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How to choose the right branding strategy post-M&A

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No. 5 Image branding strategies post M&A

When two companies are going through a merger or an acquisition (M&A), the branding strategy is often the last thing that senior managements think 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 an 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 elaborate post-M&A communications programmes.

Furthermore, the choice of branding strategy, post-M&A, has been proven to have a significant impact on the companies’ long-term value, with one approach having a much better track record than the other two.

In today’s post, we describe three potential approaches to brand architecture and branding strategy, post-M&A, and their pros and cons. Most data we use in this article comes from a comprehensive study conducted by Natalie Mizik, Jonathan Knowles and Isaac Dinner.

Approach 1 – “Nothing changes”

The first approach to a post-M&A branding strategy might sound like the safest option. Either two companies merge or one company acquires another, and 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 the two businesses are 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.

The aforementioned scientists 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 (you can read more about this topic here).

Examples:

YouTube and Google, Instagram and Facebook, Gillette and P&G, LinkedIn and Microsoft.

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 at a later date.

Key caveats:

If you keep the brands separate, overall business integration may be slower and more painful. People will keep on doing things the way they were done before the M&A.

Approach 2 – “One brand disappears”

The second approach is more aggressive in that one of the two merged brands stops existing. According to Landor, this strategy is more popular when the value of the acquisition is lower (it has calculated that 78% of companies purchased for less than $99 million had their name changed, compared to 46% of those acquired for $5 billion or more). 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 in the case of the previous approach.

There are a few reasons why this strategy might bring about disappointing results. First of all, 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 definitely 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. Secondly, 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.

Examples:

Abbey National, Bradford & Bingley and Alliance & Leicester in the UK have been rebranded into Santander (you can read more about this rebranding here).
Apple and Google buy smaller tech companies on a regular basis, change their names and integrate their operations into their own.

When this strategy makes sense:

When one brand is much stronger than the other and keeping the smaller one makes no commercial sense.

Key caveats:

If you decide to kill one of the brands, make sure not to kill people’s morale along with it.

Approach 3 – “A bit of both”

The last approach may appear lazy or indecisive, as it tries to combine elements of two brand equities 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 proven that this approach makes a lot of business sense. While the performance of companies applying two previous strategies is worse than market expectations and generates negative abnormal stock returns, this is the only strategy that actually 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 taken into account, their contributions are similar and there are two winning sides, not one.

Examples:

ExxonMobil (Exxon and Mobil), KraftHeinz (Kraft and Heinz).
New brands: Aviva (Norwich Union and CGU; you can read more about this rebranding here), Verizon (GTE and Bell Atlantic).

When this strategy makes sense:

When you want to tell the world that both brand equities matter or, conversely, that you want to create a completely new proposition.

Key caveats:

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 (e.g., Aviva) costs even more as the new identity needs to be developed.

There’s no single effective branding strategy when two companies merge. However, the mixed approach delivers results that are higher than market expectations. Whichever strategy you choose, make sure this is an informed decision, based on research, not gut feeling.

If you want to hire Magda for a brand strategy-related project, email her at: magda@brandstruck.co

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Magda Adamska is the founder of BrandStruck.

BrandStruck ithe only online database of brand strategy case studies.
This is a tool that is dedicated to brand and marketing professionals, allowing them to better understand the positioning of the world’s most admired brands, the similarities and differences between them and to learn more about certain categories.

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