What's in a name: A third of shareholder value

Brands have been steadily asserting their independent role as wealth creators bringing significant valuations to their companies

Almost a decade ago, when P&G bought Gillette, they paid almost half of the $57 billion price tag for brands alone. Last year, in total, acquirers paid approximately 72 per cent, of the takeover consideration, for assets outside the balance sheet.

Not surprising at all: look at the kind of value delivered by brands. Coke, Microsoft, Intel, Disney, IBM, GE and Toyota. These are all names valued in excess of $40 billion. Most of these constitute over a third of the value of the businesses that own them.

What is it that makes names so valuable? In a world where choosing a car is difficult enough, will you keep saying "fuel-efficient, easy to park in Mumbai, wife can drive it too, high manufacturing standards, light on maintenance and good service backup, all at around Rs 6 lakh" or will you just say i10, or, Ritz, or Ford Figo?

But can you put a meaningful value to brands?

Brand valuation as a practice is not more than three decades old. For it is only over this period that brands began asserting their independent role as wealth creators. Today, at least two methods are available for assigning a fair value to brands. Whichever you use, the essential idea is to separate the financial impact of your brand on your long term business performance. In plain English, if you only owned your brands and no other asset, what would your company be worth?

What does this mean for Indian firms?

As Indian industry attempts to integrate into a global marketplace, brands will play an increasing role in the success or even survival of our businesses (why was Jet Airways valued higher than any airline in the US?). Today, Samsung is worth more than Sony Corp. because of an ambitious business strategy that was carefully crafted around the Samsung brand name 15 years ago.

Given this scenario, the day is not very far away when companies will be acquired primarily for their names. If India is to claim its rightful share of the Fortune 500 list, this is something we may want to think about. In 1998, when Tata Sons decided to structure an internal licensing of the corporate brand, many eyebrows were raised both within and outside group. The primary motive for this exercise was not an additional earning from the license fee. It was done most of all to establish the material impact of the Tata reputation on the operating performance of group companies. So the big question was whether the Tata brand was a nice feeling or a strategic business asset. If it was more than a nice feeling, then what was its value? What was its contribution? How could these be protected, nurtured and aligned to their large global ambitions? A separate function was set up and funded only to manage what was something of a national treasure.

Recently we heard from Jeff Immelt as to why he personally oversees the GE brand. Simply because at almost $50 billion, it is the largest and most powerful business asset at his command. These assets are no longer nice to have. They have a discernible and often dominant impact on business forecasts and the resulting cash flows. Can we allow them to remain outside our financial radar?

(The author is is the President and Chief Knowledge Officer of EQUITOR Value Advisory Pvt Ltd, the erstwhile Indian partner for Interbrand. An invited faculty to INSEAD in Paris, he has also lectured at leading institutions in India)