Financial Approaches to Valuing Brands

Abstract

The financial community seriously woke up to the importance of intangibles and brands in the 1980s when some large financial transactions were completed on the back of well-established brand portfolios. The leveraged buy out of RJR Nabisco, a US consumer goods business with a diverse portfolio of tobacco and food brands, by KKR, a leading US based leveraged buyout firm, for US$31 billion in 1989 was a landmark transaction based on the steady cash flows of the target company’s brand portfolio. It remained the largest leverage buy-out until November 2006 when the same group joined the US$33 billion buyout of US hospital chain HCA.¹ Also, in the 1980s a number of significant M&A transactions emerged involving companies with strong brands such as Nestlé buying Rowntree for UK£2.8 billion (five times its book value) and Philip Morris acquiring Kraft General Foods for US$12.9 billion (six times its book value) with about 90 percent of the value represented by the company’s brand portfolio.² These transactions did not only show that intangibles such as brands are valuable business assets they also highlighted the increasing value gap between companies’ book and market values. In the 1980s the price to tangible book value of the S&P500 started its long-term ascent.