The Hindu Business Line : Brand valuation in M&A deals

As it is difficult to establish existing Indian brands in the international market, the best option is to grab an established brand and shift production to India for cost economy.

The importance of brands is being reflected in the number of brand-driven transactions. We have foreign companies acquiring brands in India and Indian companies scouting for international brands.

MR AMIT JAIN, ASSOCIATE VICE-PRESIDENT, TRANSACTION ADVISORY SERVICES, ERNST & YOUNG.

These are days when mergers and acquisitions (M&A) are globally becoming important paths to stronger corporate growth. Indian corporates too are involved in big-ticket deals, as evident from the fact that the Indian economy broke into the league of top 10 markets globally for M&As, in the first quarter of 2007.

In these transactions, rarely does a company pay book value to acquire another business entity. The difference between book value and the actual acquisition price paid is because of intangible assets of which brand is an important one.

"Estimating the financial value of a brand helps in determining the premium over book value that a buyer should pay. Therefore brand valuation generates significant interest," says Mr Amit Jain, Associate Vice-President, Transaction Advisory Services, Ernst & Young.

"A systematic brand valuation method based on justifiable assumptions would help the buyers defend what they are buying and why. It is crucial for them to determine the target brands' value in driving long-term business decisions. Anything less is likely to depress returns for shareholders," he adds, in a recent email interaction with Business Line.

Mr Jain, a B.Tech from Indian Institute of Technology, Kharagpur and Post Graduate Diploma in Business Management from Indian Institute of Management, Lucknow, has about seven years of work experience in business valuation, purchase price allocation valuation, project finance, corporate finance and corporate advisory in various sectors including tourism, financial services, iron and steel, oil and gas, and fertilisers, both at national and international levels.

Excerpts from the interview: What is a brand?

Brand, to put it simply, is a covenant with the consumer, a promise that the brand and its products will meet the expectations generated over time.

Brands provide the basis for differences between apparently similar offers. They play a key role in generating and sustaining the financial performance of a business. In industry where competition is increasing and there is surplus capacity, strong brands help in differentiating products in the market.

Can you give an example of how brand played an important role in M&A?

A good example of the role a brand plays in M&A transactions is the story of Volkswagen's (VW's) 1998 acquisition of Rolls-Royce. VW acquired Rolls-Royce paying more than œ400 million. But the deal didn't include the illustrious Rolls-Royce brand because of various reasons, including legal ones. Subsequently, when BMW acquired the rights to the Rolls-Royce brand and its visual icons for œ40 million, it was opined that BMW got the better of the deal. The opinion was proven right as BMW revitalised the Rolls-Royce marque starting from only a name and a radiator grille.

The importance of brands is being reflected in the number of brand-driven transactions. We have foreign companies acquiring brands in India and Indian companies scouting for international brands.

Are Indian companies active in acquiring global brands? Why?

Over the last few years, the appetite of Indian companies for doing global deals has increased. As the horizon expands, Indian companies need to reach out to a larger number of global consumers. The approach is to get a global footprint. As it is difficult to establish existing Indian brands in the international market, the best option is to grab an established brand and shift production to India for cost economy.

Instances?

We have Tata Motors looking forward to buying Jaguar and Land Rover, both cult British brands. We have the Himatsingka's deal involving Divatex of the US, and Bellora of Italy. Bajaj is looking at the renowned Italian bike brand Ducati. UB's Mallya is interested in French champagne companies. And the list goes on. One common theme across these acquisitions is about getting access to global brands.

What are the possible drivers behind these brand acquisitions?

Acquiring a domestic brand gives direct access to a huge growing market that is India. Sometimes the buyer may have a globally strong brand but in many cases it does not stand up to the strength of the domestic brand. The Thumbs-Up brand is a good example. The brand has not only survived the onslaught of Coke and Pepsi but has thrived. Today Coca-Cola India leads the market share not because of Coke but because of Thumbs-Up. To add to the line of deals we have Hershey's buying into Godrej Foods. We also have Anchor, the market leader in electrical products, being snapped up by Matsushita of Japan.

How important are brands in today's M&A deals?

That brands are crucial is what makes the corporates pay large sums for them. A case in point is the latest market buzz in the bottled water segment in India where Danone, Coca-Cola and Wipro are in talks with Mr Chauhan to buy Bisleri at 4-6 times sales value, if public sources are to be believed. Bisleri is believed to have annual sales of about Rs 500 crore which could mean these companies valuing the brand at Rs 2,000-3,000 crore.

Big deal sums lead to the important question: How does one measure the value of a brand? How does one know if one is getting a good deal or a bad one?

One of the most popular methods for valuing a brand is the relief from royalty method. Under the royalty relief approach it is imagined that the business does not own its brand but licences it from another business at a market rate. The royalty rate is usually expressed as a percentage of sales. The valuation consists of first estimating the royalty rate as a percentage of sales and then projecting that fee over the useful life of a brand. One then computes the NPV (net present value) of the sum of those fees over the brand's expected lifespan.

What lies at the core of the royalty relief method?

The key to this method lies in estimating the applicable royalty rate. It could be tricky and involved at times. A key determinant of royalty rate is the character of the market served, such as a consumer market (higher royalty rates) versus an industrial market (lower royalty rates).

Further there are qualitative factors one should consider while determining a royalty rate - market share, consumer recognition, longevity and product differentiation. Possible sources of royalty rates include RoyaltySource.com, big accounting firms, in-house licenses and SEC filing documents (example, 10K, 10Q).

Are there other methods too of brand valuation?

Yes, there are other methods of valuing a brand, such as premium profits method and residual value methods. The premium profit method looks at valuing the brand by considering the premium profit generated by a business, if any, using the brand and comparing it with a business not using a comparable brand.

The residual value method relies on first estimating the value of intangible assets by subtracting the value of tangible assets from the value of the business.

Subsequently the intangibles value so arrived at are apportioned over specific intangible assets, including brand, based on their expected returns.

D. MURALI
GOUTAM GHOSH

http://InterviewsInsights.blogspot.com

More Stories on : Interview | Mergers & Acquisitions | Brands

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
TDS on inter-State works contract

Which is better, FDI or FII?

CA as business analyst

Economic growth and currency value

Taking a call on options

Brand valuation in M&A deals

Do-not-call registry in three phases

Just Do IT

Number Crunch

Stress among young workaholics

Dedication is the key to success

Real creativity begins with first breakthrough