Brand in M&A: When Vision Becomes Value
While mergers and acquisitions may have slowed in 2020, nearly $4 trillion in M&A activity had occurred as of mid-August in 2021. The federal funds rate is still close to zero, buoying an already-hot bull market and enticing investors worldwide to put more capital to work in US-based assets. Still, the top 25 US private equity shops are sitting on $510B in uninvested capital, and the degree to which entrepreneurs and capital partners are comfortable experimenting with new investment models (e.g., SPACs, blank-check companies) suggests that the US economy is firmly ensconced in a growth mindset.
In a world where it can take as little as 6 to 12 months to move a company from initial incorporation to real revenue, one might argue that it’s all about building rather than buying. But it’s one thing to get a company started; it’s quite another to create a sustainable business. This is why M&A still represents 88% of exits for startups. What better way to further your mission and empower your growth than to give it a safe home within an organization that shares your values and objectives?
From a startup perspective, since M&A is the modal positive outcome, it pays to optimize brand value. And any founding team worth its salt will inevitably want to create a valuable brand. But from an acquirer’s perspective, fewer, stronger brands are generally better. So what’s to be done as companies seek to merge to drive growth?
Regardless of which side of a transaction you may find yourself on, experience and evidence show that a well-executed brand adds monetary value and helps unify merged companies. Brand plays an important role before, during, and after M&A activity. Here’s how:
Pre-M&A
Whether you are buying, selling, or merging, a brand that’s clear, relevant, and strong strengthens your position and increases the value you bring to the table. Consider that when Amazon purchased Whole Foods in 2017, nearly 70% of the purchase price was reportedly allocated to “goodwill.” Strong brands tend to have more loyal users, greater switching costs, deep technology moats, and better talent than weaker brands. Whether it’s chicken or egg is less important than the fact that, in a pre-M&A context, a great brand has high curb appeal. It puts you in a great spot in the initial conversations at the bargaining table.
So, give your brand some objective scrutiny. Hold yourself to a high standard in three areas: First, be as clear as possible about your brand purpose, and the specific moves you’re making in the market to achieve it. Second, make sure to position your brand - visually, verbally, and experientially - in a way that’s relevant to your target audiences. Third, ensure that your talent brand (which may also be referred to as an employee value proposition) is clear and captivating to people. Given that over half of working adults are considering switching jobs in the next year, the “Great Resignation” is giving way to the “Great Reshuffling,” and people are looking to work for brands with whom they have a shared interest.
When business leaders say things like “my company is the best-kept secret in my industry,” what they are really saying is that their business has gotten ahead of their brand, and the story of what they do is not clear. An authentic brand doesn’t make things up; it identifies and articulates the value it delivers in a relevant, genuine way. But, if your brand is not as strong as it could be, spruce it up - and get going now.
Mid-M&A
A strong brand is beneficial in the midst of the M&A process. Strong brands provide clear indications for both companies of who is on the other side of the table, providing insights into company culture, values, and personality. A well-articulated brand communicates the value proposition of the company, making it easier to see strengths, weaknesses, areas of complement, and areas of overlap. This additional information helps inform negotiations as you navigate the M&A process.
In addition, brand should be an explicit part of the M&A diligence process. CEOs, CFOs, Heads of Marketing, and Corporate Development Teams should insist on a clear understanding of:
The acquiring company’s brand strategy. Is the acquirer known to be a branded house, house of brands, or a hybrid? How has that strategy changed over time? What role does this specific acquisition play in the furthering of or the move away from the current strategy? If you are an entrepreneur selling your company to Salesforce or Google, it would be unusual to expect your brand to be maintained. There are of course exceptions, like Heroku and Fitbit, but these exceptions prove the rule that most companies, as they grow by acquisition, have developed a process for integrating not just people and product, but also brands and names.
Revenue upside and risk. Generally speaking, in an M&A context, acquired brands are generally migrated/integrated within a period of 6-24 months based on the time required to make product, platform, customer, and employee transitions. Acquired brands are often retained if (a) they give the acquiring company access to a new customer segment, (b) the acquirer wants to use the new brand as a trojan horse into a market or to diversify revenue - without causing revenue or reputational risk. Classic examples of (a) and (b) coming together are Facebook’s 2012 acquisition of Instagram, Disney’s 2006 acquisition of Pixar, or Salesforce’s 2019 acquisition of Tableau.
Investment expectations. Back at Prophet, I would always say that “brands require care and feeding.” It’s true. A team on the acquiree side has nurtured and grown its brand similar to the way a parent would raise a child. A lot of late nights, tough decisions, and bold moves have paved the path to growth. Acquirers need to be clear about the degree to which they plan to invest in the maintenance of the acquired company’s brand (and any important product families) so that everyone is clear on the intended starting point and desired outcome. My estimate as a brand professional is that, among the 88% of exits that come through M&A, no more than 10% of the brands are retained after 24 months.
Post-M&A
Once the transaction is completed, the initial euphoria usually gives way to the sobering thought of integration. Effective branding helps to unify teams, aligning leadership and holding them accountable to the stewardship of the brand.
Given the power of brands to help in this process, determine as quickly as possible how the brands will live (or not live) together. Will one partner fall under an existing company brand, or do the brands need to be tweaked and melded into a single new brand? Whatever the case, move quickly to make this happen to ensure an accurate and consistent brand, then drive this through the organization to guarantee the right level of integration. If your growth plans call for additional acquisitions, evaluate your performance, and then update and keep the plan ready for your next transaction.
Most of us would agree that strong brands help companies market and sell their services or products, but that is not all they do. Brands drive real value, especially in the M&A process. Whether it is driving monetary valuation, improving negotiating position, providing insights that support alignment, unifying culture, or streamlining integration, brands play an integral role. Whether you think you’ll be in the M&A game soon or not, the stakes are too high to wait. Get your brand in order - you’ll be glad you did.