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AB InBev’s offer to purchase competitor SABMiller for $106 billion casts a spotlight on a flawed accounting rule that may confuse investors about the post-deal worth of companies that make acquisitions.
If the AB InBev-SABMiller deal is approved by regulators and concluded, AB InBev will be obliged by accounting standards for business combinations to provide a breakdown of the intangibles that comprise the whopping $86.2 billion premium being offered.
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Roger Sinclair, 1938 – 2016
Both companies have leading brands in their portfolios, and brands account for much of SABMiller’s appeal to AB InBev. Another notable intangible that will figure in is the relationships that SABMiller has built up with trade customers that ensure the brands have optimal exposure at the point of sale.
But it’s the accounting for brands that is our concern in this article.
Roger Sinclair, inaugural research fellow of the Marketing Accountability Standards Board, and Kevin Lane Keller, renowned author and brand academic, coined the term “The Moribund Effect” to describe a strange anomaly that arises from M&A accounting. That is, once the deal is done, the value of SABMiller’s brand intangibles at the date of transaction will be measured and added to the balance sheet of AB InBev.
This value, carried in the company’s financial statements, will be tested annually for impairment. But even if AB InBev achieves great success with its new brands, any increase in their value will not be shown in the accounts. It will appear as though the acquired brands have been shelved, become inactive, or even become obsolescent. Investors might gain the impression that AB InBev has ignored these brands, even left them to die. Over time, they may appear increasingly moribund.
We propose that finance partner with marketing to put this situation right. Companies must ensure that any gains in value are measured and communicated both internally and externally, because any gain in value will almost certainly add to shareholder wealth.
“The Moribund Effect” highlights an aspect of financial reporting that is broken and should be fixed. The term refers to what happens when a company is acquired and the brands it owns are identified and measured as part of the premium paid to buy the business.
The acquired brands are valued at the time of the transaction and the value at that date is carried on the balance sheet until a reason emerges to remove it. That might not happen for a decade or more. Or ever. That’s what the relevant accounting rules say.
To all intents and purposes, readers of the annual accounts will assume that no value has been added to these brands. If value were added, it theoretically would be reflected in the stock price. But that cannot happen, because the relevant accounting standards do not permit a gain in value to be shown in the accounts. The brands therefore appear to be “moribund,” which, in its primary sense, means “close to death.”
This is an opportunity for marketing to step up and partner with finance to fix the issue. By conducting an annual update of the brand value and writing a comment on strategic actions taken, they could report together, in the Management Discussion and Analysis (MD&A) section of the annual report, information that accounting ignores: that the brands acquired at the time of the deal have gained value (or have not). The former information, provided to investors and lenders, would have an effect on the share price and help them understand marketing’s role in creating shareholder value.
The MASB
The Marketing Accountability Standards Board was formed in 2007 with the following mission: “Establish marketing measurement and accountability standards across industry and domain for continuous improvement in financial performance and for the guidance and education of business decision-makers and users of performance and financial information.”
And with this modus operandi: “Setting the measurement and accountability standards that visionary leaders in Finance and Marketing rely on to guide investment decisions for enterprise value.”
MASB has a number of projects designed to improve the manner in which finance and marketing cooperate. Leading these are:
Brand Investment and Valuation Project (BIV): Over a four-year period, multi-disciplinary teams from across a spectrum of companies and organizations collaborated to devise an empirically based brand investment and valuation model to assist companies in their investment decisions.
The model integrates a consumer behavioral measure of brand strength that predicts market share, sales volume, and future cash flows. A time-value-of-money, present-value calculation measures the brand value. This number will vary as marketing impacts consumers and their preferences.
Companies suffering from the Moribund Effect can employ the model to track the true performance of acquired brands. The model is currently being tested internally at Miller-Coors to help determine where to invest (across the brand portfolio as well as other investment opportunities).
Marketing and Finance Pairs: Each year the MASB hosts two summits, in February and August. The participants represent a range of industries and disciplines. The MASB’s charter members include PepsiCo, Kimberley Clark, General Motors, Miller Coors, ESPN, Nielsen, and Millward Brown, among others. Academic members hail from such business schools as Wharton (University of Pennsylvania), Darden (University of Virginia), UCLA, Columbia, Stern (New York University), and Loyola Marymount.
A major section of the program is devoted to presentations by finance and marketing pairs that report on how the two functions are collaborating within their companies. A feature of these talks is the honesty with which the partners tell of both success and failure. Here are three summary statements from the many marketing/finance pairs who have spoken at MASB summits:
“The relationships between marketing and finance that seem to work the best are the ones where both parties recognize they need each other to achieve their desired outcomes.” — Travis Colvin, head of marketing supply chain, Kimberly-Clark
“We’re now starting to work with our marketing teams — the budget owners — to evaluate their annual plans and assess what they’re doing with those dollars and what return we expect to get.” — David Barclay, director of brand finance, Quaker Foods (a PepsiCo subsidiary)
“A couple years ago our Decision Analytics team said we can’t continue to look at brand health as our [key performance indicator] — we need a team that can monetize that return. Finance is now looking at every dollar against a certain threshold of return.” — Kerry Welsh, director of global marketing analytics, Citicorp
The sense that delegates to the MASB summits take away is that there is a very definite move to bring finance and marketing closer together, both internally and across firms, with measurement standards that tie marketing activities to financial performance.
Summary
The Moribund Effect will not go away soon. But it presents a golden opportunity for the finance function to partner with the marketing function to fix a problem with financial reporting that, until now, has been largely ignored.
Roger Sinclair, PhD., who was appointed in May 2015 to the post of Inaugural Research Fellow of the Marketing Accountability Standards Board, passed away on Jan. 21.
Meg Henderson Blair, president and CEO of the Marketing Accountability Foundation, contributed to this article.
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