One question that comes up regularly during merger discussions is “which brand should we pick?”

There is no simple answer because, depending on the circumstances, the right answer may be either, both or neither. The only hard and fast rule is that the post merger branding should be whatever enables the company to maximize its delivery of customer value. When one of the merging brands is clearly weaker, this may mean migrating to the stronger brand (irrespective of whether it was the smaller or larger one prior to the merger) because this will be perceived as an “upgrade” for the customers of the weaker brand.  Many people believe that AT&T Wireless should have adopted the Cingular brand for this very reason.

When both brands enjoy high levels of customer affection and loyalty, it may mean keeping both brands as product brands (even if a single brand is selected at the corporate level) so as to maintain the customer equity.  When the oil and gas majors merge (think Exxon Mobil or Chevron Texaco or Conoco Phillips), then maintain both brands at the retail level.

When the message is “the best of both worlds”, it is appropriate to merge the two brands (as United and Continental are doing) to support the perception that the merger is delivering increased value to customers.

When the story is “complete transformation of the customer experience” then it is appropriate to consider a new brand entirely.  Think Verizon.

The important point to note is that some of these strategies involve higher cost – and that is OK so long as the higher cost is justified by the increased/maintained levels of customer equity. This is the point that the finance types tend to miss – they are obsessed with reducing costs, and may forget that there is such a thing as “good costs” (those that support an increased level of revenue and profit).

The unique mission of marketing/branding is to generate upside potential for the business by creating the brand portfolio that will enable the merged company to maximize its share of the economic value pool of the industry.  Sometimes this will result in deliberately selecting a strategy of higher costs (such as maintaining two brands) because that is the only way to enable higher revenues and profits to be earned.

The reason why most mergers destroy value is not because they did not achieve their cost savings – it is because they failed to maintain their revenue growth (i.e. they lost customers).  Marketing should demand a seat at the merger table in order to ensure that this perspective of customer equity is appropriately represented.

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I am happy to report that the September edition of HBR will feature a brief synopsis of the research that Natalie Mizik, Isaac Dinner and I have been doing into the relationship between corporate brand strategy and post merger returns.

The cause of their interest is that our research suggests that the old adage that “on average, mergers destroy value” should be subjected to one important caveat – namely that when the merging parties choose a brand strategy that explicitly combines the equities in both brands (either through adopting a compound name, or combining the name of one and the symbol of the other), then the merged company tends to outperform the market by a small amount over the three years following the completion of the merger.

We are not claiming that the corporate branding is the cause of the outperformance.  Our hypothesis (which we look forward to testing through future research) is that the branding is a symptom of a particular managerial approach and that the impact of this managerial approach outweighs the direct impact of the branding on customer and employee behavior.

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I have been pleasantly surprised by the number of times our paper “The Value Implications of Corporate Branding in Mergers” has already been downloaded from the MSI and SSRN sites.  And, as best I can tell, the interest in the paper comes from both marketing and finance professionals.

The paper does seem to suggest that there is merit in the belief that human factors play a significant role in the post merger performance of companies.  Put that bluntly, it sounds intuitively obvious – but this hypothesis about the importance of the human dimension of business has been very hard to substantiate in a scientifically convincing way.

Our research falls short of proving the impact of corporate brand strategy on business performance or even identifying the mechanism of impact.  All we have done is to document that certain forms of brand strategy (the ones that preserve elements of the two merging brands) are associated with better investor response both at the time of the merger, and in the three years post merger.  We are not able to say whether this reflects a direct impact of the brand strategy on the strength of the company’s franchise with customers and employees (we did not measure this directly), or an indirect impact (that is, the branding choice is important only as a signal of management strategy).

My sincere belief is that the paper will encourage other researchers to adopt an external resource perspective on mergers – that is, to regard mergers less as an exercise in how to buy market share while eliminating costs, and more as an exercise in extending and deepening the merging companies’ equity with their customers and employees.

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Over the past 18 months, I have periodically reported on progress on some fascinating research that I have been conducting with Natalie Mizik and Isaac Dinner of the Graduate School of Business at Columbia into the value impact of branding on post-merger financial performance.

I am delighted to report that the results have now been published as Marketing Science Institute Working Paper 10-119 and the full paper can be accessed at:

http://www.msi.org/publications/publication.cfm?pub=1815

Our results are exciting because they suggest that corporate brand strategy may be a material factor in determining the post-merger financial performance of companies.  If this is true, then companies should regard the choice of corporate branding as a critical element of their strategy for maintaining the strength of their franchise with customers and employees, instead of treating it as a matter of corporate ego or horse trading.

Our starting observation was that one of the perennial conundrums of business strategy is the continuing popularity of mergers and acquisitions as tools of business growth despite the well documented evidence that, on average, mergers destroy value.  Researchers have failed to isolate the factors that explain why certain mergers succeed where others fail – in reviewing the various theories and empirical evidence, King, Dalton, Daily and Colvin concluded that “despite decades of research, what impacts the financial performance of firms engaging in M&A remains largely unexplained” and that “researchers simply may not be looking at the ‘right’ set of variables as predictors of post-acquisition performance” (see pages 197/198 of their 2004 paper “Meta-Analyses of Post-Acquisition Performance: Indications of Unidentified Moderators” in the Strategic Management Journal).

Our hypothesis was that corporate brand strategy was a variable that had hitherto been overlooked.  If the reason why most mergers fail to create value is not the failure to trim costs sufficiently but rather the shortfall in revenue growth (as reported in the May 2008 edition of HBR based on an analysis of 270 mergers by Rothenbuecher and Schrottke), then a critical factor in post-merger success was the maintenance of the health of the customer and employee franchise of the merger company.

Could it be that certain forms of corporate brand strategy were more effective in maintaining the strength of the external and internal franchise than others?  It seemed intuitive reasonable that a strategy of “pure acquisition” (under which one of the two merging brands simply disappears) was likely to result in greater attrition of customers and employees.  On the other hand, the additional costs of maintaining multiple brands might overwhelm the positive impact that this strategy had on customer and employee attrition.

It would be fascinating to see whether the data indicated that there was evidence of the consistent superiority of one approach over the others….

Here’s how the abstract of the published MSI paper summarizes the results:

“Most academic research on mergers has focused on the role and impact of the internal resources of the merging organizations on post-merger financial performance. In this report, Natalie Mizik, Jonathan Knowles, and Isaac Dinner take an external resource perspective and explore the value relevance of corporate branding’s role in communicating context- appropriate positioning and messaging to customers, employees, and investors. They investigate whether branding-related information is priced into merger valuations, both at announcement and over time.

Using a sample of 216 large mergers undertaken during 1997—2006, they classify merger transactions into three groupings according to the post-merger corporate branding: acquisition (the identity of one of the merging companies is discarded and it is rebranded with the other firm’s name and symbol), business-as-usual (both firms continue to operate under their own corporate names and symbols), and fusion (elements of both corporate brands are maintained in the new brand). They undertake event study and time-varying calendar-time portfolio analyses to assess potential differences in the value implications of corporate branding in mergers.

They find significant differences in the immediate market reaction to the merger announcements and significant differences in the post-merger performance across the three corporate branding types.

Firms using the more expedient and cheaper acquisition and business-as- usual branding strategies underperform firms that choose the more sophisticated and expensive fusion branding. Surprisingly, the market is better able to recognize the negative consequences of acquisition- branded mergers early on: the valuation of these firms is adjusted immediately at the time of the merger announcement, and there are no significant future-term adjustments following the merger completion. Only the business-as-usual branding mergers experience a significant post-merger negative adjustment in valuation: for them, the initial negative reaction to the merger announcement is compounded by further negative adjustment over the ensuing three years. Fusion-branded mergers do not experience negative market reaction at the time of the merger announcement, and the researchers find no systematic negative future-term adjustment in the valuation of these firms.”

Pretty cool finding, no?

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It has been a long time coming – but we are now ready to submit the article on the value relevance of corporate branding strategy during mergers. 

In a nutshell, there are two significant findings:

• first, our analysis replicates the common observation that, on average, mergers destroy value (thus suggesting that our sample is representative of the broad universe of mergers)
• second, it identifies factors that are relevant in explaining why certain mergers perform better than others

It is really exciting to demonstrate financially why it is important that companies take account of a broad set of human factors when undertaking a merger, rather than focusing simply how to combine the “hard” resources of the two companies.   This type of work truly does “make the business case for branding.”

I will share the details of the analysis once we are ready for publication.

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Even since Rich and I wrote our Sloan Management piece in Summer 2006 documenting the 10 corporate branding strategies available to merging companies, we have been wanting to examine whether there is evidence from the capital markets that any particular strategy is “superior” – meaning that companies adopting this strategy tend to outperform the market over the next few years.

We have travelled down some blind alleys over the past 4 years but started making real progress 18 months ago when Natalie Mizik, marketing professor at Columbia, and her PhD student, Isaac Dinner, got interesed in the hypothesis that the capital market might be less than efficient in reacting to the choice of corporate brand strategy.

Natalie and Isaac have taken the rigor of the analysis to a completely different level - so it is exciting that our initial observation about the apparent superiority of a particular category of strategies has remained valid despite rigorous statistical tests.

In a nutshell, what the data shows is that the capital markets respond more favorably to brand strategies that involves combining elements of the two companies than strategies that replace one entirely or leave both untouched.  The presence of positive abnormal returns to these strategies both at merger announcement (as tested by the event study methodology) and over time (as tested by the calendar time portfolio methodology) suggests that the market does not fully impound the effectiveness of these strategies in supporting post-merger performance.

To a marketer, there is a compelling intuitive logic as to why this might be the case.  Corporate brand strategies that combine elements of both brands are more likely to secure the ongoing loyalty of the customers and employees of both companies because each will be able to recognize elements of their former brand in the new brand.  Corporate brand strategies that involve a clear winner and loser may be more expedient and easy to manage, but they come with a hidden human cost.

Tagged as: Business Strategy, Creating Value, M&A

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I have been engaged in a lively exchange of views with some leading designers (members of IdentityWorks’ Identity Forum) over the merits of the branding decision by United and Continental.  To be honest, I have been disappointed by the narrowness of the perspective that most of the designers are adopting. 

As marketers, we bemoan the fact that other business disciplines ignore the value that a marketing perspective can provide on business issues.  It would appear that, when it comes to corporate identity, we are just as guilty of ignoring the perspective that other business disciplines might provide.

The United/Continental combined identity is being denounced (at least by those who have voiced an opinion):

• “a kludge”
• “non-professional, CEOs fast branding”
• “a wasted opportunity”
• “low cost, low fare, low quality”
• “the result of usual merger horse trading”
• “extraordinary brands need to have balls”

Until challenged, none of the designers appeared to be thinking about what the message behind the identity was meant to be.  The immediate, knee-jerk reaction was that a big merger means a big, new, shiny identity.  Maybe yes – if a big, new, shiny customer promise is being made.  But maybe no – if the story is mostly about cost efficiency with only minor implications for the customer experience. 

This merger seems to fall squarely into the second category – which is why I think the branding decision is the right one.  Not every big merger means a big new customer promise (even if the merger results in the largest airline in the world) – sometimes the wisest strategy is about “stealing bases” not “swinging for the fences.”  Under these circumstances, it is right that the new identity should be pragmatic and unremarkable.

Academic research shows that most mergers fail to create value NOT because they fail to achieve the anticipated cost savings but rather because the merged company fails to maintain its topline growth – usually because of defections by the customers of the acquired company.  Margins may go up, but revenues falter.  Profits go down.

The branding decision taken by United and Continental minimizes the threat of customer attrition because it explicitly avoids creating the perception of a winner and a loser.  The existing customers and employees of each airline can recognize the continuation of their “brand” and not be prompted to re-assess their relationship.

I wish that designers were more thoughtful about the message that the identity is successfully communicating, than rushing to criticize it on the basis of aesthetics, expediency and lost revenue opportunity for the design community.

Tagged as: Business Strategy, Creating Value, M&A

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I am delighted to see that United and Continental have adopted my favorite brand strategy for mergers – combining the name of the acquirer with the visual identity of the target. It is a smart strategy because it communicates that there is no “winner and loser” in the merger – both sides are recognized for the contribution they bring. It is a powerful way of ensuring the continued loyalty of the customers and employees of both companies.
Given its power in maintaining the equity embedded in both brands, it is surprising to me that this strategy (number 7 in our lexicon) is not more widely employed. Boeing used it when it combined the McDonald Douglas symbol with the Boeing name. UBS paired the cross keys symbol with the UBS name when it merged with Swiss Bank Corporation.
Another favorite of mine is when the merger involves pairing the name of the acquirer with a new symbol (strategy 4 in our lexicon). This is what Sprint did when it merged with Nextel, and what BP did after the merger with Amoco. The message is clearly that “this is not just an acquisition – it is a transformation.”

Tagged as: Business Strategy, Customer Value, M&A

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I finally completed the classification of the M&A transactions over $500mn and have ended up with 897 transactions.   By the time I have eliminated transactions for which there is less than complete data, the final data set is just over 700 transactions.  These represent over $4 trillion in transaction value and $20 trillion of market value as at the merger effective date.

What is very exciting is that the observation I made back in May still appears to be true: based on a simple comparison of the changes in aggregate market value versus changes in the S&P index over a 2 year period since the merger became effective, the companies using one of the 8 “sophisticated” brand strategies outperformed those using the two “expedient” forms of brand strategy by 6%.

This is encouraging – but this analysis is crude.  It remains to be seen if this result will be replicated when the data set is subjected to a proper abnormal stock returns analysis.

Tagged as: Creating Value, M&A, Marketing Finance

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It has been laborious – but we are now close to a “clean” data set for the M&A analysis.  The latest work has focused on winnowing the 1,000+ transactions down to a more narrowly defined set of genuine merger transactions in which it is conceivable that senior management might have considered any one of the 10 potential brand strategies.

After a number of false starts, the decision rules for what constituted a merger - as opposed to an acquisition - were relatively easy to specify in an objective, transparent way.  We have set the maximum discrepancy in revenue/value to be equal to the maximum observed discrepancy in a transaction that had adopted either a “best of both” or a “different in kind” strategy.

Using this decision rule, we have reduced the number of examples of strategy 1 or 10 from over 80% of the total sample to closer to the 65% figure observed in our earlier research.  By doing so, we have hopefully eliminated a lot of “noise” from the data – all of those transactions that were clearly acquisitions (the vast difference in size between the acquirer and target made it inconceivable that it would be regarded as a merger).

As a footnote, I have learned that the technical distinction between a merger and an acquisition is simply whether the target’s legal entity survives for legal reporting purposes.  If it does, then the transaction is a merger.  If it does not, then the transaction is an acquisition.

Tagged as: Creating Value, M&A, Marketing Finance

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Following a positive reception at the Marketing Science Institute conference earlier this month, we have been working hard to expand our data set of mergers so as to be able to perform the analysis at a more granular level.

The MSI presentation was only able to divide the data set into three categories – firms that had adopted the “acquirer brand is the last man standing” vs. firms that had adopted the “business as usual” approach (leaving the acquired company to operate as an unendorsed subsidiary) vs. firms that had adopted any of the 8 more “sophisticated” strategies.

We have now categorized over 1,000 M&A transactions of greater than $500mn since 1995.  In some of these transactions the discrepancy in size/value of the two parties was so large that it is hard to imagine that there was any serious thought given to merging the identities.  So we are going to tag the transactions by whether they were “mergers” or “acquisitions” – the reason for doing so is to be able to compare the “sophisticated” strategies (any of which would only be considered under merger conditions) against a narrower peer set of merger transactions that adopted either of the two more “expedient” strategies.

The good news is that we have around 180 instances in which “sophisticated” strategies were adopted so can do some analysis about the relative performance of individual strategies.

Tagged as: Creating Value, M&A, Marketing Finance

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Not exactly the punchiest title for a blog post, but this is the actual title of the paper I presented at the Marketing Sciences INFORMS conference today.  I contemplated using a snappier title like “Does the market care whose logo survives?” as my title but decided against it – after all, this conference is the annual get together of the quantitatively oriented marketing academics and they definitely want the steak, not the sizzle.

I found it both humbling and uplifting to be among people who want to know about how your research is constructed before they have any interest in what the result might be.  There is a purity of approach that is truly refreshing in comparison to the more cavalier “the data supports our line of argument – who cares about its robustness?” attitude that is so common in the commercial world.

As I had hoped, I got some very helpful feedback on how to articulate the motive for this research more succinctly, how to make the analysis as robust as possible, and what were the implications that could be drawn from the results.

Tagged as: Creating Value, M&A, Marketing Finance

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The past week I have been immersed in a deep drill into the role of brand strategy during M&A.  This is a topic I have written about from a qualitative point of view before (see the links to the published articles to the right of this post), but the time has now come to add some financial teeth to the analysis.

I am defining the question as “is there evidence from the capital markets that certain forms of brand strategy are associated with superior post merger financial performance and valuation?”

I specifically want to test whether the more expedient strategies (those  involve the least thought and/or work) are associated with disappointing post merger performance because they fail to address the human desire to understand how the merged company will be superior to its two constituent parts.

I present the preliminary results at the Marketing Science Institute’s INFORMS conference in 3 weeks so the pressure is on…

Tagged as: Creating Value, M&A, Marketing Finance

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The natural bias in pre-merger due diligence is to focus on identifying the factors that might jeopardize the success of the merger – the deal breakers. Inadequate attention is generally given to the factors that may contribute to superior post-merger performance – the deal makers.

Rich Ettenson and I are actively doing analysis to test our hypothesis that corporate brand strategy is one of the variables that can significantly influence the success of a merger. Brand strategy plays a vital role in ensuring that customers, employees and investors understand the reasons for the merger, and the future benefits that it will deliver to them. This communication is important because it is the behavior of these three audiences that ultimately decides the success or failure of the merger.

So far, our work has resulted in:

• Categorization of the 10 corporate branding options available to managers
• Classification of over 1,000 mergers into these 10 categories

Now we are looking into whether there is evidence from the capital markets that any of the corporate brand strategies are associated with abnormal shareholder returns over the 12/24/36 months after the completion of the merger. It will be exciting to see if the market is fully efficient in recognizing in the degree to which certain forms of brand strategy facilitate a more effective post-merger integration process.

Tagged as: Creating Value, M&A, Marketing Finance

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