Branding a Merger: Implications for Merger Valuation and Future Performance

Abstract

The choice of post-merger corporate branding is a major strategic decision. It serves as a signal about the positioning and strategic intent of the new merged entity to the key stakeholders—customers, employees, and investors—affecting their ensuing behavior. We investigate the financial markets reactions and future operating performance implications of this decision. We classify merger transactions into three groupings according to the post-merger corporate branding: assimilation (the identity of the target company is discarded and it is rebranded with the acquirer’s name and symbol), business-as-usual (both firms continue to operate under their own corporate names and symbols), and fusion (elements of both corporate brands are maintained in a new brand). We find significant differences in the merger valuation across branding strategies. The stock market reaction to fusion is more positive than to assimilation and business-as-usual-branded merger announcements. Our analyses of post-merger sales, operating costs, and survival rates help explain these differences in merger valuation. Our analyses address selection and endogeneity issues, allowing for a causal interpretation of these findings. They provide support for the “brand-is-an-asset” versus the “signaling” perspective on the role of brands. Interestingly, we also find that the well-documented M&A mis-pricing phenomenon is primarily driven by the business-as-usual-branded mergers.

Keywords: Corporate Branding, Mergers, Event Study, Calendar-Time Portfolio Analysis, Selection Bias, Treatment Effects Models, Endogenous Treatment Effects

JEL Classification: M31, G34