The art of merging

2005 was a great year for mergers and acquisitions; the activity was worldwide up at least 50 percent over the previous year. But mergers are risky business, often resulting in a lower market share than those of the pre-merger brands together. A McKinsey report (1997) claimed that only one in five attempts succeeds. Just what differentiates a success from a failure? Unfortunately, mergers tend not to be driven by strategic thinking. At least not concerning brands, culture and customers. Executives get so caught up in the financial and legal sides of the deal, that the softer things like brands, customers benefits, culture and values get compromised.

Aside from richly benefiting executives and bankers, the net outcome of a merger is to add value to shareholders. Whether it actually adds value to the end customer is questionable. I have a feeling the consumer/ customer is seldom the top consideration during the M&A process. The classic idea of an M&A is to communicate the synergies between two businesses and that together they’re much better.

Another survey of 250 executives around the world involved in M&A conducted by management consultancy Bain & Co. cited the top reason for deal disappointments as “ignored integration challenges” followed closely by “overesti mated synergies.”

Famous studies by Booz-Allen & Hamilton indicated that over 70 percent of merger objectives go unmet. CFO Magazine reports a 50 percent overall drop-off in productivity in the four to eight months following a deal; just 23 percent earn their cost of capital.

Many western companies are looking to expand or rationalize, or they face new global challenges or rapid technological change, or are experiencing eroding market share or general stagnation. It is attractive to think that one can take a giant step in growth rather than many organic steps over a longer period of time.

Another problem plaguing mergers and acquisitions is often companies focus first on finding cost reduction efficiencies. The majority of these transactions have proven that most players have knowledge and skill in the acquisition, but not in the postacquisition process.

In other words, most merging companies make a successful weddings but fail in marriage. A merger is a lot of promises, so are brands.

So what happens to brands during a merger or acquisition?

How much consideration should be given to the corporate and product brands before and after the transaction? What must leaders and managers consider during brand integration?

Of all the assets exchanged during a merger or acquisition, the most important have to be culture and brand.

Deutsche Post merged all its logistics (previously Danzas) and express operations (DHL and Euro Express) under the single DHL brand. However, the transition period began months before when the Danzas brand symbols were redesigned in yellow. Now DHL has joined the yellow Deutsche Post family too.

“We want to establish one global brand,” says Deutsche Post. ”That’s one important aspect of buying DHL. Now we are putting all our activities under the one brand. At the end of the day it is easier to build one brand.”

With all these identity changes, it is not just the customer, however, who needs convincing. “You also risk losing the loyalty of employees who have an identity with the old brand,” says Deutsche Post “That’s why we have built up an internal communications program, so everybody is going to feel part of the new brand family.”

Of all the assets exchanged during a merger or acquisition, the most important have to be culture and brand. And customers must understand the benefits associated with the merged brand and recognize that it solves problems for them that the previously individual companies could not.

PricewaterhouseCoopers (PwC), itself a product of many mergers over the years, states that “cultures cannot be merged by waving a banner and proclaiming shared vision and values. Cultural change doesn’t come from newsletters, logos, screen savers, or posters. It’s not about hype, promotion, mantras or prayers.”

PwC advocates creating a profile of desired behaviors that supports the business strategy. This profile is meant to represent all the positive associations attached to the brand.

The vast majority of merged companies underestimate the behavioral changes that must take place during integration. In order for staff to get behind the change they must understand the values the merged brand is to represent and that they are to live.

And customers must understand the benefits associated with the merged brand and recognize that it solves problems for them that the previously individual companies could not.

Failure to focus on behavior can sink a merger or acquisition. When Compaq purchased Digital and floundered, much of the problem was attributed to the disrespectful dumping of the Digital name, which still had equity.

Instead it was decided to re-brand all products and services as “Compaq.” Each side had a strong culture and pride in their individual brands so this move led to defections of Digital’s top talent. The Digital employees saw a good deal of value wrapped in their name – it had guided their behavior and defined their culture. Also, Compaq underestimated the passion and loyalty of Digital customers.

Important things to watch out for are:

• The brand’s definition (what it promises); the Brand Code
• Its culture (how the brand’s previous owner honored the brand promise);
• Its infrastructure (how the brand is supported by distribution, marketing, promotion, advertising, and sales)
• The visual aspects of the brand expressed by the name and uses of the identity.

If any of these elements change during integration, so will the brand’s equity – positively or negatively – depending on the situation and the actions taken.

Citibank and Travellers Group just combined the two to form Citigroup. And it seems to have turned out very successfully.

Daimler Benz and Chrysler, while combining the names to form Daimler-Chrysler had a great deal of discussion about how and where their respective brands would be communicated and sold. The result was a decision that none of each company’s brands would not be sold at the same premises, and as far as brand communications is concerned there is little change. So even though the merger was supposed to produce economies of scale as far as operations were concerned, those achievable through combined advertising and promotions activities was sacrificed in order to cut out customer confusion and possible brand cannibalization.

Researchers have found that established brand names have a great deal of brand equity locked up in them, and that changing brand names can lead to unhappy customers and a loss of business.

This did not seem to deter Rhone-Poulenc and Hoechst, two well-known brand names that, on merging, created a totally new and relatively meaningless name of Aventis. Huge amounts of money will have to be spent on merely gaining brand awareness for the new name, not to mention the tremendous loss of equity that has been destroyed by the removal of well known and trusted brand names. But the political situation merging a French and German brand most probably needed this.

Simply put, experienced brand management helps to secure stability and brand loyalty for your company. You may consider it to be unimportant to the M&A process, but be prepared for these possible outcomes:

• Brands are managed inconsistently and brand equity suffers
• Management and staff send mixed messages, creating confusion in the marketplace
• Company image/brand loses value in the market
• Employee morale decreases and turnover increases
• Customers lose confidence and leave
• Competitors steal your best customers
• Share price plummets

Why is brand management frequently overlooked in the M&A process? Well, I suppose it’s because many companies lack the experienced resources to focus on it. Organizations don’t realize the need until it’s too late.

To come out on top in a merger you should definitely research and evaluate potential acquisition candidates or merger partners by answering questions like:

• How does the prospect’s brand compare to your company’s brand?
• What is each brand’s strongest attribute?
• How is the brand relevant to future customers?
• Which candidate will best help reach strategic objectives?
• Should one brand dominate or should a new brand be created?”

By incorporating brand consultants, like myself, in the early discussions around a merger or acquisition, your organization will come out stronger and more focused. Best of all, shareholders, clients, employees and the public will remain loyal to your brand.