Title: The Effect of Brand Acquisition and Disposal on Stock Returns (Fee or subscription required.)
Authors: Michael A. Wiles (Arizona State University), Neil A. Morgan (Indiana University), and Lopo L. Rego (Indiana University)
Publisher: Journal of Marketing, vol. 76, no. 1
Date Published: January 2012
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. This paper finds evidence that 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, the authors found, 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.
“For the first time we have empirical data showing that marketing capabilities are key to turning a brand investment, which had previously been a leap of faith, into a strategic and profitable move for buyer, seller and shareholder,” one of the authors, Neil A. Morgan, said in a press release.
The authors analyzed the stock market response to transaction announcements made by 322 consumer-oriented companies in 31 industries from 1994 to 2008. They studied several databases, along with annual reports, investor relations material, and press releases, to identify brand transactions and the type of language announcing them.
About half of the transactions studied in the sample involved the purchase of entire firms. But 47 percent of the sample companies acquired one or more brands as stand-alones, and 29 percent disposed of one or more stand-alones. The sample covered 572 brand acquisition announcements and 308 brand sell-off statements.
The authors calculated the firms’ “abnormal return” — 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 authors found that 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. “Although investors thus recognized the value of brand assets for generating a firm’s future cash flows,” the authors write, “when a more valuable ‘next-best’ use for a brand could be identified, investors rewarded firms for selling their brand assets.”
The authors found 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.
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.