Do you think it was the money, or did YouTube just want to hang with the coolest Internet company? Rumor has it that Yahoo was actually involved in negotiations to acquire YouTube, but after Google appeared on the scene, the YouTube founders wouldn’t consider a deal with anyone else. If so, this shows the effect that branding can have on the outcome of corporate deals. But are there consequences which flow the other way? What effects, if any, do corporate deals have on brands?
The other week, a reporter from Institutional Investor asked me to comment on work by Victor Fleischer, an associate professor at the University of Colorado Law School.
Fleischer has written to the effect that the structure of corporate deals can have an important branding effect when the design of the deal is intended to alter people’s perceptions of the company (click here to view an abstract).
A review of the paper suggests that Fleischer’s proposition is right on the money. Here are three examples he cites:
When Google went public in 2004, it used an Internet auction to sell its stock to shareholders. Fleischer argues that although this may not have been “elegant or efficient” by the standards of traditional corporate finance, it did reinforce Google’s identity as an “innovative, egalitarian, playful, trustworthy company.” (If $1.65 billion was not incentive enough, maybe this is another reason why YouTube’s founders went with Google.)
When Ben & Jerry’s went public back in 1984, the stock was sold only to residents of the state of Vermont. Theoretically, this limited the demand for the stock, and thus reduced the value of the deal, but it also reinforced perceptions that the company was dedicated to helping Vermont and its dairy farmers.
In 2002, The Stanley Works, a Connecticut toolmaker, considered re-incorporating in Bermuda to reduce its tax liability. This tactic could have yielded significant federal, state and real estate tax savings, since foreign-based companies are only taxed on their U.S.-based income. But negative perceptions of this apparent sell-out by the all-American company prompted a backlash, resulting in a vote by the board of directors to cancel the transaction.
In each of these three cases, the deal had clear, short-term financial impact on the company. Google and Ben & Jerry’s might have generated more money from their stock offerings, and The Stanley Works might have saved on taxes. But in the long run, Fleischer argues, the deals may have worked to benefit these companies by strengthening consumer perceptions and building brand loyalty.
While not specific to any of these cases, Millward Brown’s data would support the idea that companies with a stronger base of attitudinally loyal customers do tend to outperform the stock market. While Fleischer tends to focus on the impact that a deal has on core perceptions, I would also argue that there is a significant PR effect resulting in increased press coverage, and, at least in two cases, positive brand visibility. The combination will both widen awareness of the company and the deal, and help to reinforce core brand perceptions.
We have all heard the adage, “Actions speak louder than words.” It would appear that this applies just as much to the world of high finance as it does to more conventional marketing. Corporations might do well to think about how they structure high-profile corporate deals to truly maximize their total return on investment.
(22 votes, average: 3.32 out of 5)
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November 8th, 2006 at 7:12 am
This is a unique and insightful perspective on the actions taken by a company and its subsequent performance on Wall Street. Right now one of the more interesting companies to watch is Wal-Mart. While at the top of their game in discounting (perhaps over the peak?), they have sustained enormous bad press from their policies on hiring, promoting and offering health benefits. While taking steps to ameliorate some of these actions, they have embarked on positive actions in other areas — most pertinently in environmental conservation. So much so that their CEO has been feted by the New York liberal establishment. While not having any demonstrable short term impact on their stock price, it has given the organization and pulpit from which to proclaim their societal contributions and give their employees a rallying cry to defend themselves. I am curious to see what potential impact these and other actions will have on how the company is perceived and even valued.
November 24th, 2006 at 4:04 am
Corporate deals seem to have most certainly helped in the case of one of India’s top private groups, the Tatas. The group have been on an acquisition spree across the world over the last few years - buying Tetley Tea, Eight O’Clock coffee, and most recently, the Corus steel group among others. This has helped them consolidate their image as a confident and financially strong group, and investors here are flocking to these stocks.
November 25th, 2006 at 10:25 pm
Corporate deals definitely have an effect on brand value. They can make or break the brand. Philip’s example of Wal-Mart is an excellent one. It’s a complicated issue because one department of Wal-Mart seems to be all for helping the environment and contributing to the greater good of all. But then, its own HR department was willing to cut costs by sacrificing the well-being of its employees. This makes for a rather hypocritical corporate identity… or, at the very least, schizophrenic.
I’d like to throw in another example, that of Apple’s decision to phase out the PowerPC chips (made by IBM) and their shift to Intel chips. This caused quite a stir in the Mac community because they had always considered Intel chips as inferior. Early Apple commercials had even visibly demonstrated this sentiment, in line with the “Macs are better” theme. So you can imagine how divided the Mac community must have been. Some thought that it was next to sacrilege to put an Intel chip inside a Mac computer, and that Apple was “selling out” in order to get more PC users to switch to Macs. And yet others thought that it was a great thing, because Intel’s chip development track record showed more promise than that of IBM. Using Intel chips would also allow Mac computers to run Windows operating systems in addition to the Mac OS.
Overall, Apple seems to be selling their new Intel-based Macs quite well. They’ve been successful at getting thousands of people to switch to Macs. But as a long-time Mac user, I do wonder what effect this will have on Apple in the long run, whether it will make or break the brand. Will Apple be able to maintain its small yet loyal following? Or will it eventually become just another tech company like Dell and HP, fighting for market share in the PC world?
November 27th, 2006 at 11:21 am
Thanks for the comments Praveen and Stef.
Praveen, clearly the acquisitions by the Tatas have raised the company’s global profile - boosted its fame if you like - but was there anything about these deals that signaled something different about the company, i.e. were any of the deals deliberately structured in a way that might have been “costly” in the short-term but beneficial in the long-term?
Stef, your example of Apple is an interesting one. It makes me wonder to what degree Apple’s management team did weigh up the economic and logistical factors versus the perceptions of independence valued by loyalists. Maybe they believe that the “heart” of the company is its design principles rather than the technology itself?
November 27th, 2006 at 11:38 pm
Oh very much, most of them have been costly acquisitions - in fact, Tata Tea paid more than their net sales for Tetley, Energy Brands, and Eight O’ Clock coffee. The bid for Corus is also a fairly expensive one, but one that will make Tata Steel a top 10 player worldwide.
Quite clearly, they have chalked out a strategy to get into the areas which hold the most potential for growth in the long term - steel, software, health drinks.
November 28th, 2006 at 8:23 am
Thanks for the additional information. It will be interesting to see how much further they push their acquisition strategy and how successful it proves to be.
December 13th, 2006 at 3:20 pm
Looks like Google is at it again. This New York Times article reports that Google plans to introduce a new transferable stock option. The new option would allow employees to sell the option, potentially realizing more than if they exercised them.
Quoted in the article Nell Minow, editor of the Corporate Library, suggests that the new option is an elegant solution to the problem of employees not understanding the value of the options they hold. “It’s a very Google-esque solution,” she says, “I like that.”
If others like the idea as much as Ms. Minow, then Google will once again have used a financial transaction to help build its brand.