If you plan to grow your business through mergers and acquisitions (M&A), you may be playing a dangerous game.
According to data from the Harvard Business Review, between 70% and 90% of M&As fail. If yours falls into that wide margin, you could stand to lose millions of dollars – not just in the money you spend on the M&A, but in the loss of potential future profit.
So, what can you do? Should you eschew the idea of a merger or an acquisition entirely, and find a different way to scale your business?
Not necessarily. One element that many businesses overlook when negotiating and planning for an M&A is the impact of brand architecture. Strong brand architecture can increase your chances of successfully closing a merger or an acquisition and turning a profit. But with a weak one, you heighten the risk of the deal falling through or losing your shareholders’ investments in a financially unwise purchase.
In this article, I’ll explain exactly why mergers and acquisitions fail, how brand architecture can help improve M&A success, and how unique brand architectures handle M&A. In the end, I’ll share my tips for how to use this element of branding to make acquiring or merging with another brand go more smoothly.
Why Do So Many Mergers And Acquisitions Fail?
There are many potential reasons why an M&A might fail. I’ve narrowed the list down to 5 important ones which I think you should be aware of.
1. Destruction Of Brand Values
Brand values are the values that a company follows in how it treats its customers, sells its products, and just generally conducts its business. Their consumer base is used to these values; they are a big part of why those customers buy from them.
When a brand’s values are destroyed – as they often are when one brand is acquired by another, or when two separate brands are merged into a single, new entity – it can lose its profitability.
Many times a small company or brand has been taken over by a larger one, only to become cold, corporatized, and devoid of the brand values that made it special to customers. Losing brand values can spell doom to a fresh M&A.
2. Misunderstanding Or Lack Of Synergies
A synergy is created when the combined value of two or more brands, as in a merger or acquisition, is higher than the value of each of the individual entities. There are three types of synergies: cost, revenue, and financial.
Unfortunately, not all companies can achieve a profitable synergy. This may be because they overpaid for the deal and only realized, too late, that the high value of the synergy would not cover their losses. Another potential scenario is that they underestimated how many employees it would take to run the merged companies, resulting in higher back-end costs – and thus a lower cost synergy – than they anticipated.
What’s the end result of a lack of synergies? Most often, shareholders in the company get nervous about their investment in the M&A and back out before the deal is even closed. In fact, the misunderstanding of synergies is also one of the top reasons that high-dollar M&A deals fall through, according to McKinsey. In both cases, it typically results from a failure on one side or the other to manage expectations.
3. Inadequate Transitioning Of Employees
Employees make up one of the largest stakeholder groups in any company, and yet they are the most overlooked – especially during a merger or an acquisition. The truth is that many businesses that embark on an M&A fail to properly transition their employees or the employees of the other brand.
This error in judgment can impact all levels of the company, from the CFO all the way down to the receptionist or cashier that mans the front desk. It can cause clashes between newly joined leadership teams, as well as confusion on the part of the staff members regarding the many changes in rules, company culture, and the roles they are now supposed to fill. Some employees may even dislike the new changes and feel that they were left out of the conversation.
Confusion and disgruntlement among employees always result in a bad look for a merged or acquired brand. It also makes it difficult for the company to perform as a cohesive unit, which will negatively affect the functioning power of all departments, from marketing to sales. In this way, a failure to properly transition employees contributes directly to a failed M&A.
4. Lack Of A Strong Brand Architecture
A strong brand architecture is absolutely critical for an M&A to be successful. It guides every aspect of future branding: marketing, sales, R&D, customer support, customer service – everything.
As such, if you lack one, or if your current brand architecture is ill-defined and weak, you’re like someone who’s gotten up in the middle of the night in a strange room and doesn’t know where anything is. How will you turn the lights on? You’ll have to fumble around, tripping over furniture and on the edges of the rug, reaching out everywhere for a lamp or a light switch. In the process, you might wreck the whole room – and still not find a light source.
Businesses that don’t have a solid brand architecture are already weak, to begin with. When you ram this weakness into a merger or an acquisition, that M&A is sure to crumble.
The good news is the opposite is also true. I’ll explain how.
How Does Brand Architecture Help Improve M&A Success Rate? Brand architecture helps businesses achieve successful mergers and acquisitions in the following ways.
1. It Directs Brand Value To Generate Maximum Profit
With a well-established brand architecture, you already know the gaps in your company where a merger or an acquisition would most benefit it. You also know how to fit the new brand into your company, so that its unique brand values reach the most customers to generate the maximum amount of profit. This knowledge is not possible without a pre-existing, well-planned structure.
2. It Keeps All Shareholders On The Same Page
Misunderstandings and misaligned expectations for a merger and acquisition often arise when the shareholders of both sides of the M&A are not on the same page.
This is another problem that a strong brand architecture can solve. It’s essentially a plan that shows how you value this M&A now, and what value you expect to create with it in the future. It may even allow you to take certain risks, like merging with a brand that you can’t achieve a synergy with right away or overpaying at purchase to reap greater profits down the line.
In the end, the greatest advantage of brand architecture in this context is that it instills confidence in your shareholders that you will create value with this M&A. Therefore, it’s worth their continued investment.
3. It Establishes A Plan For Transitioning Employees
Just like the brand architecture will guide you on where to direct the brand value of the merged or acquired brand in your company to maximize profits, it will also help you establish a plan for transitioning employees from the old way to the new way. You’ll know where the gaps in leadership will be, what elements of branding you need to change or keep the same, and how to create a successful structure that is beneficial to everyone, from the top down.
How Different Brand Architectures Handle M&A
I’ve talked about the different types of brand architectures before, but not within the context of mergers and acquisitions. Each one handles M&A in a unique way, so it’s important to discuss them individually.
Branded House
In a branded house-style architecture, you have a master brand at the top with sub-brands beneath it that share its name. The master brand and the sub-brands all use the same identity to increase cohesion, enhance recognizability, and leverage the master brand’s reputation.
When a branded house acquires a new sub-brand or merges it with one they already own, they tend to subsume it completely under the umbrella of the master brand. This strategy has the potential to destroy the brand value unless the acquiring company proceeds carefully. They must make sure to retain some of the brand’s original values and/or elements of its identity so they can successfully carry over its pre-existing customer base.
One way to accomplish that carryover is by keeping the product or service that the new sub-brand is known for providing the same, as well as continuing to employ the original staff members. These strategies will show customers that even though the brand has been acquired, it still provides the same value as before.
Endorsed Brands
Endorsed brands consist of a parent company that attaches their name to their sub-brands to give them legitimacy. At the same time, the sub-brands carry their own names and operate completely independently of one another.
Companies that use this type of brand architecture may find it easier to acquire a new brand than a branded house would. The biggest challenge they may face is ensuring that the sub-brand fits well into the parent company’s niche. For example, Marriott has endorsed several different sub-brands of hotels, but if they decided to endorse a cellphone brand, then that would be an unprofitable move unfitting for their particular niche, which is hospitality.
House Of Brands
In a house of brands architecture, you’ll find a parent company at the top and many sub-brands beneath it. But in this case, the sub-brands are not only separate and independent of each other, but also of the parent company. They sell different products and services, serve different customers, and have unique brand identities.
A company that operates a house of brands will have the easiest time acquiring a new brand. The sub-brand will benefit from the parent company’s distribution power, shareholders, resources, and R&D.
Hybrid
A hybrid brand architecture will combine one or more of the above structures into a configuration that the company feels serves it best. For example, they may use a combination of a branded house with endorsements, as Amazon does.
Companies with hybrid brand architectures may have the most flexibility when it comes to M&A. This is because they can pick and choose where and when each deal would be most appropriate and beneficial for them and their shareholders.
Tips For How To Use Brand Architecture To Make Your M&A Deal Go More Smoothly
Now that you have a good idea of how different brand architectures operate their mergers and acquisitions, here are some of my tips for ensuring that your M&A deal goes more smoothly.
1. Identify Where The Acquisition Or Merger Will Fit
When considering an M&A deal, one of your first questions should be, “Where will this acquired or merged brand fit in my brand architecture?” Your goal with the answer should be to identify how well it will fit, as well as whether or not it has the potential to add value to and/or increase profitability for the company as a whole. If it does, you can now proceed with the beginnings of a solid plan for integration under your belt. If not, then that may be a sign that this M&A is not a great move.
2. Thoroughly Research The Profitability Of Potential Synergies
When it comes to potential synergies between merging brands, don’t leave anything to chance. Research them thoroughly, not just to verify the hard numbers but also to determine if they will lead to a profit in the long run.
Furthermore, find out how the presence or lack of synergies will affect your brand architecture. If they fail, or if they are outweighed by the price of the merger, how will that impact the brand you currently own that is on the table for merging? Will you lose everything due to mismatched expectations or a misunderstanding of synergy value?
The only way to answer all those questions is to research. It may seem tedious and time-consuming, but keeping the integrity of your brand architecture at the forefront of your mind could save you from making an expensive mistake with an M&A deal.
3. Involve Your Stakeholders As Well As Your Shareholders
Your shareholders need to be kept on the same page throughout the merger or acquisition process, but so do your stakeholders. These include your employees and customers, including those from the brand that’s being merged or acquired.
Some tactics you can use to achieve this are 1) to keep your staff members up to date about the progress of the M&A, 2) ask them for their input and feedback, and 3) identify the unique value that each of them is bringing to the table (in the case of customers, identify the value they are looking to keep after the merger or acquisition is completed).
Helping your shareholders and stakeholders – those from your company as well as those from the new brand – feel valued and informed will help you transition them into your brand architecture with as little confusion and bitterness as possible.
Conclusion
Brand architecture will always be one of your top strategies for maximizing success with mergers and acquisitions. Referring back to it will provide you with guidance every step of the way, as well as help you make the most profitable decisions, before, during, and after the closing of the M&A deal.
