20 January 2016 | MOF Team
In 1982 Chelsea football club was bought for £1 by Ken Bates. When Ken Bates sold it to Roman Abramovich in in 2003, the latter paid £140m for the club and has since sunk a stupendously large amount of money (said to be around £1bn) into Chelsea FC for no obvious financial return.
I am always a little fascinated by the amount of money paid when a business is acquired. As with any human endeavor there can be a myriad of motivations for purchasing, a wide range of circumstances in which the transaction takes place, and therefore vastly different valuations for companies in differing industries and sectors at different moments of time. Trying to make sense of why someone has paid so much or so little for something can be extremely challenging.
The answer always lies in the value of the brand, and just as interestingly what value means to you as a purchaser. Many would say that Abramovich undertook a vainglorious exercise in economic irrationality, but I would not subscribe to this view at all……
Probably the greatest investor of all time, and one of my heroes, is Warren Buffet. The ‘Sage of Omaha’ is the most prominent of a group known as value investors. They define value as the ability to buy an asset at a reasonable price, in the context of it generating consistent (and preferably increasing) cash returns over a long period of time. Therefore this focus on economic returns makes it pretty easy to be prescriptive about valuation and hence brand value.
So let’s look at what Buffet would say you would pay for Matter Of Form versus Coca-Cola. It’s actually a little depressing for the author who has a vested interest in the former- you would pay something like 3-5 times operating profit for Matter Of Form but up to 20 times for Coca-Cola.
The reason being that a service business like Matter of Form has only one real asset (outside of our computers and wildly expensive meeting room table)- being our wonderful pool of hugely talented and motivated people. But history dictates that over time people are fragile, capricious, and prone to move on. In other words the essence of the company and brand is fragile and impermanent. Contrast that with Coca-Cola. If everyone on the management board left I doubt it would have much impact on the number of bottles of Coke sold. There is such huge fixed distribution, and such long-established consciousness in the minds of consumers all over the world, that it would take a lot more than that to knock Coca-Cola off track.
But value is not just about ability to harvest cash in the medium term. Why is Gold so valuable when it doesn’t actually generate a yearly return like shares or property? Put simply it is because of its unique scarcity value, and therefore its reliability as a medium of exchange and store of value.
Chelsea football club is not so different- there is only one Chelsea and only a handful of clubs like it in the world. And it just so happens that it is based in one of the world’s great cities, in a comparatively safe and prosperous country, with a pretty predicable tax regime. For reasons I would rather not explore here that can be of immense use to a Russian resource Oligarch, and certainly worth the £1bn invested capital to that particular individual.
It’s the same with newspapers. They are actually incredibly challenged business models in the digital age, and yet I guarantee that if the Guardian or Telegraph were put up for sale tomorrow they would be snapped up immediately, and for amounts that Warren Buffet would find hard to justify. Because of course they are unique as tools of influence and power.
Prestige assets or trophy assets can be worth every penny. It depends on what is your understanding of the value of the brand, and this is not always obviously financial.
At Matter of Form we deliver exceptional craftsmanship in the context of brand and digital experiences. We believe the moments in which brands and people come together change business; and that even the smallest interactions are more impactful than most companies or consumers truly recognise. Moreover combining brand and technology is unquestionably powerful in unlocking value from a business, however you define value.
As an example we work with a lot of brands in the luxury and premium space where, often, eye-watering prices are paid for prestige brand names. The brand value is locked up in a sense of exclusivity, quality and luxury. It is your choice on how to exploit the value of the brand after purchase. You may sit tight, deliberately sell less, and use clever marketing to further increase this sense of exclusivity. Or you may tastefully begin to unlock further financial value through e-commerce or the marketing of new product lines.
Brand and value mean different things to different people– and the journey of unlocking value is neither predictable nor prescribed. I am just pleased that we are lucky enough to participate in this journey, and add value to a host of inspiring brands.