NAME GAME: PUTTING A PRICE ON A COMPANY’S BRAND

Valuing a company brand demands a complex mix of art and science that can produce wildly differing estimates, yet the bottom line is undoubtedly affected

In 1998 Larry Page and Serge Brin changed the name of their creation – now the world’s leading search engine – from the not-so-catchy BackRub to the rather more memorable Google. With the power of hindsight it’s easy to see what a smart move that was, and arguably one that helped the brand become a household name worth billions of dollars.

It’s hard to imagine a brand called BackRub commanding such a price tag, or becoming a verb as ‘google’ has. But then again, just 16 years ago, google just meant the number 10 raised to the power 100. Today, Interbrand and Brand Finance’s 2014 surveys estimate Google’s value significantly above that, at $107.43bn and $68.6bn respectively.

The example illustrates the pace of change in brand names and their fluctuating values in today’s fast-moving business world. But despite the growing importance of brand equity – the value of a brand – a globally standardised approach to measuring brand value has yet to be developed.

MEASURING UP

That hasn’t stopped the proliferation of brand value surveys, none of which fully reveals the metrics behind its brand value calculations. However, despite the disparities, the studies do agree on one ranking – that of Apple at number one, although valuations differ widely.

‘Apple and Google’s meteoric rise to more than $100bn is truly a testament to the power of brand building,’ Jez Frampton, Interbrand’s global chief executive officer, said last October when announcing the 2014 results of his company’s survey.

Brand valuation is a complicated art rather than an established science, although certain methodologies are now widely accepted when it comes to measuring, comparing and contrasting brand values over the years.

When identifying the 100 most valuable brands each year, Interbrand says it examines three key aspects: financial performance, influence on customer choice, and brand contribution to earnings.

Brand Finance applies one of three different measurements: market approach, costs approach or income approach, but typically uses the latter, which estimates the value of future income attributable to the brand and expresses this as a net present value.

TRIGGER EVENT

With so much value attached to a brand, why do companies choose to change their names? One of the biggest name changes of recent times came at the end of last year, when BSkyB, as British Sky Boardcasting was commonly known, announced it was losing ‘British’ and ‘Broadcasting’ from its name and rebranding simply as Sky (see box). BSkyB was itself a product of the merger of Sky Television and British Satellite Broadcasting 25 years ago.

Jeremy Darroch, who remained CEO after the rebranding, said that the name change completed the company’s transformation into a pan-European, paid-for TV business following the £6.88bn buyout of BSkyB’s sister companies in Germany and Italy.

There must, of course, be a clear case for a name change, with mergers and takeovers being the most common and understandable driver. Sky says it is dropped the word ‘British’ to reflect its pan-European target market and the word ‘Broadcasting’ to reflect its migration from a pure TV company to a multimedia one.

‘During a merger, brand is crucial to ensure confidence and support among existing employees and clients,’ says Matt Morris, director of Carr Consulting & Communications, who worked on the 2013 rebrand of Quilter and Cheviot Asset Management as Quilter Cheviot. ‘They want to know the firms are stable. It also allows the firm to instil a new and fresh image of what the company must stand for.’

Disasters, particularly public relations ones, can also trigger a rebrand, helping a company to distance itself from bad publicity. But rebranding doesn’t guarantee the business will be saved.

The most well-known PR gaffe was made by Gerry Ratner, founder of jewellery retailer Ratners, who described his own store’s goods as ‘total crap’ to a 5,000-strong business audience at an Institute of Directors conference in 1991.

Ratner’s description wiped £500m off the value of the company, forced stores to close and led to his summary dismissal from the board before the chain was rebranded as Signet Group.

I GOT A FEELING

People’s emotions and perceptions are one of the most important factors influencing brand values and turn what might otherwise be a science into an art. Brands are vulnerable to fluctuations in value because they depend so heavily on public opinion.

For example, in brand value surveys when consumers are asked to price a particular car, they may place different values on, say, Volkswagen, Ford and Mercedes marques, even though the same car is used in the survey with just the badges changed on the bonnet. In each case, the brand is seen to be worth around 10% of the retail value of the car.

‘It’s a highly emotional decision either in consumer or B2B brands,’ says Paul Hague, founder of B2B International, a business research company.

The decline in popularity of Nokia is a little more complex but ultimately boils down to emotion. Nokia failed largely because it underestimated the importance of software on smartphones, but once the business had started to slide downwards, perception took over. In 2009 Nokia was considered one of the most valuable brands in the world, claiming the fifth spot in the Interbrand survey with a value of $35bn. In its 2014 survey the Finnish brand had fallen to 98th position with a value of $4.1bn

Like a see-saw, as Nokia’s brand value went down, so Apple’s rose. In 2009 Apple sat at number 20 in the survey with a brand value of $15.4bn. Five years on, the company is considered the world’s most valuable brand, worth $118.9bn, according to Interbrand’s 2014 study.

To truly assess the value of a brand, a company has to be sold, and buyers and sellers will inevitably differ in their estimations of value placed on a brand for obvious reasons.

‘One of the challenges boards face today is the faster pace of change made possible by new media. Technology stocks are very vulnerable to that change. But cars, for example, are too. In the past those transient changes were slower and you could handle brands better,’ Hague says.

Brands today aren’t as resilient as they once were. Consumers are less forgiving and, ironically enough for technology businesses, technological advances and mass media mean that shoppers are much better informed, more quickly. That applies to business-to-business brands as much as to consumer brands.

Even though there are difficulties in measuring brands accurately since the value of a brand is merely a promise delivered and that can change overnight, it is clear that brand value can have a major impact on a company, and may even ultimately sound its death knell.

SHORTS IN FASHION

Trends in brand names come and go. In recent years one-word names have become popular – Google, Apple, Amazon, Nike, eBay, Orange, and so on. It’s a trend that is still going strong, with the need for a snappy URL likely to be one of the drivers. Of the top 100 global brands, 65 have one-word names, 16 use acronyms and the rest have two-word brand names, such as Land Rover or Harley-Davidson.

The trend isn’t exclusive to consumer brands. A few years ago, Big Four audit firm PricewaterhouseCoopers became PwC, and more recently Ernst & Young rebranded as EY. Companies are increasingly dropping geographical names too as they target global markets. British Airways became BA, while British Sky Broadcasting recently dropped both ‘British’ and ‘Broadcasting’ from its name to become simply Sky.

Meaning doesn’t necessarily figure in the search for a new name; connotation or multilingual ‘pronounceability’ may be more important. Accenture, for example, is currently 44th among the top 100 brand names and worth $9.9bn.

Michelle Perry, journalist

This article was first published in the June 2015 Ireland edition of Accounting and Business magazine.

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Boxing clever

Adrian Marsh, CFO of packaging business DS Smith, explains some of the challenges that are facing his industry and how the business is primed for growth

It has been a busy first year for Adrian Marsh as chief financial officer of packaging group DS Smith. The former head of tax at Tesco has had to significantly build up the DS Smith finance function as well as finance a fast-growth agenda at the FTSE 250 business.
Since 2010 it has ballooned from a fairly small Anglo-French consumer goods packaging company with a share price of 100 pence to a fast-growing group with a £2.7bn market capitalisation.
In its latest six-monthly results to October 2014, DS Smith reported that its pretax profits had leapt 45% to £123m on revenue of £1.97bn. Although revenue was down slightly, the share price rose more than 4% following the announcement in early December. At the time of writing, the share price was up 1.44% to 309 pence.
Marsh’s first-year contribution to the company’s successful set of results can be found in the group’s strong cash position, with £159m on the balance sheet at the end of October, up from £116m six months earlier. He has also cut net debt by £133m to £694m.
CEO Miles Roberts noted his CFO’s efforts in his results statement in December: ‘We have continued to make good progress. This has translated into strong financial performance, with a particularly good progression on margins and returns as well as excellent cashflow generation.’
DS Smith, whose clients include fast-moving consumer goods companies such as Nestlé, Unilever and Reckitt Benckiser, has been on the M&A trail since 2010 (see box). Its recent purchase of Spanish corrugated-board producer Andopack last October gave it a direct market position in Spain, which allows it to continue to grow and leverage its scale. And this is Marsh’s primary focus for the year ahead.

FIRST, EUROPE…
‘We want to create a business that can genuinely compete globally. It starts with Europe and we need to consolidate that first. There’s a big M&A and growth agenda for the next year or so,’ he explains.
In order to grow, Marsh has to make sure the company is generating cash to invest as well as return to shareholders. ‘My burning priority is putting in place the capability for growth. We have to show how we can grow fast again,’ he says. He is on course to achieve his goals if the latest results are anything to go by.
Marsh has also shown how seamlessly finance executives can move between industries and positions, and not just prosper but also make a huge impact. Despite moving from being head of tax at a fast-moving, high-margin FTSE 100 supermarket like Tesco to the finance head of a low-margin FTSE 250 manufacturing company, Marsh has embraced the change.
He says that in finance you have the benefit of being ‘industry agnostic’, although it is, of course, critical that you’re interested in the sector, which he very much is.
‘It’s a very interesting industry. It’s more than I could have imagined. For me it had the level of complexity needed and it’s growing and there is a growth agenda. There’s a lot of change.
‘I know from a competence level that there will be nothing that I can’t do, but the change to CFO level is very significant – things like how to interact with the board, shareholders, investors and communicating financial news. At Tesco, I was dealing with more money but it was part of a finance structure already in place.’
He adds that ‘in low-margin manufacturing, finance can do a lot’ – as he is currently demonstrating.
Marsh puts some of his successes down to his ACCA Qualification. ‘ACCA was invaluable in giving me a firm foundation in all aspects of finance and being a member was extremely important in my early career, giving me the confidence to move into different finance roles.’
In the past, packaging was as much about selling the paper as it was about creating the package, which is why some European packaging companies like Mardi and Smurfit Kappa still have ‘struggling’ mills attached to them.

RECYCLED RETAIL-READY
But today, fast-growing consumer goods companies – the main clients of packaging companies – are driving the change in the industry because they want to cut costs and complexity, and drive out waste from their supply chain. Recycled retail-ready packaging is where the future lies, Marsh says.
He adds: ‘Historically, boxes were sold by weight. But now we try to work with companies to use packaging to reduce environmental footprint and enhance sales in stores.’
For this reason, DS Smith has a recycling business that collects used paper and corrugated cardboard, which its paper manufacturing facilities turn into corrugated packaging. It is also why the announcement in December of the completion of the company’s design and manufacture division – which develops certain types of plastic packaging tailored to clients’ needs – is so vital to future growth and success.
Although DS Smith has its sights set on Turkey, North Africa and the Middle East for future growth, Europe is the company’s most important market. Talk of a possible UK departure from the European Union understandably makes him nervous.
‘Yes, we want to remain in the EU. The EU offers the UK economies of scale, ability to transfer knowledge and so on. It’s the only way the UK can compete on a global stage. Exiting the EU would be the worst possible outcome for the UK to pursue.’
He argues that the negative impact that a UK exit from the EU would have on DS Smith’s outlook would be ‘the same for a lot of companies. It’s a very political agenda. But from a business agenda, Europe is very important to us.’
With industry forecasts putting growth in the European cardboard sector at just 1% a year up to 2016, and with uncertainty around a growing number of political and economic developments, DS Smith is nonetheless looking to widen its client offering and build up its cash pile.
But with Marsh’s strict financial discipline, savvy finance-raising skills and cautious debt outlook, the company has in place a strong top team to weather the economic headwinds.

TIPS

Marsh has three tips for finance professionals: ‘When I was taking this job, the best advice I was given was to be absolutely certain that I would get on with the CEO and the board. If you don’t, then it’ll be a difficult job and you’ll be ineffective.
‘My second tip is you only ever have one reputation and once it’s lost it’s irrecoverable. Be careful what you stand for. It’s the only thing you can never recover.
‘And finally, coaching has been a great help to me. The transition to becoming a group CFO is not just about the professional, it’s about the personal as well. It’s a bit of a cliché but the past year has been a whole personal development journey for me.’

TIE-UPS AND BUY-UPS

2010
€1.6bn (£1.2bn) tie-up with Sweden’s SCA Group’s packaging operations brings together the second and third-largest packaging businesses in Europe’s €30bn market for cardboard packaging. DS Smith’s aim is to position itself as Europe’s leading supplier of recycled packaging for consumer goods.

July 2014
The company acquires the 50% of recycling business Italmaceri that it didn’t already own. Italmaceri operates in northern Italy, with annual volumes of around 500,000 tonnes.

September 2014
Kaplast, an injection-moulding business in Croatia, is acquired to expand the returnable transit packaging element of DS Smith’s plastics business.

November 2014
DS Smith purchases Andopack, a corrugated board manufacturer in Spain, for £35m. The business operates from a site with substantial opportunity to grow the business by serving pan-European customers based in the region.

December 2014
DS Smith (via Kaplamin Ambalaj, in which it has a minority interest) signs exclusive letter of intent to buy Cukurova’s majority shareholding in Kaplamin Ambalaj and other packaging assets in Turkey and Greece. The businesses have an annual turnover of around €160m. Discussions are at a preliminary stage and any acquisition remains subject to due diligence.

Michelle Perry, journalist