“Vesti Segodna” (Supplement “Delovie Vesti”): “Why do Baltic brands [not] sell?” Prudentia partner comments
26 February 2007One of the themes discussed at the recent conference "Mergers and Acquisitions in the Baltic States" was how real it is to sell a brand in the Baltic countries. Not a company, not production equipment, not a business with money flows and profits, but just a brand. Sadly, there have been few such cases so far.
The local market is too small, and young to boot, which is why it is easier to a potential brand buyer to create one from scratch. The more interesting the fact that sometimes-such deals happen nevertheless.
Brands that are "sleeping"
Of Latvian experts who we spoke to - Aivars Jurcāns (KPMG) and Ģirts Rungainis (Prudentia) - Jurcāns said he could not recall any cases when local brands got sold, whereas Rungainis, after lengthy contemplation, remembered just one example. However, the buyer then bought both the business and the brand, albeit each at a time.
- Our client, I will not reveal his name, put his business up for sale, Rungainis recalled. - The enterprise belonged to several companions, but the brand to just one of them, and it was registered in that person's name. In the end, the buyer bought the business first, and then he reached agreement with the brand owner and bought the brand, too. Besides, if I remember correctly, a million was paid for the brand alone - either a million dollars or euros, I don't really remember.
According to Rungainis, at that time the deal was made possible because of interest from the "right" buyer as well as - please note! - Assessment from a "top four" auditor, which said it was worth one million. And the opinion of a "top four" auditor carries much more weight than the opinion of a company's own marketing department.
- Probably there also were other cases of brands being sold, - Rungainis said. - But there is an opposite trend in the Baltic countries: most often they simply buy a company, and develop the brand themselves. Although theoretically, it would make sense for companies that are being sold to look for different buyers for its production facilities and the brand, there is economic logic in that. For instance, the situation with Laima: one investor was interested in buying the brand and developing new production capacities, the other - to buy the technology and start making other products.
Problem is that local brands do not cost much due to the smallness of our market. That's not Coca-Cola, whose image has been planted in nearly every person's brain, and whose brand costs accordingly. Our market is small, the brands are small too, and they are of not much value. Latvian brands that are still remembered on former Soviet Union markets could be the most interesting. For instance, Lauma lingerie, which has been present on these markets all these years, and now has started actively expanding its marketing networks, - Rungainis summed up.
However, Prudentia expert hastens to add that most of the brands that were once popular in the Soviet Union are "sleeping". That is, they still are recognized, remembered and probably loved, but... The local business is not always capable of using this potential, because that will require investments in logistics, effective advertising, and management, raising production capacities. But local companies, as a rule, have limited financial resources. That is why the potential of the "sleeping" brands has been and will remain a matter of guessing and speculation: would this brand be popular in the East, if only...
- It is a very interesting aspect, - said investment banker Rungainis. - In principle, the brand itself is worth as much as the buyer is ready to pay for it. If someone sees that a "sleeping" brand can indeed help expansion into the Russian market, and if the prospective buyer is planning such an expansion - he will be ready to pay. And this is when the seller must be able to sell a future prospect. For instance, sell it for a price that the business will cost after a successful expansion, which... has not taken place as yet. Of course, there has to be a discount for risks that the future may not be that bright for the buyer. Therefore the more apparent the future prospects, the bigger chunk of a potential tomorrow success the seller can get. If everything is not that clear, the seller will accordingly get less. Trading in future is probably the most interesting side of our business.
Find someone who can benefit from the brand
"But how much does my brand cost after all?" - many Latvian, and not only Latvian, businessmen must have wondered at least once. Lithuanians, who have managed to create and develop a small or medium-sized company during the past 10-15 years, also ask the question to their M&A market experts. Prime Investment senior analyst Martynas Visockas comments:
- Yes, we get these questions occasionally, and we provide our figures. That is when Lithuanian businessmen often happen to say, "OK, that's the price of the business. And how much is the brand?" - smiles Visockas. They are disappointed in most cases; in the Baltics, buyers very seldom pay separately for the brand. Most often experts rely on the principle that the brand, as well as the management and logistics - all of that produces the result that is demonstrated in the company's turnover, profit, money flows. Which is why these are the indexes that are evaluated in most cases, presuming that the brand has already made its contribution. If not, if the brand does not generate extra profit in the business, then it is a useless brand.
And so. The world practice with other brand assessment models works here in exceptional cases. In simple economies everything is simple to decide. Discounted money flows in the next five years make the price of the business. Comparative method is another option. If a similar company in the sector has been bought for the amount X, other companies in the sector will be assessed approximately at the same level - financial investors most often employ this method.
As for the more developed markets, a business is often sold not as a sum total of money flows but in parts. This is the pricing method: if the buyer needs an asset, he/she will assess the costs of creating one from scratch, or how much it will cost elsewhere. This is what happened with Rolls Royce in 1998: the factory - that is, technology - was bought out by VW, but the label (and nothing else besides it) - by BMW. If RR owners sold both to one buyer, they would receive less money, because the former buyer believed that extra GBP 40 million for the RR logo on the hood was not worth it, whereas the latter believed that paying GBP 430 million for RR technology was not necessary.
- As you can see, everything depends on buyers' business strategies, on what they need, - said Visockas. - Some already have the production basis, they only need the brand's popularity, and others believe that what they lack is production capacities, while the brand they can build themselves. Therefore it is very important to find a company whose strategy requires your brand - only such companies will be ready to pay it.
So it almost boils down to detective stories - seek that who can benefit from your brand.
How Citigroup sold "umbrella"
On the young Baltic market, the buyer is still perceptive of everything that is new, and is ready to experiment, brands and trademarks that have history spanning a hundred years and more are not rare at all on markets that have been developing for centuries. There the level of affection is completely different, wouldn't you agree. Hence the examples such as the recent sale of Citigroup's "red umbrella".
The red umbrella used to be the logo of the insurance company Travelers Group, it appeared over 130 years ago. In 1998, the insurance company merged with Citicorp. And it turned out that the umbrella did not quite fit the financial group's overall image: the group's managers said that the insurance company's logo, which symbolized protection of its clients, would be too limiting for the entire group providing a variety of services.
Here they would simply abandon everything that is unnecessary. But a large market with its history and traditions, that is another matter altogether. So the "umbrella" was sold. To another insurance company, St. Paul Travelers Cos. Alas, the price was not revealed, but Citigroup representatives said that the money from sale of the logo would compensate Citigroup costs of changing the logo.
Moreover, the insurance company's managers also said they were ready to buy the five-meter red umbrella statue at the Citigroup offices in New York. Here is what affection for a brand means. In the Baltics, though, all the factors - the size of the market, its young age - are against the value of brands if they are viewed separately from the business.
And yet, there have been a few cases. What is the logic behind assessing a brand separately from business, we asked the Lithuanian expert.
Raise the price, and you will see
- Judging from our experience, assessment in the Baltic countries, practically in all cases, is based on the principle that the brand on its own does not cost anything, - reveals Martynas Visockas.
- There is a business that creates money flows, and the brand also influences on the creation of these money flows. That is, its value is already as though included in the value of the business, assessed in accordance with its financial results. We emphasized this aspect in our presentation: in the Baltic countries the success of a business is not yet divided into success created by the brand and success created by everything else.
A strong brand, or strong management, or a good price - the combination of all of that is important, and is taken into consideration. But they are seldom assessed each on their own. And I cannot recall any cases in the Baltics when a company wished to sell its business and brand separately, as was the case with Rolls Royce.
- How can a businessman prove, in principle that a part of the success of the business is thanks to the brand?
- That's what the problem is about - it cannot be proved, - the expert said. - But the brand can be studied, as well as its popularity, to determine how much the brand, for instance, would be sensitive to a hike in the price for the product. I mentioned the example of the Lithuanian beer Zalgiris, which sponsors the Lithuanian national basketball team. I am sure that if the price for Zalgiris beer grew 10 percent, it would not affect me in any way.
It tastes about the same as other beer brands. The price is not lower, either. Logistics? Not too good, you will not find it in every store. So it is safe to say that this beer is chosen because of the brand. I see that it is Zalgiris beer, I love basketball - and I buy the beer. If you have studies proving clients' loyalty to your brand, which has not been affected by price fluctuations, then it is clear that the product sells specifically thanks to the brand.
If you are confident that raising the price 10 percent will not affect the demand for your product - well, in that case you can calculate an amount and add it to the value of the brand.
But you have to deduct a discount for risks. Because such studies after all do not have any concrete proof. In most cases, they are just speculations.
- Judging from RR example much depends on the buyer. Perhaps our companies simply lack the experience to find the right buyer who would be interested in their brand?
- Yes, it happens. And the example of BMW Corporation, which bought specifically the Rolls-Royce brand, is a good one. They paid GBP 40 million! And I don't know their motivation, when they decided that they had to have the brand. Option one: "OK, now we launch an extra-class car, and we will have to invest GBP 60 million into developing the new brand alone in the next three years." If that is the situation and you can get a well-developed and world-popular brand right away, then you will be interested indeed. It is huge economy. Provided that the available brand is strategically compatible with yours, of course.
If they believe that the brand is worth 40 million, that's what they will pay for it. But another client would probably not even give 10 million. That's why I always say that the value of the brand for a specific buyer is not the price of the brand that would be interesting for all buyers. So finding the right buyer is indeed the key to success.
- What's the highest price ever paid for a brand in Baltics?
- (Pause) To be frank, I don't even know of such cases when a Baltic brand was assessed and bought. It is a problem of a market that is too young - it is just in its teens. In such a market, it is much easier to start a new business and develop a new brand than to buy an existing one. That's why most buyers here do not understand why they have to overpay for something totally intangible.
The only case in Lithuania was in the meat industry: a private businessman sold his Klaipedos mesa brand to a Finnish meat processing company. Apparently the Finns thought the opportunity to enter the patriotic Lithuanian market using a brand popular with local consumers was worth paying for. But again, we know nothing about the amount of the deal. In most cases they sell and buy not a brand on its own but a business together with the brand.
All what has been said rather falls into the "what would happen if only" area. The reality is much simpler than that, according to Aivars Jurcāns from KPMG: the buyer buys the business together with the brand, overpaying slightly for the latter.
- During the past 16 years, so many brands have changed here, and they all were so... short-lived! - Said the expert. - So buyers' skepticism is easy to understand: why pay significant amounts of money for something you cannot touch? There are very few exceptions.
Too little time has passed yet.
...Well, it seems we will have to wait about one hundred years or so.