The new wave of optimism – watch your brand!
According to the Financial Times, the volume of announced merger and acquisition activity in the first six weeks of 2006 has reached $154bn – more than three times the amount generated during the same period in 2005. This follows a rise in confidence of chief executives reported in the Goldman Sachs Confidence Index in the last quarter of 2005.
While a return to corporate confidence – so battered by the threats of terrorism and oil prices rises – is welcome, companies should pay particular attention to the way organisations come together, particularly around corporate brands.
According to a report produced by KPMG in 1999, 83 per cent of mergers are unsuccessful at producing any benefits as regards stakeholder value. A Business Week report in 2002 indicated that more than 60 per cent of US acquisitions destroyed stakeholder value. The reasons for these figures are varied - from the bad management of aspects of the integration, to a mistaken strategic vision or insufficient attention to the people aspects of the deal. Part of this latter issue, we believe, is failure to attend sufficiently to the way employees interact with their company’s brand.
Where brands are authentic – that is, if they practice on the inside what they say on the outside – employees don’t just work for the company, they work for the brand. Brands have been viewed as something which are adopted as an expression of who people are, and where employees are engaged with the brand as part of their work, this engagement may form a very large part of the employee’s identity.
Change employees’ work (make them work with other people they don’t know, do different things, commute to different places) and you also threaten their identity. These changes are not trivial – they go to the heart of why many people go to work in the first place.
Although “due diligence” is carried out as a matter of course for M&A, this tends to focus on the financial aspects of the deal. Softer issues such as culture - which supports the brand – can be glossed over. Brands themselves are evaluated simply on their financial value, with no attention paid to the intangible elements they represent – what they stand for in the eyes of customers and what culture they represent internally. Reinforcing this financial perspective, the first efforts of the new organisation often focus on finding cost efficiencies (“synergies”) – i.e. retrenching rather than exploring the possibilities offered by the new organisation.
These possibilities include an opportunity to build a new brand or leverage strengths from an existing one – but among the uncertainty of such a major change, these are often overlooked or seriously underestimated. In addition, because the advantages of new brands or of brand synergies are not convincingly explained to shareholders, they then look to the cost savings agenda because other benefits aren’t easily identifiable.
This failure to identify the benefits - and the challenges - of merging brands can lead to some major assumptions which may ultimately destroy stakeholder value. Compaq floundered in purchasing Digital, much of the problem centred on the unceremonious dumping of the Digital name and a significant underestimation of the passion and loyalty of Digital employees AND customers. Four years and 20,000 redundancies later, Compaq was itself acquired by Hewlett Packard.
A McKinsey Consulting study blames a common slowdown in the first year of the transaction on inattention to revenue generating activities. This means focusing attention on customers and identifying their needs to drive the brand synergies, and giving employees sufficient signposts to be able to deliver the behavioural elements of the brand once customers needs have been identified. Investment in the brand is essential to ensure the company still has the capacity to make money.
Corporate, product and service brands are not just names or logos. They have four components to make up their brand equity:
If any of these elements change during the integration, so will the brand equity.
This is not to say that nothing should change – that would be naive - but we urge that senior management look carefully at the cultural aspects of brands when considering acquisitions and planning the integration. It’s essential to recognise that brands will have deeper roots in an organisation and greater significance for employees than its bare value on the balance sheet.