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Shareholder activism's impact on brand value
October 21, 2014
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By David Bogoslaw
First study of activism and brand value finds predominantly negative
impact on brand value extending long beyond original activist campaign
There has been a lot of research in recent years showing that a
specific form of shareholder activism known as hedge fund activism has
had an adverse impact on shareholder value, as measured by stock price
performance and market cap, in the wake of an activist campaign.
Harvard Law School professor Lucian Bebchuk and his associates have
questioned the ‘scientific’ validity of this research from varied
sources, but he and his supporters are a small minority.
What hasn’t been studied until now, however, is the impact of
shareholder activism on corporate brand value. To produce this
research analysis, Corporate Secretary partnered with CoreBrand, a
natural choice given the latter’s impressive database of nearly 1,000
companies from 54 key industries and more than 20 years’ expertise in
studying the elements of brand value and advising clients on how to
strengthen their corporate brand and capitalize on their brand value.
Each year, CoreBrand surveys 10,000 business decision makers from the
top 20 percent of US businesses with annual sales above $50 million to
arrive at scores for familiarity and favorability, which reflect
company size/recognition and quality, respectively. Familiarity
represents a weighted percentage of survey respondents who recognize
the brand being evaluated. Only respondents who are familiar with a
brand – knowing more than just the company name – are asked to rate
the three dimensions of favorability on a four-point scale: overall
reputation, perception of management and investment potential.
Familiarity and favorability scores are then combined into a single
BrandPower score and the scores are used to calculate the brand equity
value (BEV) – comprising BrandPower, familiarity and favorability – of
each company, both as an absolute dollar value and as a percentage of
the company’s market cap.
Event-driven impacts
With data extending back to the early 1990s, CoreBrand is able to
measure changes in a company’s BEV from a specific event such as a
major earnings restatement or a CEO’s removal. This lets CoreBrand
determine the magnitude of the impact the event has had on BEV, both
as an absolute dollar amount and as a percentage of market cap. ‘Brand
is an intangible asset, but it does have value and can be measured
[even though] it’s not on the balance sheet,’ says CoreBrand CEO Jim
Gregory.
Once CoreBrand has calculated a base level of BrandPower based on a
company’s revenue size and quality (as reflected in shareholder
value), this expected level of BEV becomes zero for the sake of
measuring changes that may result from a particular event, such as an
activist announcement. This explains why some companies show dips in
BEV percentage and dollar value to negative numbers. Because the
corporate brand contributes millions or even billions of dollars to a
company’s stock price and market valuation, any changes in it can have
a significant impact on stock performance.
Using a list of activist campaigns (provided by FactSet SharkWatch)
conducted against S&P 500 companies related to value creation, board
seat and CEO/officer removal announced since January 1, 2006,
CoreBrand analyzed 66 companies, all but eight of which show a clear
inflection point in their familiarity and/or favorability scores in
the year of the activist campaign.
‘We’re trying to identify inflection points that start a trend going
in one direction or another,’ Gregory explains. ‘It’s not necessarily
that activism is driving it – it may not even have caused the
direction – but it’s an identifiable point in time that brings
attention to an issue, and that attention can continue’ beyond the
activist campaign.
Eight of the 66 companies analyzed proved inconclusive, with
insufficient current data to see a trend, leaving a base of 58
companies in the study. Thirty-six (62 percent) of those reflect a
major inflection point of their corporate brand in the year of the
activist campaign; 15 (26 percent) show a small impact on the
corporate brand; and six (10 percent) indicate no impact from the
activist campaign.
Based on the results, CoreBrand finds that shareholder activism is
likely to have a significant impact on a corporate brand. Of the 36
companies with a large inflection point:
·
19 show significant long-term declines in favorability, indicating
perceived quality of the company
·
Seven show modest improvement in favorability
·
Two show improvement in familiarity, while favorability remains flat
·
Eight have mixed results showing short-term gains followed by declines
in the corporate brand.
The second conclusion reached by the research is that the impact of
investor activism on the corporate brand appears to be long term.
Third, the impact can be significant and longer-lasting on the
downward side, while the upside of investor activism tends to be
modest or short-term in nature. Fourth, even when there is modest
upside impact, the long-term trend is often negative.
Long-term decline in favorability
CoreBrand provided three case studies to exemplify various insights
about the impact investor activism has on brand equity value. Two of
the companies – Electronic Arts and Marsh & McLennan – are from the
group showing long-term declines in favorability, while the third
company, Family Dollar Stores, is from the group where there was
modest improvement in favorability.
For Electronic Arts (see below), BEV as a percentage of market cap
declined from 3.2 percent to 0.9 percent and the value of the brand
plunged from $207 million to $70 million between 2011 and 2013. These
changes mirror declines in favorability and familiarity, as well as
revenue, even as the company’s market cap grew from $6.6 billion to
$7.1 billion over the same time period.
Declines in perception of management and overall reputation in 2006
overrode an essentially flat investment potential between 2006 and
2010 to initiate the overall decline in favorability. Erosion in
Electronic Arts’ brand from 2011 to 2013 identifies a failure of
management to see an opportunity to increase enterprise value by
adjusting through brand, CoreBrand concludes.
The name Electronic Arts has very low familiarity for a company whose
major brands, EA Sports and EA Games, are so widely known. The company
could have created billions of dollars of shareholder value by simply
changing its name to EA as early as 2006, according to CoreBrand. It’s
the corporate brand that matters when companies confront a proxy
battle, Gregory emphasizes.
Unfortunately, the details of the proxy battle announced in May 2011
by Relational Investors in pursuit of a board seat don’t seem relevant
to the drop in Electronic Arts’ brand value, which had already begun
in 2009. It could be that Relational, having witnessed a $641 million
loss in the fourth quarter of 2008, layoffs of 17 percent of the
workforce in late 2009 and other signs of trouble, saw weakness in
management that it believed it could exploit to win a board seat,
though why it waited two years is unclear.
The proxy fight, however, was reportedly undisclosed until a
settlement had been reached with Electronic Arts’ board, giving
Relational the option to place one director on the board. It’s
unlikely the activist campaign by itself caused the brand value’s
continued decline from 2011 to 2013, so there were probably other
factors.
Elsewhere, Marsh & McLennan’s revenue declined slightly between 2007
and 2010, while market cap increased from $11.3 billion to $14.9
billion (see above). Both familiarity and favorability dropped and, as
a result, the BEV percentage of market cap fell from 6.2 percent to
2.9 percent.
Along with the decline in BEV percentage, in dollar terms, brand value
fell from $702 million to $514 million between 2007 and 2010, despite
a 31.9 percent rise in market cap. Had familiarity and favorability
not declined and had the company maintained its BEV at 6.2 percent of
market cap, the value of the brand should have climbed to $924 million
in 2010. Marsh is a case of creating shareholder value at the expense
of brand health.
Improvement in favorability
The third case study, Family Dollar Stores, demonstrates one of the
few examples where brand value improved as the result of an inflection
point in the year of an activist campaign. In March 2011 Trian Fund
Management made an unsolicited takeover offer for Family Dollar. The
company rejected the offer of $55-$60 per share and quickly adopted a
poison pill to protect itself from hostile bids. It later granted
Trian one board seat in exchange for a cessation of its takeover
efforts.
Family Dollar’s favorability score had begun to trend up from being
flat at 46 in 2007 and 2008 to 48 in 2009 (see opposite), at least a
year and a half before Trian made its move. But the uptrend became
more pronounced in 2011 after the hostile takeover bid and poison
pill, with favorability rising from 50 to 55 and continuing its ascent
to 63 by 2013. Similarly, familiarity – which had been inching up one
point per year between 2008 and 2010 – rose three points to 77 in
2011 and extended its gradual increase through 2013.
Looking at a breakdown of the three dimensions of favorability,
CoreBrand notes that investment potential had been gradually rising
from 2003 while overall corporate reputation, and perception of
management in particular, flagged. It’s possible that Trian’s 2011
announcement may have spurred subsequent growth, although the chart
indicates that the other two attributes were already in an extended
uptrend by 2010.
Mirroring the favorability trend, Family Dollar’s BEV percentage, in a
steady uptrend since 2003, had an inflection point in 2011, when the
uptrend steepened and kept rising until 2013 before flattening out at
14.5 percent. BEV rose from $721 million to $1.07 billion in the same
period. Family Dollar appears to be a case of well-managed shareholder
activism, where lethargy in favorability was ‘activated’ by what seems
to have been a well- orchestrated effort to create value and
ultimately sell the company, according to CoreBrand.
Rival discount retailer Dollar Tree offered to buy Family Dollar on
July 28 this year for an enterprise value of almost $9.2 billion, or
$74.50 per share, a 23 percent premium over the closing price on
Friday, July 25. The Wall Street Journal reported that the offer came
amid veteran activist investor Carl Icahn’s push for a sale of Family
Dollar and threats to replace the board after CEO Howard Levine
overhauled the sales strategy earlier this year.
Other effects
There are cases where BEV changes for a company don’t clearly track
its favorability trend. Marsh’s favorability stabilized at 68 points
in 2010 after falling from a peak of 78 in 2007, the year KJ Harrison
& Partners submitted a proposal for the 2008 annual meeting
recommending that the company spin off the Kroll and Mercer units to
enhance shareholder value. But BEV percentage continued to decline,
from 2.9 in 2010 to 0.2 in 2014, which suggests an even longer-lasting
adverse impact on brand equity value than the favorability change
indicates.
While favorability had stabilized, the continuing decline in Marsh’s
familiarity score from 26 in 2010 (compared with 39 in 2007) to 17 in
2013 seems to account for the continued drop in brand power, according
to CoreBrand.
Weyerhaeuser’s BEV percentage continued to drop from 2006 to 2014,
even as favorability bottomed out in 2010 before rebounding by 2013 to
above its 2006 level. In 2006, Franklin Mutual suggested the timber
company modify its corporate structure to become more tax-efficient by
converting to a real estate investment trust. Like Marsh, the
subsequent decline in Weyerhaeuser’s BEV percentage appears to have
tracked along with familiarity, with the increase in BEV percentage in
2011 corresponding to a rebound in familiarity that same year.
A company’s familiarity score may fall after an activist event if, as
a result of the event, there are enough changes in corporate structure
or assets that business leaders surveyed are no longer certain what
transpired, says CoreBrand.
Fifteen activist campaigns for 12 companies led to proxy fights.
CoreBrand calculated average changes in familiarity, favorability, BEV
percentage and BEV dollar amounts for four groups of companies
according to the outcome of the proxy contest – management win,
dissident win, split and settlement/concession. Most of the averages
indicate declines in all scores. The only average gain is in BEV
percentage change for companies that settled with dissident
shareholders.
Biogen Idec was one of the few companies that had declines in
familiarity and favorability after the activist campaign announcement,
which may indicate the company stopped communicating after the
activist event. That’s one option a company can choose, especially if
it lacks confidence in its story – ‘but it’s a self-fulfilling
prophecy,’ warns Gregory. ‘If you don’t communicate, a negative will
fill that vacuum’, ensuring a decline in brand equity value.
More companies are paying attention to their CSR positioning, but
Gregory sees those efforts being wasted when companies don’t take care
to nurture their brand. Not only is that potentially costing them
customers and market share, but it’s also having an impact on employee
morale and media coverage. When corporate brand value is being
preserved, ‘you’re getting more positive stories from the media, and
not having to spend as much on PR,’ he concludes.
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