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
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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)
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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
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4.
“Backing the Stronger Horse”
Acquirer
Target
Merged entity
Variant 1
Variant 2
Variant 3
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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
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6.
“Business As Usual”
Acquirer
Target
Merged entity
Example 1
Example 2
Variant
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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
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8.
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9.
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10.
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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
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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)
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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
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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)
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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
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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
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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)
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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
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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
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20.
226 Fifth Avenue
6th Floor
New York
NY 10001
C: 646 345 6782
T: 212 537 9200
F: 212 658 9869
j.knowles@type2consulting.com
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