This outcome validates the “winner’s curse” phenomenon commonly cited in merger and acquisition circles, the authors write, which holds that buying an entire firm to capture some of its brand assets is likely to be inefficient. “The source of the curse is more likely associated with the number of different types of assets being valued and the costs of integrating them into the buyer’s organization,” the authors write.
The 111 brand transactions for which the authors had paired data — that is, one firm in the sample sold a brand to another in the sample — created an average net increase of more than $181 million in the market value of the firms involved, the analysis showed. The authors attribute this gain to investors’ recognition that the purchasing firms would be better at positioning the brand than the selling companies.
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.
Finally, the results also raise the possibility of a novel “brand nursery” business model, in which companies could develop and nurture brands before selling them to firms with better marketing resources.
“Although many small entrepreneurial firms have created brands and sold them to larger rivals, and other firms have bought distressed brand assets for later resale, we are not aware of any firms that have adopted such a business model explicitly,” the authors conclude.
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.