Mergers & Brand Strategy

Only a minority of mergers create value. We believe that effective use of brand strategy is one of the factors that explains superior post-merger performance.

Branding M&A Archives

Value Exchange is the Basis of Business Success

HBR’s blog from last Friday (December 26) featured a piece by David Fubini (former head of McKinsey’s M&A practice) about the importance of the cultural dimension of mergers.  He included three recommendations for how the due diligence process could be expanded so that relevant cultural factors could be systematically included in the merger evaluation.

“Cultural factors” makes it sound like the success or failure of M&As is dependent on the egos of the management – especially as he cites a number of mergers (Barrick/Newmont and Publicis/Omnicom) where this was clearly a factor.

My belief is that there are two primary causes of the shockingly low success rate of M&As:

  1. The first is the classic agency problem whereby a number of powerful parties (ambitious managers, investment bankers, law firms and hedge funds) are highly motivated to see a merger transaction occur, but have little interest in how the merger subsequently performs
  2. The second is that the strategic planning and due diligence process around the merger tends to focus on too narrow a set of interests (shareholders, and managers)

It is the second point I want to focus on in this post.  My conviction is that sustainable business success is based on the exchange of value.  The goal for merger due diligence is to establish whether the merger will generate enough value in the currencies important to each of the main constituencies (shareholders, management, employees and – perhaps most importantly – customers) to gain their support.  Current due diligence focuses purely on the short term value exchange from the perspective of the shareholders – is the merger an attractive financial transaction?

However, unless the merger is also value creating for the wider set of stakeholders, then the post merger integration process is likely to be ugly.  Research by Rothenbuescher and Schrottke (featured in the May 2008 edition of HBR) indicated that most mergers achieved their forecast costs savings but many still failed as a result of a decline in their top line growth, reflecting a weakening in their customer franchise. Research that I collaborated on with Natalie Mizik and Isaac Dinner (featured in the September 2011 edition of HBR) highlighted the superior financial performance achieved by mergers that explicitly used a branding strategy that maintained the customer and employee equity in both parties to the merger.

Business strategy is about defining ways in which value can be created across enough of the currencies that are important to the key constituencies in the business that all constituencies regard their participation (whether in the form of employment, investment or purchase) as being based on fair value exchange.

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Brand Strategy and Mergers

I have posted to SlideShare a summary of the two major research projects that T2 has conducted into the role of brand strategy during mergers.

The focus of the first piece of work was to ensure that business executives had a comprehensive list of the options for branding the merged entity – either through selecting or combining elements of the existing brands, or inventing new elements.

The second piece of research was to investigate whether there was any evidence that any particular strategy was associated with improved post-merger performance.

The overall goal of both pieces of research was to reinforce the importance of paying heed to the management of customer and employee equity during the merger process, since earlier research had demonstrated that the failure to maintain top-line revenue was the primary reason why mergers failed to create value.

I would welcome feedback on what should be the focus of the third piece of T2 research into the role of brand strategy during mergers…

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Brand Strategy & Post Merger Returns (Video)

If intangible value represents a significant proportion of the value of a company, then it would be wise for the post-merger integration process to focus explicitly on how to preserve and grow the intangible assets of the acquired company – specifically its customer and employee goodwill.

In the video below, I summarize the results of the academic research into post-merger financial returns on which Natalie Mizik, Isaac Dinner and I have collaborated.  The research effectively uses the choice of post-merger corporate brand strategy as a proxy for management emphasis on the preservation of customer and employee goodwill.  The results are startling – companies that adopt a “fusion” strategy outperform those that adopt the more typical “assimilation” or “business as usual” strategies by a wide margin.  They also contradict the received wisdom that “mergers destroy value” by showing a small, but significant, outperformance vs. the market in the three years post merger.

Here is the link to the short (two and a half minute) video:

www.youtube.com/watch?v=iHB8XO9xdjQ

Let me know what you think!

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M&A Research in HBR

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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Mergers and Brand Strategy

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.

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United & Continental: The Designers Weigh In

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.

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M&A – Yet More Progress

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.

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M&A – More Progress

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.

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M&A Progress Report

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.

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Brand Strategy during M&A

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…

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Focus on Deal Makers as much as Deal Breakers

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.

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