Brand value and architecture considerations

In any acquisition process, brand value plays a vital role. Brand Finance estimates, for example, that approximately 20% of the market capitalisation of the largest companies in the world consists of brand value. However, decisions in this area are far from clear cut.

The question of value

While there is much debate about how to calculate brand value as the outcomes vary with each applied methodology, broadly speaking it is similar to how investors value stock. For example, any listed company with 10 analysts will probably have two advising to sell, two to hold and six to buy. The reason for this is that all decisions are based on expectations for the future.

In essence, a brand valuation is a combination of:

• the relative strength of a brand (company or product) compared to its competitors. Brand valuation experts use as much external and internally available research as possible to gauge this; and
• the financial outlook in terms of revenue and profitability – however, as this means creating future projections and then calculating the net present value, the face values resulting from such a calculation can vary widely.

How to structure the new brand

The question of how to structure a brand post-sale also plays a key role in these valuation exercises. After all, from a buyer’s perspective, the acquired portfolio’s worth, combined (or not) with that of the buyer, is where the real future potential lies.

All assumptions made pre-completion must be checked and assessed once the legal constraints against accessing information have been relaxed. The main rule here is to investigate whether it is possible to unify the branding of the combined entities going forward. The benefits of doing so are obvious in terms of effectivity and efficiency – the more aligned the brands, the fewer resources required.

On the other hand, there are very good reasons not to unify all brands. This is especially true if the market segmentation is quite different, or when the profitability of the acquired portfolio is significantly higher. There may also be pertinent cultural reasons to avoid unification.

Therefore, a stepped approach is recommended, both for prioritising which brands will achieve the highest impact at the lowest effort and for mitigating risk once the unification process has started. The latter can be achieved by keeping names at a lower (product) level in the new architecture or by aligning the visual brand appearance across the portfolio, without immediately changing all names. Although it can vary greatly by company or situation, such an approach can help to avoid the risk of losing equity by moving too swiftly to the new brand.