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Last week at a management retreat someone asked why acquisition
after acquisition had failed to deliver to expectations in spite of all the
auditing and assessment that goes into them.
All of us have read and heard about high profile acquisitions
like that of Cadburys and Gillette. The astronomical prices that were paid and
the arguments about the exuberance exhibited in these purchases. Many of us
would have consumed the large amounts of print in HBR and similar sources of
wisdom on why many of these were doomed for disaster.
My counter question to the participant was this:
Are we certain about what we are buying? The auditing firm and
the lawyers will tell us with great certainty (at a great fee of course) about
cash, receivables, inventory and facilities on the one hand and creditors,
lenders, taxes and financial charges on the other hand.
But the average financial statement accounts for only about a
fourth of the acquisition value. Hence we do not have a handle on three
quarters of the price tag.
So what did P&G pay for? At the time of the acquisition,
sometime in 2005, the Gillette brand alone was worth $18 bn, by itself
representing almost a third of the $ 57 bn bill. In fact, the book value of the
firm was just $ 4.5 bn accounting for under 7% of the sale value.
This is not a one off case. Data from a globally regarded M&A
track suggests that over the last 600 odd acquisitions, only 19 % of the
aggregate payout represented book value. So what did they pay the balance 81%
for? More importantly, what specific shareholders expectations were attached to
the unaccounted portion?
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 a financial
recognition 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 indeed it was more than nice feeling, then
what was its value contribution to individual operations. In what specific ways
was it contributing? 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.
But what was exemplary was the role and responsibility of leadership
in recognizing and implementing this thinking about the marquee as a strategic
business asset. Last week, we heard from Jeff Immelt as to why he personally
oversees the GE brand. Simply because at $50 bn, 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?
