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:
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?