Brand Lost in Private Equity Haste

The trade unions hate them.

Investors love them.

The German Government refers to them as "heuschrecken" or locusts.

The Economist describes them as a “superior model of capitalism”.

They own big brands like Iceland, Kwik Fit and United Biscuits and they may soon get their hands on even bigger ones like Sainsbury’s and Boots.

Private equity is suddenly everywhere.

 The concept is relatively straight forward: a partnership of business brains raises a load of investment capital from pension funds, wealthy individuals and their own pockets. Then they go out and buy companies, often taking them private in the process. As soon as possible they then sell the company or float it on the stock market and make a sizeable profit for everybody involved. The term private equity simply connotes the fact that the acquired companies are not publicly listed on the stock market, but rather privately owned with money raised from investors. The absence of public shareholders also means that the industry is notoriously secretive about its aims, operations and profits. 

Essentially, there are two different types of private equity. The first, venture capital, focuses on buying a stake in a small business and then injecting extra capital and expertise into the organisation in order to grow its value. But it’s the other form of private equity, in which a fund acquires a large existing company, which is currently making all the headlines. 

Central to any private equity acquisition is the premise that the purchased company can be sold for more than it was acquired for in a relatively short amount of time.

The problem comes when you begin to explore exactly how this profit can be realised. In some cases, notably New Look or Travel Lodge, the private equity fund actually recognises that the brand has a lot more potential than its current owners appreciate. Money is invested into the brand and the company grows. Unfortunately there are also other, frankly more reliable methods, to make a profit on your newly acquired company. You can identify a big brand like the AA which has lots of overhead and infrastructure and a relatively captive consumer base. You can then fire 3,000 staff without having any immediate negative impact on sales but a very positive impact on profitability. You then make an enormous performance based profit and even more money when you off-load the newly streamlined company which may or may not prosper in the future. I

t really is a tale of two equities. On the one hand private equity can represent a very beneficial force for brand revitalisation and investment. On the other it can resemble the old asset stripping era of the 1980s. Confusingly, most private equity funds can play either role depending on which will deliver the most profit. There are no black hats and white hats in this game, just lots of grey suits.

 I’ve worked for private equity firms several times during big brand acquisitions. I can happily report that, like every other major player in the corporate finance world, they pay extraordinarily well and have not got the faintest clue about branding or brand equity. Indeed, whenever the dreaded ‘B word’ comes up noses wrinkle and eyeballs head skyward. Pace is the big danger for brands in this new era. The success of private equity depends upon rapid acquisition, fixing and divestment. Often the whole process can take a matter of months. It’s all too easy to forget about brand equity during these frenetic ownership cycles.

Our challenge is not to debate the relative merits of private equity ownership. Let’s leave that to the unions and the politicians. Instead, let’s help our new masters appreciate (in both senses of the word) the value of the brands that they have acquired.  

PE starts to PR before things get FUBAR

With government and union antagonism growing the private equity funds, traditionally a silent industry, are on the PR offensive.

Private equity firms try to buff image in Europe

By Julia Werdigier

Monday, March 5, 2007

LONDON: European private equity firms are trying to rescue their reputation.

Under attack by politicians who called them "asset strippers" and "locusts" and by trade union leaders accusing them of cutting too many jobs, private equity firms are offering to hold meetings with their fiercest critics and have contributed £5 million, or $9.8 million, to set up a foundation to share part of their wealth.

In the latest effort, a group of European buyout firms said Thursday that David Walker, a former chairman of Morgan Stanley in Europe, would lead a task force to draw up a code of conduct for disclosure. The unstated goal, analysts say, is to prove wrong those who say there is too much privacy in the private equity world.

The stakes for the industry are rising, particularly with rumors circling about bidding for the British retailer J Sainsbury. There is also said to be interest in some Airbus factories, and firms are looking at Continental, the tire maker based in Germany, and Vodafone Group, the telecommunications company.

Some analysts and bankers add that support from trade unions and politicians is vital for the private equity industry to continue to raise record levels of money and finance takeovers, which totaled $234 billion in Europe last year.

"Ignoring the debate would make it seem private equity firms are insensitive," said Scott Moeller, a professor at Cass Business School in London.

Paul Kenny, who leads the British trade union GMB, put the industry under new pressure last month, demanding that the firms be more open and calling on Gordon Brown, chancellor of the Exchequer, to clamp down on a tax benefit GMB says is available to buyout firms.

The union represents about a thousand people who were laid off at the Automobile Association, the roadside car-repair company in Britain, after the private equity firm Permira bought it. In Britain, about three million people, or 19 percent of private sector employees, are working for companies controlled by buyout firms.

The calls for stricter tax laws have worried some private equity executives.

"The outcome that would concern the industry is if the playing rules change to the extent that it would reduce our ability to produce returns," said Colin Taylor, head of DLJ Merchant Banking Partners in Europe.

With France holding presidential elections in April and Prime Minister Tony Blair of Britain preparing to step down before September, some private equity executives have become alarmed that they could become scapegoats in a political debate in Europe.

Private equity firms turned to Walker, who has held senior posts at the Bank of England, the British Treasury and Lloyds Bank, now part of Lloyds TSB Group.

About 25 private equity firms have signed on to the disclosure initiative, including Blackstone Group, Kohlberg Kravis Roberts and CVC Capital Partners. The three firms said last month that they were considering a bid for J Sainsbury. With a market value of £9 billion, J Sainsbury would be the biggest leveraged buyout in Europe and the first takeover of a company in the FTSE 100 index.

Damon Buffini, head of Permira, and others worry that the private equity industry's success has made it a target, and they acknowledge the need for outreach. "We recognize that the industry's success has led to growing and legitimate interest in its activities," said Rod Selkirk, chairman of the British Venture Capital Association.

Analysts have criticized buyout firms for cutting too many costs and laying off too many employees at companies they own to make the books look good ahead of an initial public offering.

Some point to the example of Debenhams, the department store operator. CVC led a group of private equity firms that bought Debenhams for £1.7 billion in 2003. They delisted the shares, added debt, sold stores, cut costs and jobs and then went public last May, making 3.5 times their investment. For those who bought Debenhams shares, the investment has been less lucrative; shares have dropped 14 percent since the May initial public offering.

Private equity firms argue that they create value. According to their industry association, the number of employees at British companies backed by private equity firms has risen about 9 percent a year in each of the last five years, compared with an average 1 percent increase at publicly traded companies that are part of the FTSE 100 stock index

Private Equity Parent

Here's the Telegraph's list of the 10 biggest brands owned by private equity funds. Did you know all of these were in the hands of PE?

Top 10 private equity-owned firms in UK

Here it Comes....The Shift to Digital (and PR!)

Th 4 A's Conference is the biggest gathering of the Year for US communications agencies. Its been the site for some almighty speeches over the years and this year was no exception. Mich Mathews, senior VP-central marketing group at Microsoft, announced that the vast majority of their half a billion annual marketing spend will be digital within 3 years.

According to Advertisijng Age (see below) Mathews signalled a shift to digital channels by 2010 and.. and here is the interesting part, a bigger emphasis on PR.

It appears that the plurality of the communication space is finally increasing big clients attention towards PR. In the global pie chart of marketing spend 2010 we will almost certainly see PR and interactive/digital increasing at the expense of traditional advertising and direct marketing.

LAS VEGAS (AdAge.com) -- It may be dumping hundreds of millions of dollars into an old-school TV campaign for its latest operating system, but Microsoft expects it

will move the majority of its ad budget into digital channels within three years.

"We're actually pretty confident that by 2010, the majority of our media mix will shift to digital," Mich Mathews, senior VP-central marketing group at Microsoft, said in an address at the American Association of Advertising Agencies Media Conference and Trade Show here.

Already big web spender
In 2006, Microsoft spent $447 million in measured media, according to TNS Media Intelligence. The media-spending tracker said 18% of that was spent on internet advertising -- far and away above the national average. Still, it laid out $69 million on network TV, $33 million on cable, $118 million on magazines, $67 million on business to business and $29 million on national newspapers.

Ms. Matthews said the shift is simply an effect of following consumers, who are spending more and more time on the web and becoming more important in deciding how marketing messages are distributed. She followed Procter & Gamble Co.'s Jim Stengel in citing the importance of consumer control to the marketing process, calling the epoch the "Era of Customer Participation."

As proof of how much consumers have inserted themselves in the marketing process, she cited the hundreds of mash-ups of a popular ad for the hot-selling "Gears of War" video game for Microsft's Xbox system.

More collaboration
Ms. Matthews said the key to navigating all the change is getting collaboration among various disciplines. "I want everyone in the room at the same time, including the PR guys," she said.

Her speech was notable for its many mentions of public relations, not something you'd expect at a media conference. In pointing out the importance of earned media, she mentioned Dove's much-ballyhooed "Campaign for Real Beauty," which has been expert at amplifying ad executions with PR by tying them into news events. 

But I Thought they Were Crap? HBOS. RBOS. Barclays. Lloyds TSB.

Compare the results of the recent Millward Research on the Net Promoter Scores of some of Britain's biggest banks with their profits and you are in for a shock.

All the worst performing banks are reporting the biggest profits. Eh?

The reason is BAD PROFITS.

Over the last few days we have seen some of the big British banks announcing very impressive profits. On Wednesday HBOS, the bank formed by a merger of Halifax and Bank of Scotland, reported a 19% rise in annual pre-tax profit to £5.71bn. Their namesake brand The Royal Bank of Scotland did even betterl with a 16% increase in profits to £9bn.

We also had Barclays  achieving a 35% rise in pre-tax profits to £7.14bn. Meanwhile Lloyds TSB's profits were up 11% to £4.25bn.

But if you were reading Marketing last week you would have discovered that all these brands were featured among the VERY LOWEST when it comes to their Net Promoter Scores. This all important metric provides a single score (out of 100) for how positive its customers are about the company and its offerings. 

In the case of RBS (+15), Halifax (+12), BOS (+10) Lloyds TSB (+8) and Barclays (-3) all five were among the lowest 20 net promoter scores in Britain. One quarter of the worst performing marketing orientations, poorest customer focus, service delivery. Barclays was actually dead last!

 If you know anything about Net Promoter scores you will know that the scores are very strongly correlated to business performance. And yet in the case of our three banks we apparently have low Net Promoter Scores, and very big profits. How is that possible?

 The answer is what Fred Reichheld (below), the inventor of Net Promoter Scores, calls Bad Profits. When a company makes too much money for its shareholders by extracting value from its customers it makes a lot of money - in the short term. But sit tight. Screwing value from customers, rather than making value for the company by making value for customers, will eventually come back and get you.

Lets come back and check the results in 5 years time. By then the poor service, unhappy customers, acquisition costs, bad word of mouth, and customer churn that go hand in hand with low Net Promoter Scores will kick in.

Unless some of these companies take some of their enormous profits and return them back to their customers, the people who pay for everything, in the form of better products and services. Not advertising or a swanky new brand campaign - more service staff, lower charges, better value.

Watch this space.