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In this brand (!) new world, What IS a Brand and What DOES a Brand do?
18-Sep-10
Contents
What is a Brand Why Brand Valuation General Valuation Methods Specific Valuation Methods of various players Case of the Melting Moments Case of the Pain Killer Case of the Value in paper An aside at Accounting for Intangibles
What is a Brand
What is a Brand?
A brand is name, term, sign, symbol, or design, or a combination of them, intended to identify the goods or services of one seller or group of sellers and to differentiate them from those of competition. American Marketing Association (AMA)
Source: Competing for choice: developing winning brand strategies by Lars Finskud
What is a Brand?
A brand is a complex symbol, it is the intangible sum of a products attributes, its name, packaging, and price, its history, reputation, and the way it is advertised. A brand is also defined by consumers impression of the people who use it, as well as their own experience. Advertising guru David Ogilvy, 1955
Source: Competing for choice: developing winning brand strategies by Lars Finskud
Brand Iceberg
Brand experience externally Brand experience internally
Name Advertising Logo Brand Equities Environment Products and Services Brand Values Management - control structures Internal Communications Business Process Investor Relations Customer Relations Training Quality Staff Motivation Knowledge Management Recruitment Policies HR Policies & Processes Technology
Source: http://www.brandchannel.com/images/papers/bankonthebrand.pdf
Why Brand?
Important wealth creator Enhances return from commoditized offerings Investment in brands beginning to show valuable return Helps address customer churn Examples:
Malaysian Airlines strong brand experience has helped the business to avoid near bankruptcy and for it to stage a turnaround of the business Nirmas blitzkrieg when it entered the market in a big way
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Position in 1985
Leader Leader Leader Leader Leader Leader No. 2 Leader Leader Leader Leader Leader Leader No. 5 Leader Leader Leader Leader Leader Leader No. 2
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Source : K.L.Keller
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Brand Equity
61 46 37 34 22 20 1 0
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Global Parallels!
Calvin Kleins $58-million securitisation in 1993, which was linked to future sales of its perfume products. DreamWorks used $1-billion raised from the securitisation of copyright in a film portfolio to refinance outstanding credit facilities in 2002. Fashion brand Guess raised $75-million in 2003 from securitisation of its trademark licences. Athletes Foot, a sports footwear retailer, raised around $40-million securitising its franchise resources. Burn Stewart Distillers raised 31-million from Belgium-based bank against its whisky brands in 2008.
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Essentially, component costs are looked at as the size of the deal increases!
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Done by identifying
Reproducing an identical asset in the market Developing, replacing or building similar asset
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Methods of valuation
Market value of shares less book value / adjusted book value of shares Market value of shares less book value less managements expertise (intellectual capital) Brand replacement value
Present value of historic investment in marketing and promotions Estimation of the advertising investment required to achieve the present level of brand recognition
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Methods of valuation
Difference between the value of branded companies and similar unbranded (generic) companies
Present value of price premium paid by the customer over generic products Present value of extra volume over generic product that sells due to brand The sum of the above two values The sum of the above two values less all brand specific expenses and investments
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Methods of valuation
Difference between (price / sales) ratios of branded and unbranded company multiplied by the companys sales Differential earnings multiplied by a multiple
Multiple reflects the brand value drivers
PV of FCF minus (assets employed multiplied by required return) Options valuation of the option of selling at a higher price, higher volume, growing through new distribution channels, geographies, products etc.,
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Specific examples of how an understanding of cross-industry brand dynamics can help analysts in estimating royalty rates for use in valuation analysis of a given brand.
If the available data shows that royalty rates for brand licensing in personal care segment of the FMCG industry are 5-6 per cent of sales turnover, the rates should usually be lower in the retailing industry. If royalty rates for brand licensing in 5-star hotel category are in the 3-4 per cent range, the rates should be higher in the branded (but non-star rated) hotels category if profit margins are similar in both categories.
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Once a reasonable royalty rate is estimated, the valuer can use the DCF method or the comparable multiples method to arrive at valuation of the brand.
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An Example
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1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
$1,682 $1,783 $1,831 $2,064 $2,314 $2,368 $2,446 $2,665 $3,038 $3,348 $4,076 $4,604 $5,249 $5,695 $6,297 $6,986 $8,020 $7,852 $8,284 $9,814 $8,551 $6,149 $7,001 $7,488 $8,146
$1,121 $1,189 $1,221 $1,376 $1,543 $1,579 $1,631 $1,777 $2,025 $2,232 $2,717 $3,069 $3,499 $3,797 $4,198 $4,657 $5,347 $5,235 $5,523 $6,543 $5,701 $4,099 $4,667 $4,992 $5,431
$561 $594 $610 $688 $771 $789 $815 $888 $1,013 $1,116 $1,359 $1,535 $1,750 $1,898 $2,099 $2,329 $2,673 $2,617 $2,761 $3,271 $2,850 $2,050 $2,334 $2,496 $2,715
$22.43 $23.77 $24.41 $27.52 $30.85 $31.57 $32.61 $35.53 $40.51 $44.64 $54.35 $61.39 $69.99 $75.93 $83.96 $93.15 $106.93 $104.69 $110.45 $130.85 $114.01 $81.99 $93.35 $99.84 $108.61 $1,703.35
$0.00 $23.77 $48.83 $82.56 $123.41 $157.87 $195.68 $248.73 $324.05 $401.76 $543.47 $675.25 $839.84 $987.13 $1,175.44 $1,397.20 $1,710.93 $1,779.79 $1,988.16 $2,486.21 $2,280.27 $1,721.72 $2,053.63 $2,296.32 $2,606.72 $26,148.75
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Market value of Equity Debt Cash Enterprise Value Sales (D + E) / S Difference Brnad Value (Difference x sales)
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Other Multiples
Branded Market value of Equity Debt Cash Enterprise Value EBIDTA EV / EBDITA Difference Brand Value (Difference x EBIDTA) 98,160 7,178 6,707 98,631 7,760 12.71 5.91 45,824 Generic 949 345 27 1,267 186 6.81
Market value of Equity Debt Cash Enterprise Value Capital& Debt (book value) EV / Capital invested Difference Brand Value (Difference x Capital invested)
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Interbrands Methodology
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Begins with determining brand differential EBIT Moves on to determining brand differential earnings
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Use of a multiple applied to the brand differential earnings based on above 7 factors
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Thus, not only differential earnings but also the qualitative parameters are given weightage in this method
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Bert Methodology
Values brands based on following factors
Scores on each factor Values the brand as multiple of sales/ earnings based on the aggregate score
Factors considered
USP's of the brand Stability of the brand Markets - the industry in which the brand is in use Internationality of the brand The long term trends of the brands Brands receiving consistent investments Legal protection commanded by brands through registration and trademark laws Quality of support received by the brands
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Leadership Stability (consumer loyalty) Internationality Continued importance of the brand within the industry Security of the brands proprietorship
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Emerging potential
Leadership
Brand Strength
DREK
New/unfocused
DREK
Eroding Potential
DR E K
D R
EK
Brand Stature
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Present value of Companys FCF less the required return on assets employed
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1995 Rs.18.64 crores 2003 Rs.38.60 crores Consequently, Simple Annual Growth Rate 13.39% Thus, sales for 1996 Rs.21.14 crores Profitability of Crocin in year 1996 approx. 10%. Marketing expenses in year 1996 were approx. 15% Crocin was in maturity stage in product life cycle There is few little scope for any line extension
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Thus, maybe Crocin was overpriced! This was reflected by the fact, for long after acquisition, Crocin had not overtaken Calpol!
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Value in Paper
Value in Paper
Year - 2005 Brand Dainik Jagran Leader in Daily Newspaper Status Privately held company Plan Public issue by the business
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Value in Paper
A public company was floated The Private company valued the Mast Head and transferred it to the public company at a value Valuation of Rs.17 crores surfaced as an intangible assets!
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What is conservative?
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What is conservative?
A US study revealed that expensing off R&D expenses is not always conservative!
If rate of growth of R&D expense is low (compared to the entitys cost of capital), then expensing provides aggressive reflection of ROE, ROA If rate of growth of R&D expense is high, then capitalisation and amortising of R&D expenses provides aggressive reflection of ROE and ROA
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Thank you
T V Balasubramanian tvbalu@pkfindia.in
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