As M&A Market Heats Up, Brand Is Taking On Elevated Role, Prophet Says

Businesses jumping into the resurgent merger and acquisition market need to consider the brand implications from the outset to avoid becoming another "deal gone bad" statistic, warns Prophet, a leading consulting firm specializing in brand and business strategy.

By the first quarter's end, the U.S. M&A market had experienced three consecutive quarters of year-over-year double digit growth, both in transaction volume and number of deals. However, Michael Dunn, Prophet's Chief Executive Officer, pointed to studies that show that 50% to 80% of M&A deals under-perform or actually destroy shareholder value within the first five years.

Dunn said Prophet has found that many companies spend too much of their post-merger integration efforts focused internally – identifying cost savings and restructuring jobs, for example – when they should also be focused externally on ensuring they continue to meet customers’ needs and their expectations of the brand.

Dunn also asserted, "Businesses need to better understand that there's a strategic and financial value to the brand beyond just acquired customers, in that it's an asset that can allow the organization to expand in new and different ways. Brands can help companies to enter new markets, reach new customers, and launch new businesses that create value for the organization."

Its 2003 acquisition of Kinko's, for example, enhanced FedEx's access to and credibility in the small-to-medium sized business market. Likewise, Coca Cola Company's 2001 acquisition of Odwalla provided an avenue to a new segment of the beverage market into which it wouldn't have had sufficient credibility to enter on its own.

While marketers haven't traditionally been offered a seat at the deal-making table, new U.S. accounting standards concerning intangible assets make at least one argument for doing so, Dunn said. "How the acquired brand(s) will be managed – whether they're kept as-is or retired – affects the way they are valued as part of the deal, which is why brand strategy needs to be incorporated into the process from the outset," he explained.

Dunn, noting that brand and marketing issues are too often brought into the mix after the deal is completed, cited several common mistakes that arise as a result:

Short-term and ultimately shortsighted incentives can be allowed to dictate how the acquisition is branded. Such was the case in the AOL merger with Time Warner, where the desire to play off AOL's prominence overshadowed the fact that it had little relevance outside the Internet channel. As this case exemplifies, branding decisions motivated by business politics rather than customer insights can easily lead to loss of customers, employees and shareholder trust, negatively affecting business results. Time Warner dropped the AOL designation from its corporate unit in recognition of the failure of content and distribution convergence and negative publicity emanating from AOL's accounting practices.
Too often, the acquired brand is integrated into the acquiring company's portfolio without a strategy that thoroughly accounts for communication of the move and, ultimately, delivery against the brand promise across all customer "touchpoints." These encompass more than just advertising, but customer service departments, retail sales, and the organization's website. "It's essential, for the long-term success of the deal, that the transition is smooth and ensures that customers will consistently experience the promise represented by the joined brands long after the transition," said Dunn.
While awareness of the importance of brand metrics to gauge how well brands are supporting business strategies is rising, metrics programs are not yet widely employed after the assimilation process has begun. "There's a strong causal relationship between customer attitudes, customer behaviors, and business results that all businesses should monitor," said Dunn. "As a rule – and not just in a merger or acquisition situation – putting related metrics in place is critical to monitor and prove out how well brands are driving business performance."

The current wave of M&A activity will have an end result, according to Dunn, of creating of stronger businesses and brands, "if a brand-oriented lens is applied at all stages of the transaction. This will require a more prominent role by marketers to help ensure the strategic, brand benefits are closely tied to the economic benefits of the deal."

7/12/04

Contact:
Sally Saville Hodge
Hodge Communications
312.666.6662