Close-Up: Live Issue - How do venture capitalists affect brand values?

Marketing spend can often be the first casualty of cash deals. Bob Willott explains. Hardly a month goes by without press reports of a famous brand being offloaded by a major corporation - either to the existing management team or to financial institutions who will introduce new management. The family run Weetabix business was sold to Latimer Acquisitions last December. Soon afterwards, Unilever sold off its Ambrosia brand.

Almost invariably, such deals are funded in part or whole by a special breed of money men called venture capitalists. And often big money is involved. But does the brand benefit? Do venture capitalists really understand marketing and product development? Do they recognise the need to spend on product development on top of the cash outlay incurred on the deal itself? Or are they simply looking for a fast buck?

Venture capitalists get involved in two main types of deal. Either a large corporation wants to divest itself of a non-core or underperforming brand, and asks the venture capitalist to assemble both the finance and a new management team to acquire it. Or the incumbent management feels it could do better if freed from the constraints being experienced under the current brand owner and persuades the venture capitalist to support a buyout bid (a variant of this type of deal arises when a founding owner actively seeks to sell the business on to the next generation of management).

In either case, the main commodity brought to the party by the venture capitalist is a pile of cash. And the main reward that the venture capitalist seeks from its involvement is a bigger pile of cash, and in the not-too-distant future.

Most such deals are highly "leveraged", meaning that the finance put up to buy the brand is predominantly in the form of loans. And loans have two potentially worrying obligations - the obligation to repay by a predetermined date and the obligation to service the loans with regular interest payments.

For example, at Premier Foods - which along the way has acquired brands such as Ambrosia, Typhoo, Crosse & Blackwell and Hartleys with financial backing from the US venture capitalists Hicks, Muse, Tate & Furst - the cost of finance had reached about £70 million per annum by 2003 and there would have been no profit left if it hadn't been for a useful tax rebate.

By comparison, Premier's advertising and promotional expenditure was £29 million.

So if venture capitalist-backed companies cannot boost profits to more than cover the increased finance costs, marketing costs are likely to be pruned, thereby making it difficult to take bold and costly brand-development initiatives designed to build much stronger growth potential in the longer term.

This seems to pose a serious danger. A brand may have a strong historical reputation, but have been losing ground in a highly competitive market before disposal. Inevitably there will be a temptation to assume the remedy lies in a better quality ad campaign (normally assumed to require an immediate change of ad agency) or some simple smartening up of the packaging. Indeed, such initiatives often produce short-term improvements in sales. But unless there is a more thorough root-and-branch analysis of the brand's potential and the need to make more radical innovations over a period of time, there will be little lasting financial improvement beyond any short-term cost-cutting and sales boosting.

But are venture capitalists really interested in the long-term anyway?

Typically, the venture capitalists want to get out at a profit within five years and they will drive the business strategy single-mindedly with that objective. Anyone with even a second-rate MBA can find ways to cut costs and improve operational efficiency when a brand is acquired from a major corporation, and that's often all to the good. If that's not enough to make the numbers support a profitable exit, advertising budgets can easily be adjusted downwards in the short term if necessary.

Those close to the brands and their owners confirm there is a stark dichotomy between the time horizons that drive the venture capitalists and those that ensure the value of their brands are enhanced. Some even go so far as to question whether real value enhancements are achieved during the short period of ownership by venture capitalists. When Hicks, Muse, Tate & Furst decided to float Premier Foods on the stock market earlier this year, its prospectus showed it had spent almost £400 million on the intangible value of the brands it had acquired.

Yet whichever way you look at it, group sales had hardly changed over the past three years and the internal return on the investment was extremely modest.

One brand that has made a refreshing impact since its owner RHM was acquired by the management and venture capitalist Doughty Hanson & Co for £1.1 billion is Hovis. Within a year of the ownership change, the brand was successfully relaunched in June 2001, re-interpreting its traditional "goodness" proposition in a way that was considered more relevant to families today. The packaging was covered with baked beans and cucumbers and a new, brightly coloured cartoon-style advertising campaign introduced by DDB. The taste and the texture of the bread itself were improved. Hovis also launched Best of Both in 2001 - a new bread that looks and tastes like white bread, but has all the goodness of brown.

But, like Premier Foods, RHM is saddled with massive interest costs of £119 million per annum on loans of £1 billion that stem primarily from the venture capital purchase. Those costs more than wiped out any operating profit the group made in 2002 and 2003, leaving the group's balance sheet with a negative net worth of £58 million. Something will have to give soon. On its own, the imaginative re-launch of Hovis is unlikely to breathe sufficient life into the group as a whole. How long will it be before the bean-counters almost certainly begin to stifle the flow of financial oxygen required to fuel any top quality long-term marketing efforts elsewhere in the group?

At Umbro - another Doughty Hanson investment -- the financial position is less strained, mainly because a lot of the business is conducted through licensees who bear about 40 per cent of the group's £43 million marketing costs and provide much of the working capital required. All that Umbro has to do is collect the royalty cheques. This spared the company from the weight of financing costs that has burdened many other venture capital-funded operations and also suggests that some serious thought has been given to marketing. Even so, Umbro has made very little profit in recent years, a situation not helped by the bankruptcy of its North American licensees and a fine imposed for price-fixing in the UK.

Umbro's marketing expenditure may not yet be under too much pressure, but if other, more heavily indebted venture capital-backed companies are not provided with the resources and long-term commitment they need in order to build more valuable brands, they will find it very difficult to recruit and retain top marketing talent.

The recruitment challenge will be made no easier by the relatively limited experience that many venture capitalists will have of managing a successful consumer product marketing programme themselves. For some, the only thing that money and marketing seem to have in common is the initial letter.

And when discussing the return on investment, too much emphasis is likely to be placed on immediate payback than on lasting earning power.

Small wonder that the advertising industry feels it is on a different wavelength to venture capitalists. And if the present trend continues, only the money men will come out smiling. Their short-term gain will be the brand values' long-term loss.

Bob Willott is the editor of Marketing Services Financial Intelligence ( and a special professor at the University of Nottingham Business School.


BRAND/ACQUIRED BY DATE Co sales Venture Funding Exit date

(1) pounds capitalist co-ordinator

Ben Sherman/

Ben Sherman Group 2000 70m(2) 3i Sale 2004


Umbro 1999 310m(3) Doughty Hanson

& Co IPO 2004


Premier Foods 1999 773m Hicks, Muse,

Tate & Furst IPO 2004

Jaffa Cakes/

Finalream (UB) 2000 1,332m Cinven, PAI

Partners None -


Premier Foods 2003 773m Hicks, Muse,

Tate & Furst IPO 2004


RHM Group One 2000 1,700m Doughty Hanson

& Co None -

Golden Wonder/

Golden Wonder 2000 140m Bridgepoint

Capital Sale 2002



Acquisitions 2003 380m Hicks, Muse,

Tate & Furst None -

Yell (BT sub)/

Yell Group 2001 774m Apax Partners/ IPO 2003

Hicks, Muse,

Tate & Furst

(1) Latest annual sales of acquiring company where available.

(2) Estimated.

(3) "Wholesale equivalent" includes notional turnover of licensees.

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