Buy a brand or build a brand?

Somu, my friend, was an angry old man. After a stellar career in tech hardware companies he had begun a start-up at the age of 50, only to sell the company to a tech major (for a handsome valuation, I should add). As a part of the acquisition, he was given a seat at the high table in the acquirer’s company. He was recounting his frustration as a member of this management council that voted on new product ideas. He challenges that he could walk out with any one of those ideas, build it into a business and the very same large company would be ready to buy that for a hundred million dollars or more. The question we were debating was why acquisition is such a popular game in Silicon Valley. Was it because big corporations were too bound by processes? And is the simpler way to grow, if you had the cash, just by acquiring brands and businesses?

One simple reason why companies acquire brands (and businesses) is because that is an easy way to show growth. But the cost can be huge.

Yet another strategic reason for acquiring a brand could be to get a foothold in a new country (or region). When SC Johnson exited India after their joint venture with Hindustan Unilever failed to take off, they found a new way into India by acquiring All Out. In the last 10 years, they have managed to grow the business and also launch a number of their global brands like Glade and Mr Muscle on the back of All Out.

Sometimes an acquisition could be triggered by a brand owner wanting to exit the business, due to reasons like strategic misfit or heavy headwinds. DCW Home Products sold their brand Captain Cook to International Bestfoods’ Indian arm because they felt that the market was getting too hot with ITC and HUL making big moves. For Bestfoods, it was a good fit to their food business. Unfortunately, Unilever acquired Bestfoods in a global deal and they did not see any place for Captain Cook in their Indian portfolio. Rip Captain Cook.

Brand acquisition is sometimes actioned by a buyer who may be seeing greater value in a brand than a seller. For instance, a buyer may see synergies that could improve the profit margin of a brand. The improvement could be 300 basis points on EBITDA or more. This was achieved by Dabur when they acquired the Balsara brands. It is also possible that the acquirer can take the brand into new areas that the previous owner did not envisage as opportunities worth pursuing. For instance, Wipro Consumer Care has managed to build the legacy brand Yardley into a vibrant modern fragrance, deo and skincare player.

The problem is that an acquirer often feels that they can do a better job than the previous owner in all departments: sales, distribution, product development etc. It plays out as planned if the buyer is lucky, but if the acquired brand has weak legs it will call for significant investments raising the question “why could we not have built it ourselves, why did we buy it”? While HUL managed to build Lakme into a successful skincare brand, their luck with the other TOMCO brands like Hamam, OK and Moti has been poor.

This leads us to yet another reason why brands are acquired. Quite simply, to be put out. To remove a player from the playing field. In a sense HUL did that when they acquired TOMCO.

Global research has shown that more often than not the winner is the seller. He or she gets to keep the money. The buyer, who may have paid a huge premium to the prevailing forward PE ratios, has to figure out how to make the investment work.

Talks of Tata acquiring Bisleri have triggered discussions around the rationale and logic of acquiring brands at high valuations. Why add one more brand to the existing Tata portfolio (Himalayan at the premium end and Tata Copper at the mid-price end)? Is the acquisition triggered by the brand recognition or by the fact that along with the brand Tata will also get hold of 130 operational plants and 4,500 distributors (Business Standard, November 25)? Will we see Tata making a play for the healthy water market by taking Bisleri into the domain of Vitaminwater (a brand in which Tata bought a significant stake in 2006 only to sell it to Coca-Cola a year later)?

The last person who bought brands from Ramesh Chauhan had a great run in India. Thums Up continues to be the biggest cola brand in India (Coke comes in at third position). Reports in 1993 said that The Coca-Cola Company paid around ~188 crore (or $30 million) to acquire Parle Beverages and its brands, Thums Up, Limca, Gold Spot and Maaza. Both Thums Up and Mazaa have performed well under the Coca-Cola management and possibly this acquisition was one of the best they have done in this part of the world.

Here’s wishing Tata similar luck with Bisleri, if and when the deal is concluded.

Ambi Parameswaran is a best-selling author, independent brand coach and founder Brand-Building.com a brand advisory. He can be reached at ambimgp@brand-building.com