The Value of Brands in M&A

Acquiring Companies Need to Conduct a Brand Valuation Post-Acquisition to Comply with IFRS.  Here’s Why it Makes Sense to Do it Before the Acquisition.  

As all companies complying with IFRS must carry out a brand valuation post acquisition for compliance, there’s a strong argument for carrying out the necessary due diligence and valuation beforehand, explains the marketing director of Intangible Business, in a piece first published in Finance Week.   Valuing brands pre-acquisition helps management determine how much to pay, it can help finance the deal, prepare the team for integration and identify opportunities for the brand. Seeing as this will all be done after the acquisition anyway for financial compliance purposes, why not employ synergies and do the brand valuation before. 

Market share, brands and synergies are three key motivations for acquisitions. You’ve only got to look at Hewlett Packard’s acquisition of Palm and the merger of United Airlines and Continental, as examples of that. 

As all companies complying with IFRS must carry out a brand valuation post acquisition for compliance, there’s a strong argument for carrying out the necessary due diligence and valuation beforehand. This can then be dove-tailed into the IFRS 3brand valuation, increasing knowledge and reducing risk of over paying or missing business opportunities post acquisition.

And yet brand valuation for the financial reports and some due diligence into the brand typically occurs after the acquisition not before. You’d think that determining the value of what in many instances is the company’s most valuable asset and one of the key motivations for the acquisition after it’s been bought could be seen as rather academic. 

The primarily reason Hewlett Packard gave for its $1.2bn acquisition of Palm was its intellectual property, or more specifically its webOS mobile operating system. No mention of the Palm brand. There is, however, a very strong case for claiming that it is the Palm brand that will give HP its main competitive advantage, and not the technology. The technology is well regarded and does give HP a step-up, but the Palm brand will provide most long term value as technology is often quickly outdated and replaceable. 

HP’s core markets are mature. In contrast, the market for portable lifestyle products such as smart phones is a fast growing opportunity for HP. Furthermore, the growing convergence of television, computers and mobile phones has made it increasingly important for HP to gain a slice of the action. 

HP’s acquisition of Palm is, arguably, an admission that the HP brand doesn’t have the credentials to move into Palm’s more lifestyle oriented market. Adding Palm to its brand portfolio, which also includes Compaq and 3Com, will enable HP to compete more effectively in this lifestyle market. How effectively the brand could compete would have been determined by the brand valuation, leading to a more informed bid process.

At the other end of the scale in the airline industry, the mergers of United Airlines and Continental, and British Airways and Iberia, are examples where brands – despite being very valuable – are not the key motivation for purchase. In these cases, it’s all about synergies. The airline industry operates on such small margins which leave very little room for the brand proportional to other industries. 

The driving forces behind these mergers are reducing duplicate overheads such as marketing and head office costs, and increasing economies of scale such as purchasing power for fuel and aircraft, and leverage for landing slots. The brands appear rather an afterthought. Indeed the Continental brand will be transitioned into the United Airlines brand and removed altogether. The British Airways and Iberia brands will continue to be used under the International Airlines Group name which is likely to become increasingly dominant in a bid to increase efficiencies.

 

Intangible Brand Value is Sometimes Tough to Figure, But it’s Critical to Solid Business Planning