The Brand Impact of Mergers
Last year saw a n ear-record high in M&A activity, which at $3.5 Trillion was the highest activity recorded in seven years, according to the New York Times. Tiny startups (WhatsApp: $19 Billion) and major blue chip companies (DirecTV: $49 Billion) were swallowed up by larger acquirers for astronomical sums.
The conventional wisdom fueling these buying sprees goes like this: once a company gets to a certain size, organic growth becomes very difficult to sustain. Acquiring into new areas or capabilities is a much faster route to growth in revenues, capabilities, and ideally profitability.
But what happens to brand value in these transactions? How should brands be managed to retain or augment their combined value? Which company gets to keep its brand name and promise, and what happens to the other? In our experience, too few companies invest in the upfront strategic thinking and decisions required to get full brand value, and hence business value, out of their mergers.
Ways to destroy brand – and business – value.
Consider the following historical example: In 2000, AOL acquired TimeWarner for a staggering $350 Billion, ostensibly to transform media for the Internet era. At the time of their split, less than a decade later, the worth of the two companies combined was about one seventh their value at the time of the deal. Neither business has returned to its former size or stature. More importantly, both brands have suffered irreparable damage. Neither brand carries the credibility, relevance or trust each had prior to 2000, creating a major obstacle to rebuilding their businesses. Much of this failure has been attributed to a lack of compatibility between the two cultures, values and priorities – in other words, the failure to reconcile two very different brands.
Many mergers look good on paper, but fail to deliver a coherent brand promise.
Research has shown that the percentage of mergers that failed to achieve their original business goals have been as high as 83 percent. Failure to consider the brand aspects of a merger, along with the business aspects, is a major contributor to many of these failures. Why? Because a great deal of a company’s valuation is “goodwill” defined as the intangibles that create positive perceptions around a company’s future.
Goodwill is typically attributed to brand loyalty, relevance, appeal, and trust. This goodwill doesn’t just transfer when companies are combined. If brand promises, values or cultures are incompatible, or if the merger creates complexities that employees and customers don’t understand, brand value suffers, often destroying the appeal and premium that might have inspired the acquisition in the first place.
Successful mergers consider both brand and business perspectives.
There are, of course, good examples of mergers gone right, from both a business and brand point of view. The most consistent example that stands out in my mind is Disney. Its acquisitions of major brands like ESPN, Marvel, and more recently Pixar have demonstrated a knack for amplifying both business and brand value through its ability to franchise and productize for ever larger audiences.
Disney starts with an acquisition of a strong brand with a clear promise, and then they build upon, rather than try to dilute, that promise by connecting its product to others across the portfolio. The result is a very strong and reliably growing house of brands, each of which retains reasonable autonomy while also strengthening the Disney corporate brand.
Mergers are both a business necessity and a major brand challenge.
Evidence suggests mergers are very hard to get right, for many reasons. More often than not, a lack of brand thinking during the merger process can provide a major obstacle to success. More companies ought to think like Disney, and consider how to build both business and brand through M&A activity. Disney has proven time and again how this can be a ticket to success. Considering brand strategy along with business strategy can create better alignment and understanding, increase goodwill, and amplify both the value and viability of mergers and acquisitions.