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VOLUME 21|NUMBER 4|FALL 2009
APPLIED CORPORATE FINANCE
Journal of
A MORGAN STANLEY PUBLICATION
In This Issue:
Market Efciency and Risk Management
The Global Financial Crisis and the Efcient Market Hypothesis:What Have We Learned?
8
Ray Ball, University of Chicago
Contingent Capital vs. Contingent Reverse Convertibles forBanks and Insurance Companies
17
Christopher L. Culp, Compass Lexecon andUniversity of Chicago
International Insurance Society Roundtable on Risk Management After the Crisis
28
Panelists: Geoffrey Bell, Geoffrey Bell & Company;Nikolaus von Bomhard, Munich Re; Prem Watsa andBijan Khosrowshahi, Fairfax Financial Holdings.Moderated by Brian Duperreault, MMC
Lessons from the Financial Crisis on Risk and Capital Management:The Case of Insurance Companies
52
Neil A. Doherty, University of Pennsylvania’s WhartonSchool of Business, and Joan Lamm-Tennant,Guy Carpenter & Co. and the Wharton School
The Theory and Practice of Corporate Risk Management
60
Henri Servaes and Ane Tamayo, London Business School, and Peter Tufano, Harvard Business School
Measuring the Contributions of Brand to Shareholder Value (and How to Maintain orIncrease Them)
79
John Gerzema, Ed Lebar, and Anne Rivers,Young & Rubicam Brands
Creating Value Through Best-In-Class Capital Allocation
89
Marc Zenner, Tomer Berkovitz, and John H.S. Clark, J.P. Morgan
Using Corporate Ination Protected Securities to Hedge Interest Rate Risk
97
L. Dwayne Barney and Keith D. Harvey,Boise State University
The Gain-Loss Spread: A New and Intuitive Measure of Risk
104
Javier Estrada, IESE Business School
Assessing the Value of Growth Option Synergies from Business Combinationsand Testing for Goodwill Impairment: A Real Options Perspective
115
Francesco Baldi, LUISS Guido Carli University, andLenos Trigeorgis, University of Cyprus
Journal of Applied Corporate Finance
•
Volume 21 Number 4 A Morgan Stanley Publication
•
Fall 200979
Measuring the Contributions of Brand to Shareholder Value(and How to Maintain or Increase Them)
1. This is the main thesis of our recently published book, John Gerzema and EdLebar,
The Brand Bubble
(Jossey-Bass, 2008).
B
F
by John Gerzema, Ed Lebar, and Anne Rivers,Young & Rubicam Brands
c o cot xp why omcomp outpom th comptto.Mcocoomc cto, th quty o thmgmt tm, xpct gowth t,
t vlu t bd c lp xpli wy s cpis
k out o th pck. But qutyg th u o uch
intangibles is not an easy task.
Sc 1993, Youg & Rucm h t o$130 mo coctg tptg t o
consumers’ perceptions o some 44,000 product and service
o 50 cout. At th co o Y&R’ chot th BAt® Vuto (o “BAV”), motht cot th m’ ho o t o go coum
perceptions and behavior patterns into assessments o brand
tgth u. Wh com wth th g o
idpdt sc by cdics i kti d c
(ug Computt t o copot optg tock-pc pomc), th BAV’ mt o u
can be used to quantiy the contributions o brands to bothcorporate earnings and market values.
At iptt cpt us t BAV is t pvidisit it wt cuss bd vlus t is d ll—d, is css, cv. F c t t 44,000 bdscvd i u dtbs, w v idtid ( i y css“dvlpd”) d tckd t 80 bd tics, wic
cu cto o coum w, pcpto pc, ug. Wth th hp o uch mtc, ouBAV mo k ow th u o to ou
major components that we call “Energized Dierentiation,”“Relevance,” “Esteem” and “Knowledge.” And as we suggest
th pg tht oow, o utg o ’
psitii l c ts u disis c b usd t
guide companies in maintaining and building their brands.One o the main ndings o the research cited above is
tht cotut to th mkt u o comp
by increasing not only current earnings, but also the price-to-earnings (P/E) multiples that investors assign to current
g. Such c P/E mutp tu ctto’ xpctto o ow k, hgh gowth, o
bt. Ad wil ly but -tid t ttl stitd
ct o quty o copot u ct cut g, th mg two-th o ’
contribution to value is attributed to its eect on investors’expectations.
So tht’ th goo w out thcotuto to u. But ou ch o h mo
troubling message: In more recent consumer surveys (during2005–2007), we began to nd signs o brand erosion even as
th mkt w puhg up h pc, pumy wthth xpctto tht tg k wou cotuto optg g th utu. Mo pccy, wh W Stt w g up th gggt u o u, ou ch uggt tht coum’o pcpto o w comg o.
Idd, w w di stp dclis i csu tis
all
wt w viw s t u ky clssicl “ttituds” twd
brands: “trust,” “awareness,” “consideration” and “regard.”
1
Tis discct btw bd vlus d s pics—
though somewhat reduced by the market decline associated
wth th c c—uco th ty tht thpcpto tht uc th o ot o coumo M Stt c y t om th cy u y t yt o W Stt. E
with stock values well below their peaks, we believe that the
mmtch tw coum tttu tow th mkt u o th comp tht pouc owthm cotu to tht. It th poty tht
y bdd busisss vvlud—d tt, w t
“ u” ct th tock pc t, th
valuation multiples and stock prices could all again.
I th mtm, o th o coum-cgcopoto, th mmtch tw tock pc u pot to cotug chg o mgmt. Bug u mpott o othc poo tyg to c hho u mkt tyg to u u c mg. T m o ou ch to g thtwo goup—c mktg—co togth y mottg th o o mktg ttgy
equity in driving shareholder value.
80Journal of Applied Corporate Finance
•
Volume 21 Number 4 A Morgan Stanley Publication
•
Fall 2009
The Four Pillars of Brand Value
T BdAsst® Vlut dl sus t vll lt
o a brand by assessing our o its distinctive components, or“pillars”:
• Energized Dierentiation• Relevance• Esteem; and• Knowledge
Ec t u ctibuts i dit wy t buildi
.
Energized Diferentiation
compotmu o ttut tck y th BAV:“uqu,” “og,” “pcg pow,” “oto”
“dynamism. ”
Relevance
aims to capture the appropriateness
o to coum togy t to mktptto. Both o th p,
Energized Diferentiation
Relevance
, h po to g cto o
bd’s dicti d tu. Ad w cbid it
g ctgoy tht w c
Brand Strength
( how
Figure 1), the two pillars provide a orward-looking measureo brand value.
By cott, th th outh p,
Esteem
Knowledge
, cut cto tht togth tm
Brand Stature
. A brand’s
Esteem
is evaluated using measures
o pct, pc quty ty, gy
viwd s pquisit buildi lylty.
Knowledge
is tculiti d csquc bd buildi d fcts
a consumer’s depth o experience with the brand.
I Fgu 2, w ty to uggt how ou ou-pmwok c u to ’ hth togo po pom outo. Fo xmp, th
pscipti bds tt sc i Kwld t
Etm typcy o ot to pu coum totk h ook, wth th m o ttg th
and building consumer respect and, eventually, some degreeo loyalty. By contrast, in cases where Esteem is greater than
Kwld, t bd lly s pptuity t xpd
market share by increasing consumer awareness.
Brand Metrics Help Explain Stock-Price Performance
T is ld d tt sys, “T vlu sti tt’s
tuy ot c’t mu.” Wth th hp o ouBAV, ch h po pu c tht
st bd c is cpy’s kt vlu by icsi
t ly its
current
vus d pts, but ls lysts’ d
investors’ expectations or
future
prots.
su w bds ct bt t cut d utu
cil pc ti tpiss, w v cbid
our 16 years o BAV data on a large sample o multinational
“moo-” wth t o copot g tock pc om St & Poo’ Computt t t thUty o Chcgo’ Ct o Rch Scuty
Prices. Mono-brands are companies like Intel, McDonald’s,
d Micst tt stk ti ti sil “pw”
mo th 80% o th u u
rom that brand.
Wit t lp kti psss Rbt Jcbs
t Uivsity Wsit d Ntli Miik Clubi
Bu Schoo, w yz g um o coum o uch comp wth th m o tygth ttut tht mot uccu xpg
unanticipated
c tock pc. By “utcpt,”
we mean those stock price changes that cannot be explainedby simultaneous changes in corporate undamentals such assales and operating returns on capital.One outcome o this joint eort was a regression model
tt, usi u BAV dt, liks icss i bd sst vlus
Figure 1
BrandAsset Valuator Model
ESTEEM
How you regardthe brand
Relates to perceptionsof quality and loyalty
KNOWLEDGE
An intimateunderstanding of the brand
Relates to awareness andconsumer experience
RELEVANCE
How appropriatethe brand is to you
Relates to consideration and trial
BRAND STRENGTH
Leading Indicator Future Growth Value
BRAND STATURE
Current Indicator Current Operating Value
ENERGIZEDDIFFERENTIATION
The brand’s pointof difference
Relates to margins and cultural currency
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