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David Haigh
Unni Krishnan

AS SHAREHOLDERS bank on increased merger and acquisition (M&A) activity in the financial markets, analysts' views are mixed on what could be the potential benefits.

Consider Oriental Bank of Commerce snapping up a bank in Kerala. ICICI Bank is looking at Federal Bank, in spite of vocal opposition from some stakeholders. Indian Bank is identifying possible takeover targets to gain a foothold in the North. While the merger talk, as always, has revolved around synergies, cost-cutting and access to new markets, brands and the value of intangible assets, as issues, have been sidelined.

During the recent takeover of Global Trust Bank, the talks centred on non-performing assets, integrating IT systems and cutting costs. But how was the marketing strategy overlooked? The banking market is fragmented and highly competitive, demanding effective brand management to differentiate a company from it peers.

For a retail bank such as the Oriental Bank of Commerce, attracting and retaining large numbers of private and business clients, is essential. To this effect, consistent service delivery, strong brand, and efficient marketing strategy are vital. Yet, the Global Trust Bank, which used to command a high degree of commitment and satisfaction even among clients who knew about its financial difficulties, has been put to rest without even as much as a murmur.

The debate on transforming GTB's fortunes poses important questions, many of which remain unanswered. In a truly competitive bid process, which bank would have been most successful at leveraging the GTB brand as an asset; which would have been able to improve and squeeze out all value from the GTB's name?

As it materialised the `winner', Oriental bank of Commerce will hopefully be successful in its attempts to integrate various stakeholders under the OBC brand. The costs of getting it wrong can be high, as what is at stake is a million-odd consumers, and the costs of losing them to other aggressive players is going to be high. With rising competition and retail banking increasingly driving revenue lines, treating brands as economic assets, will become even more essential to successful M&A strategies.

The recent investments made by banks in developing their retailing identities and network highlights the significant costs of marketing, costs they are ready to bear with because they, hopefully, see the long-term financial benefit accruing into the brand. When it comes to M&A, however, the old world management issues take precedent and the cost and benefits of intangible assets such as the brands instantly disappear as other priorities seem to take the management's time. If this happens in the days to come, successful M&A deals in the sector might prove to be elusive.

With the Government paving the way and competition boundaries fading, the stage is set for M&A deals in this key sector. To become global brands, banks have to be successful in the art and science of integrating and leveraging synergies from brands. Global brands such as Citigroup and HSBC have shown the way.

HSBC has acquired a number of companies, replacing local brands with the global HSBC name and symbol. These re-branding exercises have been carefully handled with an appreciation of the future value implications. The Midlands re-branding was carried out in stages over a period. First, the recognition of Midlands's integration into the HSBC network was added (a member of the HSBC group) and then, later, the old brand was phased out to become HSBC.

Of course, one prominent member of the group to thus far escape the global branding is First Direct. It has built considerable brand equity in its niche market and, sensibly, HSBC has decided to retain its unique identity, although the HSBC sub strap line has now been added. It will be particularly interesting to see what branding treatment will be meted out to acquired Indian brands.

But how do you decide a brand strategy following acquisition, that is, to replace the local name or build on its strength within that market. The key is to focus on the structure of the markets in which the acquired brands trade and the equity it enjoys among the customers who use them. Brands should confer a number of functional (recognition, guarantee of service quality), and emotional benefits (association, exclusivity) which increasingly play a role in creating higher volumes or higher prices (or sometimes both). What companies need to do if brands are to be rationalised efficiently is to create two parallel segmentations.

The first segmentation considers why the brand is commanding a relationship with various consumer groups and what brand equity is attached to the brand. If two brands in the merged portfolio have similar profiles, one of them may be a candidate for rationalisation. If they sell to different consumer groups or via different channels, they may not be suitable to eliminate, at least immediately.

The second is a value segmentation by which we can see whether the brands under review, in fact, offer an economic advantage or not. In other words, do they generate sufficient consumer demand and economic value to be worth keeping? Sometimes, `brand guardians', whether agency or brand management, confuse great heritage, high levels of awareness or substantial sales volumes with sustainable long-term profits and business value. Some brands may have hidden economic potential, others are simply dogs.

The objective of a brand due diligence is to identify which brands in which segments are dogs, cows or stars. The first step is to form a brand rationalisation team of internal and external specialists, which has high level authority and support. The second is to define a framework of key information requirements and a sensible timetable for action. Then, one can evaluate the brands and sub-brands under different market scenarios and the value implications of each option. The final stage is to define a brand value migration plan. Inevitably the devil is in the technical detail, (market research, financial, strategy) but the principles are simple common sense. For example, a review of this type for BMW when it acquired Rover, would have accepted that the two brands overlapped, that BMW was stronger and that Rover should have been quietly put to sleep.

After throwing hundreds of millions down the pan, BMW has sold Rover. Sadly, for BMW, intuition and emotion rather than objective evaluation prevailed.

It is now widely accepted that intangible assets will drive growth in the 21st century and that for many companies, including financial services brands, represent their most important intangible assets. However, all too often, neither the acquirer nor the defender has conducted a thorough ``brand due diligence'' to assist in a successful bid or to mount a successful defence.

Against this background, well-researched BrandDueDiligence and brand value analysis can be vital weapons in the battle to maximise shareholder value. The evidence for this goes back over ten years. In 1988, Ranks Hovis McDougall successfully used brand valuation to avoid take-over by GFW. RHM argued that the market had considerably undervalued its brands. As part of the defence process, RHM put all acquired and home-grown brands in its balance-sheet at £678 million, a subject of considerable controversy among accounting standards setters and accountants. The ensuing debate for over a decade has recently resulted in the release of International Financial Reporting Standard 3 Business Combinations (IFRS 3) and very significant changes to two existing International Accounting Standards, IAS 36 — "Impairment of Assets"; and IAS 38 — "Intangible Assets". These three standards are interlinked and the business implications of the changes are potentially significant. The changes made to IAS 36 and IAS 38 mainly relate to the requirements for the testing of goodwill for impairment on an ongoing basis, and the accounting procedures related to intangible assets. The new IFRS 3, and the revised IAS 36 and IAS 38 must be applied to accounting for business combinations, and the goodwill and intangible assets acquired thereunder, for which the transaction agreement date is specified as on or after March 31, 2004.

One of the more significant consequences of IFRS 3 is the new requirement that companies no longer automatically amortise goodwill systematically over its estimated useful life. Instead, goodwill must be tested for impairment annually, or more frequently, if events or changes in circumstances indicate a possible impairment. Because of the new requirement for goodwill impairment testing, the application of the revised IAS 36 will become all the more critical. Furthermore, since the application of IAS 38 and IFRS 3 together will result in a significant increase in the number of intangible assets that will be recognised in future accounting procedures for business combinations, the number and nature of the types of assets that will be subject to impairment tests will become even more significant.

This information gap is highlighted by Brand Finance's annual research in the City among sell side analysts and investor relations directors of major listed companies.

Seventy-one per cent of analysts supported the statement that brands are increasingly important in M&A activity; 65 per cent of investor relations directors agreed. Analysts strongly support the notion of better disclosure of brand-related information and brand valuations although investor relations directors are more reticent.

It is clear from recent bid history that not enough information is disclosed to allow analysts and investors to estimate the true value of underlying brands. Consequently, there is a tendency for markets and parties involved in mergers and acquisitions to undervalue or, sometimes, not at all value precious intangible assets such as brands inside their organisations.

This year, we have prepared both brand due diligence reports and brand valuations in a number of take-over defences in Europe and the US. Such reports included detailed and segmented assessments of brand ownership and registrations world-wide, market growth, future demand, new markets, licensing revenues and potential, reviews of key competitor trends and above all brand extension possibilities.

This type of research and value scenario analysis underpins reports and financial valuations, which have been cleared with the Takeover Panel and incorporated into defence documents. Key brand valuation methods used include economic use, relief from royalty and market comparables with any business valuation, the different methodologies are assessed against each other before concluding on an appropriate value or range of values. The common thread behind this is the research and analysis of information relevant to brand values as part of the M&A process.

For the seller, it is an opportunity to present relevant information which maximises the sale position, the key general elements being:

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