'Investment bankers know nothing of branding'

Q&A: David Haigh, CEO, Brand Finance plc

David Haigh

David Haigh is as comfortable in the financial world as he is with marketing jargon. He's lived in both worlds, after all. A qualified chartered accountant who began his career in London with Pricewaterhouse Coopers, Haigh moved into marketing consultancy a few years later, working with well-known firms such as The Creative Business and Publicis Dialogue. From there to brand valuation at Interbrand was just a short step. In 1996, Haigh quit Interbrand to set up Brand Finance, which specialises in brand valuation and marketing accountability. On his recent visit to India, Haigh spoke with Business Standard on how brand due diligence "" detailed analyses of brands and their true values "" can prevent companies from making the wrong divestment or paying the wrong price. Excerpts:

Most Indian companies are going global and acquiring brands. Are they paying the right price?

There have been far too many instances where people have either overpaid or sold too cheap because they haven't fully understood the value of their brands. In Europe we are finding that there's an awful lot of money chasing acquisitions.

Clients who don't do brand due diligence do not know what price to pay and many good deals do not materialise because people are nervous of paying a little more. A lot of corporate ambitions are being spoilt because there isn't enough information to make the decision to go ahead and make a deal.

Brand valuations may help sellers realise the true value of their assets, but do they also help buyers in areas other than paying the right price?

Yes. It means that you test out the revenue line and understand where revenues are coming from. There are the same basic steps as in the due diligence process "" review the market, build the market model that you feel is reasonable, map the future market scenario and so on.

Normally such due diligence is done by the merchant bankers in terms of company prospects. And in my experience, brand valuation is not done very well by investment bankers.

Where do they go wrong?

Usually they give the brand valuations away for nothing. First, they are not objective and independent when they are preparing them. Then they haven't put a lot of resources behind them. And they don't look at details. More often than not, investment bankers know nothing about marketing and branding anyway.

In my opinion, the investment banking valuations are a starting point and from that all companies should do a brand due diligence to really understand what are the real drivers of the business value or the brand value.

Frankly, I think it's ridiculous that clients get their due diligence done by their investment banks. There's a conflict of interest and the reason that people do it is they are trying to get a cheap deal. More often than not, when you go for a cheap deal, you get a bad deal.

Give us an instance where brand valuations helped in getting a good deal.

We did a brand valuation for a company in the business of making showers. The seller achieved a price 10 to 15 per cent higher than he thought he was going to get because the brand valuation process identified a whole range of hidden value opportunities.

In the forecast model, the valuation experts had not fully recognised the market share in certain channels. When a marketing and brand due diligence was done we realised that the underlying revenues were higher than what first appeared.

Generally speaking, a financial due diligence process takes one topline number. They don't break it down by brands or divisions. So if you go into more detail, sometimes you find that the topline valuation done by the investment banker does not fully reflect the real value.

In reverse, there have been a number of transactions where the acquirers in all likelihood did not do a proper due diligence and, hence, did not understand the brand. So they mismanaged it post the acquisition and probably even overpaid.

One of the best examples of that would be Snapple. It was acquired by Quaker. Snapple was a good brand, but it was not as good as Quaker thought it was. It had a very complicated distribution network that Quaker proceeded to ruin. It lost a lot of value and ended up being sold again. That was largely because there wasn't enough proper due diligence done.

Does due diligence also prevent companies from making the wrong move in their investment or divestment strategies?

Absolutely. Courvoisier is a French cognac brand that was owned by Allied Domecq. Five or six years ago, we were asked if we could help them divest the brand since it was underperforming.

Basically, the problem was it was selling in the wrong geographic markets, into the wrong consumer segment and at the wrong price. The marketing mix was wrong.

By doing a brand evaluation we found what they needed to do in order to get their marketshare back and demonstrated the value impact if they did. The company then changed its brand strategy to target those markets, rather than divest.

We told them, "Don't divest. Redirect you money and energy here." They did that and the brand grew dramatically both in volume and value terms. That is a classic example where a brand valuation framework was used to turnaround a brand and make it more profitable.

Just recently Allied Domecq was sold and the star brand was Courvoisier. All of that was the result of a new brand strategy that came partly from market research and party from financial research.

In that case, would you recommend that companies should set up strong internal brand valuation processes?

Lion Breweries in Australia, for instance, has already built in brand valuations for every one of its brands. The valuation process gets done once a year. BAT, the cigarette company, does the same thing: it has an internal brand valuation process. Many companies value their brands on a regular basis to check if they are healthy and see if there are any actions needed.

Does it also help them change their strategy? For instance, tobacco giant Philip Morris changed its corporate name to Altria....

Philip Morris got into foods as it was trying to use its huge cash flows in cigarettes to diversify and it thought, "We are good at packaged goods; let's go into foods". But many people who don't smoke do consume food.

These consumers don't like the idea that their favourite food brands are owned by cigarette companies. So the divestment is a recognition that it's damaging demand in the food business.