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Brand Strategy and Mergers


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Reviews the major alternatives open to business executives during mergers, and the associated post-merger returns for companies adopting each of the three main alternatives.
The research suggests that the choice of corporate brand strategy is value relevant, and may play an important role in facilitating a smooth process of post-merger integration.

Published in: Business, Economy & Finance

Brand Strategy and Mergers

  1. 1. Brand Strategy and Mergers: Is Brand a Significant Variable? Research into the Role of Brand Strategy in M&A Type 2 Consulting New York October 2013 Does Marketing Matter? January 2009 P1
  2. 2. Corporate Brand Strategy During Mergers •  Type 2 Consulting has conducted two major research projects on the role of corporate brand strategy during mergers: –  The first was to document the 10 alternative branding strategies available to business executives (published in Sloan Management Review Summer 2006 – “Merging the Brands and Branding the Merger”) –  The second was to investigate whether any of these strategies is associated with superior post-merger performance by the combined company (published in Harvard Business Review September 2011 – “Why Fusing Company Identities can add Value”) •  This presentation summarizes the findings of this research with the goal of helping marketers demonstrate the value that they can bring to the evaluation and implementation of M&A: –  See also “M&A Blind Spot” (Wall Street Journal, 16 June 2007) P2
  3. 3. Options for Corporate Branding in Mergers MERGING COMPANIES HAVE THREE MAJOR OPTIONS •  “Backing the stronger horse” –  The combined entity adopts the identity of one of the brands, at both the corporate and product level •  “Business as Usual” –  Both brands continue to be used on products; but only one is used at the corporate level •  “Fusion” –  Elements of both brands are incorporated into the corporate brand P3
  4. 4. “Backing the Stronger Horse” Acquirer Target Merged entity Variant 1 Variant 2 Variant 3 P4
  5. 5. “Backing the Stronger Horse” – Pros and Cons Pros Cons •  •  •  •  •  •  •  Discards all brand equity and associated goodwill of customer and employees •  Immediate cost to re-brand operations of the target Simplicity Expediency Clarity Efficiency Long-term low cost Market power P5
  6. 6. “Business As Usual” Acquirer Target Merged entity Example 1 Example 2 Variant P6
  7. 7. “Business as Usual” – Pros and Cons Pros Cons •  Preservation of brand equity of both brands •  Expediency •  Segmentation of the market •  Long-term cost to maintain two separate brands •  Impedes post-merger integration P7
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  11. 11. “Fusion” – Pros and Cons Pros Cons •  Preservation of brand equity of both brands •  Sends a unique signal of continuity & integration •  Long-term low cost •  Market power •  Immediate cost to re-brand the operations of both firms •  Requires buy-in from the stakeholders of both firms P11
  12. 12. Research Questions •  Is the corporate branding decision value-relevant? –  Is there evidence from the capital markets of an association between corporate brand strategy selection and post-merger financial performance? •  When does the information get reflected in the share price? –  Are the markets efficient at impounding the effect of the merger at the time of the merger announcement? Or does it appear that the value relevance of the branding decision is only appreciated over time? This research was a collaboration between Type 2 Consulting, Natalie Mizik (Associate Professor of Marketing, University of Washington) and Isaac Dinner (Assistant Professor of Marketing, University of North Carolina at Chapel Hill) P12
  13. 13. Results of Prior M&A Research Immediate Reaction •  Acquiring firms experience small negative returns •  Target firms have strong positive returns –  Mulherin & Boone 2000 –  Andrade, Mitchell & Stafford 2001 –  Jensen & Ruback 1983 Long-Term •  Merged entities realize 5% to 7% negative risk-adjusted returns in the three years following a merger –  Mitchell & Stafford 2000 –  Agrawal, Jaffe & Mandelker 1992 P13
  14. 14. Why Do Mergers Fail to Create Value? Lots of Theories Conclusion •  Agency theory: misalignment of managers’ and shareholders interests (Jensen 1986, Kroll et al. 1997) •  Hubris theory: management overconfidence (Roll 1986) •  Transaction-specific issues (e.g., is merger friendly or hostile, vertical or horizontal, financing) (Travlos 1987, King et al. 2004) •  Market relatedness (Lubatkin 1987; Andrade et al. 1987) •  Resource complementarily (Harrison et al. 2001) •  Absorptive capacity (Zahra and George 2002) Meta-analysis by King et al. (2004) concluded that: •  “Despite decades of research, what impacts the financial performance of firms engaging in M&A remains largely unexplained” (p. 198) •  “Researchers simply may not be looking at the ‘right’ set of variables as predictors of post-acquisition performance” (p. 197) P14
  15. 15. Our Hypothesis about Post-Merger Performance Three Key Audiences Potential Impact of Branding •  Customers •  Affect relationships with customers •  Affect employee morale and loyalty •  Signal strategic intent of the merged entity to competitors, investors •  Signal a change in managerial mindset and behavior •  Employees •  Investors P15
  16. 16. Data Set •  •  •  •  216 mergers over $1bn Mergers were between publicly-traded companies Mergers were completed during 1997 to 2006 Corporate branding strategy coded independently by several analysts and verified directly through a survey and follow-up interviews with the management Acquisition Business-As-Usual Fusion 119 53 44 P16
  17. 17. Two Methodologies Used •  We used an event study approach to assess market reaction to the merger announcement: –  We replicated the findings of previous research that mergers result in small negative abnormal returns to the acquirer and large positive returns to the target (as measured one day pre- and post-announcement) •  We used a time varying calendar-time portfolio approach to measure abnormal post-merger returns over three years: –  We replicated the findings of previous research that merged companies under-perform the market by 7% in the three years following the merger –  However, our analysis revealed a very significant divergence in the performance of the three corporate brand strategies (see next slide) P17
  18. 18. Cumulative Abnormal Returns for Buy and Hold (measured from the merger completion date) 15% 10% 5% 0% 0  years -­‐5% 1  years 2  years 3  years -­‐10% -­‐15% -­‐20% -­‐25% -­‐30% -­‐35% Acquisition Business  as  Usual 18 Fusion P18
  19. 19. Key Points for Marketers •  The widely-quoted observation that merged companies tend to under-perform the market by 5 to 10% in the three years following the merger masks a very important subtlety: –  Mergers that adopted a “fusion” branding approach out-performed the market; while those adopting an “acquisition” or “business as usual” approach to branding under-performed the market •  This suggests that the explicit attention that the fusion branding approach pays to the combination of the equities of the two merging entities may play an important role in facilitating the post-merger integration process •  The thinking around M&As so often appears to be dominated by cost synergies – this research is a timely reminder of the importance of customer and employee equity in ensuring the success of a merger P19
  20. 20. 226 Fifth Avenue 6th Floor New York NY 10001 C: 646 345 6782 T: 212 537 9200 F: 212 658 9869 P20