Sundar Bharadwaj, an associate professor of marketing at Emory University’s Goizueta Business School, is a Snapple devotee—not necessarily because he prefers the taste of the iced tea beverage, but for what the Snapple name represents. He watched with interest in 2000 when Cadbury Schweppes bought the Snapple brand of drinks, justifying the purchase to its board by saying that Snapple would be a wonderful addition to its product line and could be sold through its established distribution channels. Cadbury could successfully launch this small-town brand into the big time. When Bharadwaj began to study analysis of this deal, he was intrigued to note that Quaker Oats, a previous owner of the Snapple brand, had given the same reasons for wanting to buy the brand—and yet, Quaker had failed to build the Snapple brand to any measure of its aspirations. “This piqued my curiosity,” says Bharadwaj. “How does a brand decide what brands to buy and when they do decide, how do they identify what values to put towards them?”

Building on that basic premise, Bharadwaj teamed up with two other similarly intrigued Emory marketing colleagues Rajendra K. Srivastava and S. Cem Bahadir, who holds a PhD in business (marketing) from Goizueta and is now an assistant professor of marketing at the Moore School of Business, University of South Carolina, to research brand valuation in M&A. For Cem Bahadir this research became a part of his doctoral thesis. The result: their paper “Financial Value of Brands in Mergers and Acquisitions: Is Value in the Eye of the Beholder?” which will be published this month in the Journal of Marketing.

The topic of brands and brand equity is fairly common in academic research. Brand valuation has largely been in the domain of consulting practices with firms such as InterBrand. Client companies, who pay big money for consulting expertise that helps them figure out the values of their brands, consider many factors when arriving at that value. But brand valuation takes on a different significance in M&A, when both acquirer and target contribute inherent qualities that fuel brand value. “For example, Procter & Gamble (P&G) acquired Gillette and about 49% of the acquisition was attributed to the Gillette brand,” explains Bharadwaj. “You start wondering whether or not this valuation is a function of what the brand had done in the past. Is it also a function of what the brand will continue to do in its existing markets, as well as what expertise this firm can bring to bear? Each firm brings an inherent capability to leverage this new asset.”

Bharadwaj and his fellow researchers, armed with their marketing knowledge, set out to study the contributing traits of both the target firms and acquiring firms to explain the value given to a brand. They used audited measures of acquired brand value from SEC filings and other sources to create a model that is based on 133 M&A transactions where acquirers attribute value to target firms’ brands. They scaled the firms in their sample based on their marketing resources and what those resources generate for the firm. By assessing the maximum marketing input and the maximum sales output of all the firms, they were able to determine the capabilities of both the acquirer and the target and how those, in turn, influence brand value.

The study also recognizes the strength of market-based characteristics, adds Bharadwaj, again citing P&G’s acquisition of Gillette. “P&G was very strong with the women market and Gillette was very strong with the men,” he notes. “There was an opportunity for P&G to take its brands and leverage them with the men’s market because Gillette has this wonderful connection with the men. And they can take this Gillette brand and sell it to the women’s market because P&G has inherent capabilities with a rich understanding of the women’s market. We need to take that ability to leverage across both into account in our study to come at the valuation.”

Study results show that both acquirer and target marketing capabilities, as well as brand portfolio diversity have positive effects on a target firm’s brand value. Both parties’ capabilities are critical. “You need both to guide you in terms of valuation,” explains Bharadwaj. He adds that the diversity of your portfolio determines whether or not you maintain the brand identity that you acquire and how you value those brands. For instance, a company that typically promotes one brand, like AT&T, will absorb acquired brands into the strength of that single brand and therefore value those individual brands lower, while companies with the expertise to maintain several brands, like P&G, will place a higher valuation on multiple brands that it acquires.

The study also stresses the importance of market characteristics in determining brand value. Does the acquisition enable the acquiring company to enter new markets or is it entering a market that is identical to its own? The answer has important implications for brand value. “If there’s redundancy in your portfolio, then your valuation is likely to be lower,” suggests Bharadwaj. “If you’re acquiring a brand that allows you to get into a whole new market, then your valuation would be much higher.” What’s more, the potential of the target’s market, whether it will grow or remain stagnant, can influence brand valuation in an M&A.

“Is Value in the Eye of the Beholder?” has important lessons particularly for target firms as they put themselves up for sale. For instance, if you have a wide variety of brands, then you should seek out an acquirer who also has many brands. “Target firms need to recognize the significance of a firm’s marketing capabilities as well as its brand portfolio diversity,” write the authors. “Targets with strong marketing capabilities can negotiate higher prices for their brands because the target’s marketing capabilities provide assurance to the acquirer firms in terms of the future performance of its brand portfolios. Targets with diverse brand portfolios can charge higher prices for their brands because diverse portfolios provide strategic options for the acquirer.”

Bharadwaj and his marketing colleagues are exploring different avenues to pursue with their brand valuation research. Bharadwaj is especially interested in the effects of taking a brand private. “This gives you the freedom to do things that a publicly traded firm would have trouble with,” he notes. “Inherently there seem to be some advantages to acquisitions by private equity. I would like to look at what happens to a brand when it transitions to private equity ownership. They have a longer-term horizon in terms of what needs to be done. Does it change the nature of what happens to the brand over time?”

 

Photo: Professor Sundar Bharadwaj