Brand Family Values

The debate about accounting for intangible assets obscures the progress brand valuation has made in becoming a common language for finance and marketing.

After more than a century in the food business, RHM knows a thing or two about what it takes to make a brand a household name. Thanks to catchy advertising and years of careful management, many of RHM’s brands are so well known in Britain they have become part of the social fabric—to say Bisto gravy in the company of Britons is to evoke the “Bisto kids,” characters that appeared in advertising for the better part of the twentieth century; while RHM advertising campaigns in the early 1970s not only launched the Hollywood careers of film directors Ridley Scott (Gladiator) and Alan Parker (Mississippi Burning), but also made its Hovis bread into a brand that is as British as Chanel is French or Coca-Cola is American.

But RHM not only became part of advertising history, it also was the central player in a recent chapter of financial history. Back in 1988, when it was called Rank Hovis McDougall, the firm famously became the first publicly listed company to record non-acquired brands as intangible assets on its balance sheet, sparking off years of discussion, government studies and accounting-standards pronouncements in the UK and elsewhere.

While accounting for brands and other intangibles has been receiving plenty of attention lately, the experience at RHM since the late 1980s reflects how finance chiefs in many companies have come to use brand valuation for practical purposes, transforming it into a common language for finance and marketing

According to Michael Schurch, current CFO of RHM, the company didn’t expect the attention it received in 1988. More than anything else, the original exercise to assign numeric values to its brands was part of its bid to fend off an unwelcome advance from an Australian asset-stripper, Goodman Fielder Wattie (GFW). “There is a bit of a strange history at RHM, going back to the Goodman Fielder Wattie bid,” says Schurch. “It was a defensive mechanism in a takeover situation … and it worked.”

GFW’s bid came at the tail end of a wave of deals in the 1980s in which asset-strippers had acquired companies with strong brands at bargain-basement prices. One such deal was closed shortly before GFW’s bid for Rank Hovis McDougall. In 1986 Hanson Trust paid £2.3 billion for Imperial Group, then promptly sold off the new acquisition’s undervalued food portfolio for a total of £2.1 billion. It was left with a tobacco business that was hugely cash generative, having paid a net price of just £200m for it. It signalled to many managers of highly branded businesses at the time that accountants and stock analysts were undervaluing their greatest assets.

To avoid that “valuation gap” problem in the GFW bid, RHM turned to Interbrand, a consulting firm specialising in brand building. Having never been asked to value a portfolio of brands before, Interbrand began working with academics at the London Business School to develop an early set of metrics based on brand strength.

With hindsight, Jan Lindemann, currently managing director of Interbrand’s global brand-valuation practice, says the metrics were unsophisticated, but they were a start. They came up with a figure of £678m for RHM’s portfolio of brands—the tangible assets already on the balance sheet had been valued at less than £400m.

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