Insights: AMA's digest of the latest findings from marketing's top
Building products and brands internally is slow and costly, and new product failure rates are high. As a result, many firms acquire resources such as products and brands from external sources to compete. For example, in recent months, Estee Lauder announced that it had acquired By Kilian, a Paris based prestige fragrance brand, for an undisclosed sum. Nantucket Nectars, currently owned by Dr. Pepper Snapple Group, was acquired from Cadbury Schweppes PLC. Cadbury Schweppes PLC in turn had acquired the brand from Ocean Spray. Do these acquisitions add shareholder value? If so, under what conditions?
Under what conditions should a firm acquire a product or brand?
Prior research on mergers has mainly focused on entire firms trading hands. Because target firms comprise bundles of tangible and intangible assets and capabilities, disentangling characteristics associated with acquiring individual resources is often difficult. Research that helps isolate the factors that drive successful transfer of specific resources is of particular significance. New research by Casey Newmeyer, Vanitha Swaminathan and John Hulland examined acquisitions of two specific types of marketing resources (i.e., brand and product) and showed how various firm-specific factors interact with acquisition type to either enhance or erode investors’ firm valuations following acquisition announcements. The authors collected stock market data on brand and product acquisition announcements in multiple business-to-consumer industries over a 20-year period and conducted an event study to test the research hypotheses.
The results showed that acquiring marketing assets in the form of brands and products could create firm value. The findings revealed that managers should carefully consider the nature of the resources being emphasized both internally and externally. When many of the resources in the transaction are intangible market-based assets (e.g., brands), managers should ensure that the following conditions are present to achieve successful transfer:
1. A strong target with significant brand equity,
2. Strong organizational marketing management capability within the acquiring firm
3. A low level of acquirer diversification. When an acquisition emphasized intangible assets and the acquiring firm did not meet these three conditions, investors were skeptical that the transaction would create value and reacted negatively to the transaction.
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In contrast, when the focal resource to be acquired was product-related, acquiring firms were not punished for being more diversified. Furthermore, the strength of the target and the acquiring firm’s marketing management capability were of lesser importance to investors in a product acquisition context. Overall, for value creation to accrue, investors required less stringent criteria of product acquisitions compared to brand acquisitions.
Brand and product acquisitions offer a potentially valuable strategic solution for firms that want to limit development costs and reap the benefits of existing products and brands. However, such acquisitions often fail and thus must be undertaken wisely, with a keen understanding of the type of brand or product to potentially be acquired and how it should be managed.
Casey Newmeyer, Vanitha Swaminathan and John Hulland (2016), “When Products and Brands Trade Hands: A Framework for Acquisition Success”, Journal of Marketing Theory and Practice, 24 (2), 129-146.