According to Interbrand’s annual ‘Best Global Brands Report‘ published in October 2014, at $119bn, Apple remains the most valuable brand, closely followed by Google at $107bn. These findings follow WPP’s ‘BrandZ Top 100 Most Valuable Global Brand‘ report published in May, which concluded that Google had overtaken Apple, and Brand Finance’s brand valuation report published in February.
For professional valuers, independent brand valuations are an increasingly in-demand advisory assignment, whether for commercial, M&A advisory, financial reporting or litigation purposes. Given this, to what extent do these research conclusions around ‘value’ correlate with the fundamental principles of business valuation?
The International Valuation Standards Council defines basis of value as “a statement of the fundamental measurement assumptions of a valuation”, but with separate definitions for ‘market value’, ‘fair value’ and ‘investment value’; quantifying ‘value’ can be both wide-ranging and complex.
Consumer v investor
For consumers, brands and companies are often synonymous despite many companies being the ultimate owners of several, unrelated brands. Perceptions of ‘value’ are more likely to be impacted by the popularity of specific products/services and quality/delivery standards associated with an individual brand (either from prior experience or expectation).
Conversely, while quantifying the value of brands will be a key consideration for the purposes of M&A transactions (particularly pricing), the extent to which market investors attribute value to component brands is unclear. Investors will typically place less emphasis on individual brands, instead favouring company and market metrics such as operational performance, financial position, total shareholder return (TSR), earnings per share (EPS) and income and capital growth prospects.
Brand Value v market value correlation?
Unsurprisingly, the most valuable brands identified in recent industry reports come from sectors with high consumer awareness such as technology, retail, food/beverages and automotive. Whilst awareness and ‘value’ are not necessarily intertwined, the amount of correlation between individual brand values to the ‘market value’ of the ultimate parent company is worth consideration, as arguably small-scale or inexperienced investors may elect to acquire shares in companies with whom they can relate.
To test this, we have considered a sample of listed companies that own brands that figure prominently in the published research. Are year-on-year movements in brand values indicative of similar movements in performance at the parent-company level or is value driven by other factors? Is there any correlation within specific sectors?
‘Coca Cola’ represented approximately 45 per cent of the overall parent company’s average market capitalisation, despite the company also offering products under well known brands such as Fanta, Sprite, Powerade and Schweppes, which will also have value and contribute to overall company performance. This contrasts with ‘Starbucks’ and ‘Pepsi’, where there appears to be greater segregation between brand and company value.
As shown below, Coca-Cola’s brand value is 4.3x that of Pepsi, significantly higher than the corresponding market capitalisation multiple of approximately 1.3x. However, multiples are broadly aligned for technology and retail companies.
Per Interbrand’s report, the brand values of Google and Samsung both increased 15 per cent year-on-year, despite contracting fortunes when assessed by market capitalisation and performance. For example, over the last twelve months to the current date, Google’s TSR and EPS growth of four per cent and nine per cent respectively exceeded those of Samsung (down 13 per cent and 14 per cent respectively). The movements in the brand values of ‘Nike’ and ‘Adidas’ are broadly supported in TSR terms with Nike’s 27 per cent growth comparing favourably to Adidas’ decrease of 28 per cent, even though both companies have continued to report strong EPS figures.
Pepsi’s brand value increase marginally exceeds that of Coca-Cola, which is supported by stronger recent TSR and EPS growth. Conversely, whilst Amazon’s brand value increase (25 per cent) outweighs Ebay’s (nine per cent), this is not supported by other metrics with Ebay’s nine per cent TSR growth exceeding Amazon (14 per cent decrease) and both shares showing declines in EPS.
While adverse publicity can impact brand and company value – as shown by Tesco’s recent share performance – internal and external factors such as management, competitor performance and macroeconomic conditions will also impact value. Ultimately, brands that are high-profile and valuable to consumers, can also be owned by underperforming companies, as evidenced by brands often being a key asset acquired from corporate insolvencies due to their ‘goodwill’ value.
Equally, many high-performing companies, particularly in the technology sector, will currently own niche products/services with unheralded ‘brands’ that could become the stars of tomorrow.
Related Article: How much is a business worth?
Jon Steward is a manager at BDO Valuations.
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