Brand spanking news: Buying and selling brands can pump up stock prices

Corporations may strut their synergies and crow about cost savings in acquisition announcements, but does buying a company really create shareholder value? Generally not — but what happens when company A buys brand X from company B? As it turns out, that transaction could be a winner for all, according to research recently conducted by Michael Wiles, an assistant professor of marketing at the W. P. Carey School of Business.

Corporations may strut their synergies and crow about cost savings in acquisition announcements, but does buying a company really create shareholder value? Generally not, according to several studies. Researchers have identified what they call a “winner’s curse,” which holds that buyers often pay premium prices for the firms they obtain. An investigation by the nonpartisan, nonprofit National Bureau of Economic Research showed total shareholder losses of some $218 billion in the three-day periods following 12,023 buyouts that took place between 1980 and 2001.

Purchasing a company outright may not yield favorable results for shareholders, but what happens when Company A buys Brand X from Company B? As it turns out, that transaction could be a winner for all, according to research recently conducted by Michael Wiles, an assistant professor of Marketing at the W. P. Carey School of Business.

Wiles teamed up with Neil Morgan and Lopo Rego, both associate professors at Indiana University’s Kelley School of Business, to see how and when brand acquisitions paid off. After looking at 572 brand-acquisition announcements and 308 disposal announcements made by consumer-oriented firms between 1994 and 2008, the team found several circumstances where the winner’s curse doesn’t necessarily play out. Rather than destroying shareholder value, brand buying and selling can be a winning move for all.

Marketing muscle pays off

Advertising guru David Ogilvy once said, "Any damn fool can put on a deal, but it takes genius, faith and perseverance to create a brand.” Once created, Wiles’ research indicates it takes marketing know-how deliver value during brand acquisitions or sales.

When a firm buying a brand was judged by investors to have stronger marketing capabilities than the seller, investors rewarded the acquirer, study results showed. Wiles says this is because “the buyers add more value to the brand asset than the brand’s prior owners could.” How? By having the marketing muscle to generate more cash flow with the brand than its previous owner did.

In fact, Wiles says companies with strong marketing arms “frequently can buy the brand for a price that is less than its value but more than the value to the seller. This is because the seller is able to extract more value from the sale than they could by running the brand as part of their business.”

On the flip side, a seller’s marketing capabilities did not enhance the company’s returns from a brand sale. According the research team, one reason for this asymmetry might be that marketing capabilities are tough for investors to judge, which makes Wall Street types more reliant on brand acquisition or disposal announcements. “Whereas buyers may highlight their superior marketing capabilities as a rationale for a brand acquisition, sellers are less likely to draw attention deliberately to their relatively weak marketing capabilities as a reason for disposing of a brand asset,” the team states in a paper covering the research.

The wording in a brand acquisition announcement also appears to have some stock-market impact. According to Wiles, announcements that referenced cost synergies earned favorable marketplace response. Those that included revenue synergies didn’t. As Wiles explains, investors reward cost-savings, but they view revenue projections with a skeptical eye.

Quality counts, too. For buyers, acquiring brands with higher perceived quality or price positioning pleases “The Street,” while selling higher-quality brands created lower stock returns for sellers. As Wiles explains, this echoes marketing-related research that links brand strength with corporate performance.

Sweet sell of success

On the brand-sellers’ side, investors did reward firms with weaker distribution resources than those of the brand buyers. Conversely, buyers with stronger channel relationships than the seller’s did not get a stock boost. According to the research team, this is because a buyer’s complimentary channel relations are relatively easy to observe by both sellers and investors, so such distribution strengths are often captured in the price the buyer pays for the brand. Sellers, on the other hand, are signaling to the market that they’re unloading an asset for which they have inferior distribution channels and, presumably, they will be better able to generate solid cash flows with other assets.

Investors also responded favorably to brand sales where the seller disposed of a brand only distantly related to its remaining brand portfolio. This, the researchers said, suggests that investors see value in “sticking to the knitting.” Examples of companies rewarded for culling outliers from the brand portfolio are Brown-Forman, a liquor company that disposed of its Hartman luggage brand, as well as Unilever, which sold its home-diagnostic health aids, such as the Clearblue Easy brand of pregnancy test kits.

Buyers, however, weren’t rewarded for buying brands closely related to their existing portfolios unless the brand was already perceived as having high quality. This, Wiles says, further validates exiting brand-equity literature. Better brands pay off.

If you build it, they will come

Like the middle-of-nowhere baseball diamond in the 1989 movie Field of Dreams, it could be said of brands: “If you build it, they will come.” What’s more, customers aren’t the only thing that may show up. Brand acquisition can be a good way to build a business and, perhaps, attract corporate buyers, Wiles notes.

As an example, he points to Tennessee-based Chattem, which spent the 1990s and first seven years of the 21st century buying and nurturing various health-related consumer brands, including the diet aid Dexatrim; various topical analgesics, such as Aspercreme and Icy Hot; as well as personal care products, such as Selsun Blue shampoo and Gold Bond moisturizing creams. The company was so successful with its brand-acquisition and growth program that it wound up being purchased by Sanofi-Aventis, a global healthcare giant with more than 100,000 employees in 100 countries.

So, what should corporate leaders look for when buying and selling brands? For those in the acquiring mood, Wiles says the research indicates they could benefit by seeking out high quality brands owned by companies with weaker marketing capabilities. Those selling brands should consider disposing of brand assets that are not well related to others in the portfolio and have weaker distribution channels.

And, what about shareholder value? Will the brand acquisitions and disposals companies enact create overall wealth for all concerned? Probably yes, according to the research team’s findings. The data contained 111 paired buy/sell transactions involving 96 companies, which allowed the researchers to measure the combined economic shareholder value of these deals. They found net gain totaling more than $181 million during the day of and day after the sales took place.

This, Wiles says, presents “a testament to the value of brand assets. It shows that you can positively impact stock prices through appropriate stewardship of your brand portfolio.”

Bottom Line

• Mergers and acquisitions often destroy stock values in the few days following a sale, but the same isn’t true with brand transactions.
• Buying and selling brands can raise stock process for both buyers and sellers if conditions are right.
• Buyers gain when they have stronger marketing capabilities than sellers and buy higher-quality brands.
• Sellers gain when they sell brands not closely related to other brands in their portfolios and lack good channels to support distribution.
• Shareholders can gain from both buying and selling. A look at 111 brand transactions revealed same-day and next-day gains of some $181 million for investors.