When two companies are going through a merger or an acquisition (M&A), the branding strategy is often the last thing that senior management thinks about, wrongly assuming that it’s more a creative decision than a business call. This is a huge mistake.
There’s no clearer signal to the market regarding the intentions behind the M&A than the decision about the post-M&A branding strategy. The decision as to whether to keep both brands as they are, whether one will disappear, or whether a new brand will be created out of the two has a huge impact on how the M&A will be perceived and tells the market much more than any elaborate post-M&A PR campaign ever could.
In this post, we will take a look at three common approaches to post-M&A branding strategy.
Approach 1 – Change Nothing
The first approach to a post-M&A branding strategy might sound like the safest option. Two companies merge or one company acquires the other, but both brands are kept intact, as if nothing has really changed. Although ownership changes and, with time, there’s some integration in the way the businesses operate, the signal to the market is that it’s business as usual and the two businesses will continue to be run as two separate entities.
On the surface, this approach might seem sensible. How can you damage any of the brands by delivering them as usual? It turns out you can. Research has confirmed that this strategy is, in fact, the most harmful to long-term company value.
Mizik, Knowles and Dinner, based on the analysis of 13 years of data, have calculated that the stock of companies applying this strategy generates negative abnormal returns at a staggering level of –30% three years after the M&A (the abnormal return is the difference between the actual and expected return; if stock generates a 25% return, when it was expected to generate only 10%, the abnormal return is the difference, that is, 15%). This means that companies applying this strategy perform significantly worse than the market expects.
Mizik, Knowles and Dinner believe that the reason why this strategy is less successful than the other two is because, in the long run, it is much costlier to keep two separate brands: for the same reason the house of brands’ brand architecture doesn’t work for every company – it’s too expensive to maintain.
- When this strategy makes sense:
- Keeping both brands makes sense when the acquirer’s overarching brand architecture is the house of brands model (e.g. P&G or Unilever), and the new addition will offer new benefits or target audiences that were not available with the existing brands.
- Another instance in which this strategy might work is when a company buys another company with a clear objective to sell it later.
Approach 2 – One Brand Disappears
The second approach is more aggressive in that one of the two merged brands is eliminated. According to Landor, a brand consulting firm, this strategy is more popular when the value of the acquisition is lower (With deals under $1B, brands are changed 78% of the time, compared to 46% with transactions greater than $5B). There are also transactions in which the acquiring company takes the name of the acquired business. This is not a common situation, and it mostly happens when the acquirer’s brand has some brand image problems.
According to the research conducted by Mizik, Knowles and Dinner, this strategy also leads to lower-than-expected returns (-18% abnormal returns three years after the M&A), but higher than the first approach.
- There are a few reasons why this strategy might bring about disappointing results:
- The psychological effect on the employees of the brand that is going to be terminated can’t be ignored. This branding strategy sends a strong signal to the market that there is a clear winner in this business transaction, and it’s not the brand that is going to disappear. Morale among employees working for the acquired brand goes down, the best talent leaves, integration becomes more difficult and results get worse.
- Prior to an M&A, companies often avoid carrying out proper brand and market research in order to measure the strength of both brands and their respective levels of customer loyalty. As a result, some customers of the acquired and rebranded business may leave.
- When this strategy makes sense:
- When one brand is much stronger than the other and keeping the smaller one makes no commercial sense.
Approach 3 – A Bit of Both
The last approach may appear lazy or indecisive, as it tries to combine elements of two brands into one. This can be done by simply merging two names or two visual identities into one, or by launching a completely new brand that is unrelated to its predecessors.
Counterintuitively, research has shown that this approach makes a lot of business sense. While the performance of companies applying the two previous strategies is worse than market expectations and generates negative abnormal stock returns, the third approach is the only strategy that delivers a positive abnormal return at the level of 13% (three years post-M&A).
The reason why this branding strategy might work better than the others is because it signals to the market that the transaction is between two equal entities. Employees of both companies might feel that their interests are considered, their contributions are similar and there are two winning sides, not one. However, the initial costs of this approach are the highest, as you will need to go through a rebranding process in both organizations. The scenario in which you create a new brand from scratch costs even more as the new identity needs to be developed.
- Examples: ExxonMobil (Exxon and Mobil), KraftHeinz (Kraft and Heinz).
- When this strategy makes sense:
- When you want to tell the world that both brands matter or, conversely, that you want to create a completely new proposition.
Jason Oh is a management consultant at Novantas with expertise in scaling profitability for retail banks (consumer / commercial finance) and diversified financial service firms (credit card / wealth management / direct bank).
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