Time for a revaluation?

The scenario: From March 31, 2017 publicly listed companies in India have to value and disclose the value of their acquired brands from the next financial year, according to new accounting standards (Ind AS).

The backdrop: A few months bago, the Serious Fraud Investigation Office launched an investigation into the brand valuation of Kingfisher Airlines to understand how the valuation of more than Rs 4,000 crore was arrived at. This was one of the many reasons why the banking system lent money to Kingfisher Airlines and is now saddled with non-performing assets. (See companion piece on lessons to be learnt from the Kingfisher Airlines valuation exercise.)

The market reality: Today, a brand can cherry-pick the valuation that it desires to put out in the market. As the accompanying table shows, the brand’s value depends on which valuation consultant is valuing your brand. For instance, HDFC’s brand value could range from $1.9 billion as put out by Brand Finance in 2015 to as much as $ 12.57 billion as put out by Millward Brown BrandZ in 2015. Interbrand values the same brand at $3.13 billion in 2015. The variance is because of the methodology employed by each valuation consultancy is different.

The valuation’s true worth As the Kingfisher Airlines case shows, brands could use what suits them best and could eventually harm the interests of stakeholders and lenders in the process. “Most brand valuation exercises that are put out in public are unsolicited, without access to most relevant data and information from the owners of the brands. They are simply to create publicity and consulting engagements for the firms who release them. None of these values has traction with the real world when it comes to transactions. This holds true in particular for brands in banking, telecom, airlines, and others which are never acquired for their brand names,” says Christof Binder, managing partner, Trademark Comparables AG, a Switzerland-based intellectual property consultancy. He adds that the brand valuation rankings that are put out in public could have a negative influence on the accounting firms and financial valuers who are currently “learning” to adopt the new Indian accounting and valuation standards.

Valuation at the end of the day is all about the methodology or perception of the evaluator. Those in the brands and valuation business come up with all sorts of justifications for their assumptions. How does one ascertain the efficacy of the various methodologies being put out by different organisations? “Valuation in general, and brand valuation in particular, is much dependent on how methodologies adapt to the world we live in,” says Unni Krishnan, founder, LongWealth GMBH. He adds that while the basis of the shareholder value maximisation view of capitalism – a widely accepted world view for three or more decades – is being deeply questioned, almost all valuation methodologies which are in use remain firmly rooted in the old principles. “Most business leaders find that increasingly irrelevant at this moment of transition,” he says.

Ashish Mishra, managing director, Interbrand India, defends the valuation service providers. He says, “Global business leaders now widely accept the importance and value of strong brands – and the significant role they can play in enhancing business performance. We have been able to instil confidence in the business leaders all around the world through the robust methodologies deployed by us for valuation.”

He adds that as global competition becomes tougher and many competitive advantages, such as technology, become more short-lived, the brand’s contribution to shareholder value will only increase. “Brands are one of the few business assets that can provide long-term competitive advantage.

Some CEOs are willing to make these critical brand strategy decisions based on qualitative strategic analysis and intuition. The majority, however, are looking for a business case that goes further. They want to understand the likely overall financial impact on the business over time, covering a range of alternative scenarios.

By bringing together market, brand, competitor, and financial data, the brand valuation model is the ideal framework within which such business case modelling can be conducted,” he says.

He cites the case of companies such as Samsung, Philips, Hyundai and AXA, among others, who have used brand valuation to help them refocus their businesses on their brands, motivate management, create an economic rationale for branding decisions and investments, and make the business case for change.

New age, old models But LongWealth’s Unni Krishnan says that most brand valuation exercises are guilty of adopting the old-world models in the digital age. “All accepted methodologies continue to be flogged even if the utility of these approaches is well past their expiry date,” he says.

According to him, the industrial age marketing principles of the 1970s continue to define the ‘brand’ even today in most organisations, be it an MNC or a medium-scale local enterprise. He calls it the ‘Image Brand’ paradigm where the brand name, logo, copyrights and how all that effects the perception of customers is captured. In the pre-digital age, those factors along with the communication strategy set the agenda of a brand. “In the post-2007 world and with the rise of digital, the ‘Image Brand’ is fast losing its relevance. The real question is whether the brand has any relevance in conjunction with other soft assets like people, values and culture and perhaps the most critical – the purpose of existence of the firm,” he says.

Krishnan argues that in most organisations there is little clarity on this count and the broken paradigm of the ‘Image Brand’ is laid bare in the headlines so often. Wells Fargo, Volkswagen, Yahoo, IBM, HP are all examples that come to mind. He says, “None of these brands are failing because their name, logo or communication is sub-optimal. Despite all the excellence in those areas, the brands are losing it and fast. Therefore the valuation of the ‘Image Brand’ as a piece meal intangible is becoming increasingly irrelevant. But when the brand along with other soft assets is coherent to a purpose-led design, it reveals a lot about the commercial sustainability of any enterprise. This where the future of the brand is moving, the brand as a first derivative of a “purpose-led business model.”

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