretation and action margins, which leads to chaos and mistakes rather than efficiency and synergies.
With a clearly defined brand, you define an action framework for everyone. You orient the companies toward a common goal and offer an inspiring, motivating incentive for participation.
Brand as success factor in M&A projects: Ignorantia legis non excusat
In M&A projects, the brand-strategic challenges are diverse, complex and crucial for success. Brand decisions impact not only the company's central value driver. They also affect the entire PMI process. For example, if the acquired brand is eliminated, employee pride could wane, productivity could decrease and revenue could drop, all because customers are lost. Costs could rise, synergies could fail to materialize – the nightmare begins.
And yet, important brand decisions regarding M&A projects are still made by non-experts. They focus on the top line and neglect the not-so "hard facts". Fact is, however, that brand competence can make the difference between success and failure of a transaction – and that most top decision makers gravely underestimate this success factor.
This article was written in cooperation with Prof. Dr. Christopher Kummer. He is the founder and president of the Institute for Mergers, Acquisitions and Alliances (IMAA), a think tank for M&A. He also teaches strategy and finance at various business schools. The think tank supports companies and professionals with building and improving their M&A competences. In addition to his academic career, Prof. Kummer has been involved in a range of companies and transactions. He earned a degree in Strategy & Organization at HSG University in St. Gallen and his doctorate at TU Berlin.