By Mike Rocha, global director, brand valuation at Interbrand
When the Covid-19 pandemic struck it had a profound impact on most areas of business and mergers and acquisitions (M&As) were no exception. Deal making was largely put on hold, although as the months have passed that initial inertia has been kicked into touch and activity has resumed.
As activity picks up and a sense of normality returns, brand considerations are very different. When it comes to M&As – and brand disposal activity – accurately valuing the brand is crucial; even more so in these anxious times, when every bit of business value must be maximised. Looking at how businesses have performed in previous crises shows that the strength of the brand is a key determiner in how that business survives any new crisis. The strongest brands outperform others and post-crisis, they rebounded twice as fast as weaker competitors.
The coronavirus crisis will drive M&A and brand disposal activity as businesses will need to cut costs, find brand synergies and acquire funds from selloffs. All these moments are crucial inflection points for brands as are how they evolve post-transaction.
Pre-deal the focus is mostly due diligence – in legal, financial and commercial. Here the brand value needs to be factored in, to help inform valuation and negotiations. Get this wrong and a lot of money can be left on the table.
Identifying unrecognised potential in the brand
When luxury online fashion retailer Net-a-Porter was sold by its owners Richemont to Yoox, its founder, Natalie Massenet, and some minority shareholders were troubled by the deal, disagreeing with the brand valuation. We were brought in to conduct an evaluation of the Net-A-Porter brand, to calculate the brand value in the deal and give an estimate of business value. The shareholders wanted to ensure the arbitrator fully understood the strength and value of the brand. We successfully argued for an increase in the business value and according to media reports, the arbitrator set the business value at £1.5bn, compared with the original deal’s value of £950m.
So, the questions a business should ask pre-deal are: have the brand’s strengths and weaknesses been properly valued; is there unrecognised potential in the brand and does the business value reflect the brand value?
Factoring in the emotional as well as the rational
Post-merger the brand implications come to the fore when determining the brand strategy of combined businesses. Does the brand portfolio need to be rationalised and, if so, what will the impact be on future business? There is no one size fits all here, each merger will come with its own issues and considerations. And not all of them are cold, hard business decisions. Founders have emotional attachments to brands, which can be heartfelt and irrational.
At the post-deal brand strategy phase, there are specific risks that need to be managed:
We adopt a four-step process to managing those risks: create a strategic foundation and a robust business case; design a market-ready migration plan; equip the business; and deliver the promise.
A merger of two equals
The merger of Lan and Tam airlines to become largest Latin American airline group is an interesting example. When airlines merge both brands tend to be maintained but this became a world-first merger, in the way it managed the brand.
The first step following the merger was to look at optimal brand architecture, a brand solution that would minimise risk but maximise the deal potential. As both brands were leaders in their respective home markets there was not an immediately obvious solution which meant all options were on the table.
We started a strategic analysis assessing the different options against key criteria – business vision, brand strength, internal culture and impact on key stakeholders. That allowed us to shortlist options that we took forward into more in-depth analytics and financial modelling. One was to maintain the status quo – keep two brands but sharpen the propositions – and the other was to bring the two together to create the best of both.
The three key areas to consider were the revenue impact and, in particular, the share of wallet and customer acquisition, the cost synergies – especially marketing and media – and the cost to deliver a new single brand across two airlines, including all the painting of aeroplanes, corporate literature etc.
The business case ultimately supported bringing the two brands together into one new regional powerhouse brand. The financial case supported it and gave the shareholders the confidence to move forward. The entrepreneurial founders were still involved – but the business case helped take the emotion out of the equation and bring it to rational decision-making and the right solution for the business.
Culture can still eat strategy for lunch
Different business cultures should not be underestimated. Culture is a big value driver in itself – so when you bring together businesses you must anticipate those challenges. The biggest often come when more legacy based businesses combine with technology disrupters – where the pace, the decision-making and the style and structure clash. Fail to deal with this, and the acquisition can fail.