Financial Implications of Brand Consolidation

The financial community has always had an interest in anything that is undervalued, ostensibly because there is no faster way to make money than by buying an undervalued entity and then selling it on at its true value.

The 1980s was the decade of brand extension. Fuelled by the theories of brand gurus such as David Aaker and Kevin Keller, firms were encouraged to stretch their strongest brands into as many categories as possible.

Not surprisingly, the 1990s became the decade of brand consolidation.

Many firms discovered that the combination of global markets and multiple brand extensions created a confusing matrix of hundreds of different brands.

Worse still, many companies discovered that their major competitors in a market were actually other brands that they owned. As a result, companies such as Akzo Nobel and Unilever embarked upon massive phases of brand consolidation, winnowing them down to a more simple and efficient brand architecture.

The questions facing any potential brand consolidator underpin the need for efficient systems for valuing brands. Which brands should be eliminated?

How should they be eliminated? How much should we expect to sell them for? Companies can fall foul of the brand valuation process. For example, it has been said that when Allied Domecq sold Plymouth Gin to a consortium of private investors including John Murphy, the founder of Interbrand, it undersold it. The new owner turned the brand round and made a packet when selling it on.

In 2002 Saatchis' private equity vehicle, Saatchinvest, announced the acquisition of Complan and Casilan, two food supplements, from Heinz.

There is a difference between the two deals. With Plymouth Gin, tangible assets in the form of a distillery and stock were included in the price so there were tangible assets backing the deal. In the case of Complan, Saatchinvest was acquiring only intangible assets. Andrew Leek of Saatchinvest said: "The Complan deal is unusual in the sense that few tangible assets are involved and the security is largely intangible assets - formulas, trademarks, design and copyrights, distribution and manufacturing agreements."

How do investors and divestors know what brands are worth now and could be worth? The answer is by conducting a detailed brand due diligence.

In the Saatchinvest example, Brand Finance advised the organisation on the potential value of Complan. It reviewed the strength and integrity of the trademarks, the potential of the market, the strength and performance of the Complan and Casilan brands, and carried out discounted cashflow appraisals of future earnings under various scenarios.

Too many outfits still perceive branding as the creative side of the business - the logos, fonts and colour schemes. But this is a small part of the brand function. For organisations with multiple brands a much greater concern should be the accurate financial valuation of all their brands.

Unfortunately, though most clients are comfortable with the creative tasks associated with brand building, the same is not true for the financial implications.

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Comments

[Suzi Orman]

In the Saatchinvest example, Brand Finance advised the organisation on the potential value of Complan. It reviewed the strength and integrity of the trademarks, the potential of the market, the strength and performance of the Complan and Casilan brands, and carried out discounted cashflow appraisals of future earnings under various scenarios.