Brands in M&A. Do brand-heavy acquisitions lead to value destruction?

Abstract: Brands are often considered to be a critical asset for companies, and according to previous research, this asset class represents almost 9.8% of the value in merger and acquisition (M&A) transactions. With a global M&A transaction value of over 4 trillion USD in 2007, it is interesting to note that the effect of brands in M&A has not attracted more attention within research, yet. This thesis aims to shed light on the effect brands have in M&A transactions, and more specifically identify whether acquisitions of relatively “brand-heavy” companies earn negative returns or not. To research this topic, an event study is carried out, where the cumulative abnormal returns (CAR) for acquirers in connection to M&A transaction are examined. The critical variable examined is the “brand-heaviness” of the targets, calculated based on historical advertising expenditures. The study includes 142 deals between listed companies in the US between 2002 and 2007.The results of the study indicate that there is a significant negative relationship between abnormal returns and “brand-heaviness”. The results suggest that acquisition of relatively “brand-heavy” companies destroys value to larger extent than M&A activity in general.