(An excerpt form an article at B+S by Michael A. Wiles and Lopo L. Rego published by Journal of Marketing, vol. 76, no. 1).
Most large business-to-consumer firms market multiple brands and adjust their portfolio by buying or selling them. For example, since 2000, ConAgra Foods Inc. has been building a portfolio of 48 major brands, of which only three were developed in-house. And Unilever PLC announced a strategy in 2000 to slim its portfolio and increase its operating margins, eventually selling off Golden Griddle syrup, Elizabeth Arden perfumes, and several hundred other brands.
But despite the active market in trading brands, little is known about how these transactions affect shareholder value. Investors reward companies that acquire stand-alone brands rather than entire firms. This is especially true when the buyer has stronger marketing capabilities for a brand than the seller had, including savvier pricing strategies, better access to distribution and sales channels, and effective communication that spurs demand and attracts new customers. The more aligned the new brand is with the acquiring firm’s core business, the better.
Similarly, a company that parts with a brand that it isn’t marketing well and that is perhaps acting as a drag on other operations can boost its stock price contrary to the often accepted wisdom that such sales are indicative of problems that warrant a lower price. And when a firm with weaker marketing abilities transfers a brand to a company with better marketing, shareholder value increases for both.
The stock market response to transaction announcements made by 322 consumer-oriented companies in 31 industries from 1994 to 2008 were analysed. Several databases, along with annual reports, investor relations material, and press releases were studied to identify brand transactions and the type of language announcing them.
The firms’ “abnormal return” were calculated — the difference between the stock return in response to the announcement and what it would have been, according to market benchmarks, without the announcement — as a measure of whether investors rewarded different types of acquisitions and announcements.
The brand acquisition announcements generally led to a boost in the stock price of buying firms; they registered an average positive abnormal return of 0.75 percent. The purchasing firms gained an average of US$137 million in shareholder value on the announcement date.
The stock of selling firms not only also rose on the day of the announcement but rose in a slightly more dramatic way, with a positive abnormal return, on average, of 0.88 percent.
No evidence that abnormal returns were lower when firms bought multiple brands, but investors did appear to become concerned when the acquisition was large enough to alter the complexity of the firm’s overall portfolio. When companies bought an entire firm, along with its brand assets, their abnormal returns were lower, the analysis showed. Indeed, regression analysis indicated that the purchase of a firm, compared with that of a brand, had a –0.58 percent impact on the acquirer’s stock price, everything else being equal.
Overall, the results indicated that investors have a nuanced appreciation of how marketing capabilities can enhance the assets of acquired brands and how this will likely affect financial performance. In particular, companies with strong marketing abilities and complementary assets are rewarded when they acquire individual brands of good quality, with high price points, from firms that are without the resources to properly position and market them.
Companies looking to divest assets should scan their portfolios for large brands with lower quality and price positioning — and those that are furthest from the firm’s core business and that lack marketing or distribution resources. Bundling multiple brand assets in a single sale could also be worthwhile.
Managers should be aware that investors are sensitive to public statements surrounding brand transactions, and that it’s important to emphasize marketing capabilities in those announcements. When companies talk of tactical and specific “cost-saving synergies,” they create shareholder value, the authors found. But discussion of “revenue synergies” from integrating brands is perceived as too vague, and as a worrisome sign that the company might not know what to do with the new brand.
Investors reward companies that buy individual brands as opposed to entire firms. But it’s crucial that the acquiring firm has stronger marketing capabilities than the selling company.
Full Article: http://www.strategy-business.com/article/re00187?pg=all
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