Cover Story: Acquiring the Socially Conscious Company

The hullabaloo surrounding the sale of Ben & Jerry’s Homemade Inc. drove home the point that people value companies that support a cause. Because the company had become somewhat of a paragon of virtue, feelings ran deep as supporters across the country feared that the likeable little ice cream maker would be scooped up by a big conglomerate and become lost among the company’s numerous brands. But after all is said and done, if Unilever, the buyer, can deliver on its commitments to expand on Ben & Jerry’s community values and social mission and bring the company’s message to consumers worldwide, the deal could very well become a model for future acquisitions of companies known as much for their good deeds as their products and services. Certainly, the deal requires Unilever to delicately balance the concerns of all stakeholders and have a clear understanding of exactly what Ben & Jerry’s is, does, and stands for. If Unilever is able to deftly manage those elements of the acquisition, it should be able to reap the many rewards of owning a socially responsible company, including enhanced reputation, a loyal customer base, unique product positioning, dedicated employees, and superior brand image. As the battle over Ben & Jerry’s was playing out, Mergers & Acquisitions spoke with experts in the areas of brand management and reputation assurance to gather their thoughts on the social responsibility movement and the crucial issues that buyers of mission-oriented companies must keep in mind when they’re doing these delicate kinds of deals. Corporate social responsibility has grown dramatically in recent years, and companies of all sizes and from a wide range of industries have been developing innovative strategies for marketing their missions as well as their products. In some cases, companies also have been encouraged to adopt or expand social responsibility efforts as the result of pressures from customers, suppliers, employees, communities, investors, activist organizations, and other stakeholders. In other cases, companies are looking for a competitive edge. Increasingly, businesses are dealing with brands that in the past had differentiated themselves through “functional” product differences, such as taste, efficacy, unique ingredients, or packaging, says Raymond Perrier, global director of brand value management at Interbrand, an international branding consultancy. But now that manufacturers use similar technology and move products through the same distribution channels, functional differences among products are eroding, he explains. In this environment, he adds, manufacturers must work harder to establish a point of difference for their products, and many are finding that a good way to truly differentiate a product, and provide it with long-term, sustainable competitive advantage, is to adopt a business strategy that integrates a social or environmental mission into the brand and the organizational identity. Although “socially responsible” is a present-day label for describing civic-minded businesses, the roots of ethical, values-based organizations can be found in some of the country’s great, old, family owned companies, says Barbara Ley Toffler, an independent consultant who formerly headed Arthur Andersen’s Ethics & Responsible Business Practice. “Such companies as Cummins Engine, Hallmark, and Levi Strauss have long had a reputation for being extra-responsible companies with strong family values systems that drive their business to a good degree,” she says. Today, almost every company now feels a need to meet some basic level of social responsibility, she notes. Yet, the experts agree that a company that has some social or environmental policies in place is quite different than a company that embraces social responsibility at the deepest level and creates a distinctive market position for its products based on its values system and social mission. In acquisitions of more “radically mission-oriented” companies, acquirers must fully understand the key elements of these types of organizations, including: * Culture; * Values and mission; * Reputation; * Customer base; * Stakeholder groups; and * Market positioning. Culture A thorough cultural analysis of the potential target is an important part of any due diligence assessment, and its importance in an acquisition of a socially conscious company is even more critical, because most likely the potential target is a high-profile company with an entrenched culture and corporate mission and very loyal customers who have high expectations for the organization, says Bruce Cohen, a director at Swander Pace & Co., a San Francisco-based strategy consulting firm specializing in the food, beverage, and consumer packaged goods industries. Yet, few companies do cultural due diligence, observes Katie Paine, president of Delahaye Medialink, a Portsmouth, N.H.-based research firm specializing in reputation measurement, branding, and communications. “For companies like Ben & Jerry’s that have been so public about their culture, you don’t need to do a lot in the area of a cultural due diligence. But there are many other companies out there that are socially responsible that are not as public about their culture and in those cases you need to find out exactly what you’re dealing with,” she says. For example, are you acquiring a company that includes Earth Day as a company holiday? A company where employees wear only sweatshop-free or child-labor-free clothing to work? An organization in which office supplies come only from companies that don’t sell paper products whose source is old-growth forests? What might seem like quirky little behaviors to an insensitive acquirer could be manifestations of the firmly rooted beliefs of the company and its employees. Organizations have distinct cultures and ways of doing business that may seem strange to another firm. Culture issues are difficult to handle in any deal, and are even more so in acquisitions of mission-oriented companies, in which culture often develops out of the company’s core social mission and employees’ belief systems. There is no exact paradigm for handling this sensitive issue, but the experts agree that the acquirer must keep in mind that often the company’s culture is one of the things that make it special, and it may even be a selling point for the company’s products. “Remember what happened to Snapple,” warns Perrier. “It emerged as one of the first fruit-based drinks, and there was something idiosyncratic, almost homespun, about it in comparison with the Cokes and Pepsis. It had an image of We’re just good ole Snapple. We’re not a big corporation, we’re actually quite likeable.’ ” When Quaker Oats acquired the brand one of the key mistakes it made, he says, was that it did not understand that one of the things that made Snapple valuable as a brand was its “specialness.” That “specialness” was undermined by making the brand part of a large corporation, because part Snapple’s uniqueness was that it had distinguished itself from the big companies, he notes. Values and Mission The term “socially responsible” encompasses a broad range of social missions, everything from philanthropic ventures, such as Newman’s Own, to companies that are against animal testing, such as Aveda, to manufacturers of environmentally friendly products, like Seventh Generation, to the more “radically” cause-oriented companies like Ben & Jerry’s and The Body Shop. The experts concur that an acquirer must understand the target’s values, how it chooses to fulfill its mission, and whether the company’s core business is in conflict with its own. A company whose social mission is largely based on corporate giving programs is vastly different from one that is against animal testing, in which case a company must manage the integrity of its entire supply chain, and trace all ingredients back to their original source, in order to stay true to its values, remarks Alistair Jackson, director of values and vision at The Body Shop USA. Acquirers need to realize just how diligent an owner of a socially responsible company must be when it comes to preserving its values, says Perrier. He relates a story about The Body Shop, whose brands his company has valued. “The company was seeking a franchisee for the Southeast Asian market, and it looked at Inchcape Motors Ltd. in Singapore, a well-established distributor of branded goods which is involved in a broad range of businesses, including timber logging. In that part of the world, elephants often are used in logging. The company realized that Inchcape’s view of working with the environment and with animals is very different from its own views and it was clear that there would never be a comfortable cultural accommodation between the two companies, so the deal never went through.” Another important consideration, says Cohen, is that while most acquirers strive for increased growth and enhanced shareholder value in their deals, not all cause-based companies are growth-oriented; in some cases, the corporate mission may be even more important. “Some companies may not be interested in being a half-billion-dollar brand, which is what most big companies are looking for, so there could be some conflict between the acquirer and target right there,” he says. “Here in the Bay Area, we are in the hotbed of cause companies’ and we see that for many companies, staying true to their vision is as important, if not more important, as double-digit or triple-digit growth.” That’s not to say that socially conscious organizations lack bottom-line concerns, Cohen adds. Socially responsible companies must be profitable before they can make contributions to society. Most U.S. consumers expect companies to make a profit, but they also want companies to become actively involved in a social cause, according to the 1999 Cone/Roper Cause-Related Trends Report. “Causes are important not only to the companies themselves but also to their customers. The quickest way to undermine an acquisition of a socially responsible company and create negative feelings would be to cut funding for the cause or to make a dramatic change in the target’s mission” says Cohen. Toffler agrees, saying, “Often the social efforts of these companies are very public. That makes it very difficult to make changes, because you don’t want to alienate any of your stakeholders, including the charities that you’ve supported in the past.” Yet, as a company evolves, it is possible, and in some cases preferable, for it to reevaluate its mission, says Perrier. “What we’ve seen in a brand like The Body Shop is an ability to mature and redefine the whole idea of social responsibility. If the kinds of campaigns that the company runs today were the same as they were 15 years ago, we as consumers would get bored. The company has been successful in redefining its territory. It remains edgy, a challenging brand,” he comments. He emphasizes that although the company has supported a broad array of causes over the years – from protecting endangered species to preserving rain forests – its core values have remained the same. Most experts would agree that an acquirer should refrain from making major changes regarding the mission of the target and the causes that it supports, at least in the early years following deal completion, in order to avoid resentment among any major stakeholder groups. Achieving the target’s vision will likely require a new kind of thinking within the larger corporation. Reputation Closely linked to the mission of a socially conscious company is the company’s reputation. Warren Buffett truly understood the value of a company’s good name when he said, “It takes 20 years to build a reputation and five minutes to ruin it.” Reputation begins to erode when a company’s performance doesn’t live up to stakeholders’ expectations, says Dr. John Browne, director of reputation assurance at PricewaterhouseCoopers in London. Incidents such as Nike’s problem with sweatshop labor can tarnish the reputation of even the finest companies. In acquisitions of socially responsible companies, a good deal of a company’s value can be tied up in reputation – an intangible but very real asset. Recently, there has been a major shift in people’s attitudes toward brands, where a brand is now becoming synonymous with a company’s reputation, says Browne. According to measures that his firm uses to estimate reputational capital or reputational value, Browne says that the value of a brand’s reputation can account for anywhere between a third and two-thirds of the market capitalization of the company. In cases where brands are closely tied to their company’s reputation, sales can be jeopardized if the company’s reputation becomes tainted. One of the most difficult aspects of maintaining the reputation of a mission-oriented company is ensuring that the company’s values are upheld throughout its entire value chain, says Perrier. For instance, the problem with having a policy against animal testing, he comments, is that the company has to trace its ingredients back to their original source. “In the case of The Body Shop, the company was buying ingredients from suppliers that had assured the company that the ingredients hadn’t been tested on animals when in fact they had purchased sub-ingredients from other suppliers that had done some animal testing.” After all the publicity and uproar over that dilemma, The Body Shop changed its original claim that the products had not been tested on animals to the claim that the company is against animal testing, Perrier adds. The acquirer’s management team would be wise to focus on proactively managing and protecting the reputation of a socially responsible target, the experts say. Particularly in these types of deals, it is critical to move away from a crisis-driven approach based on reputation repair to an approach in which reputation is managed and enhanced on a daily basis. Customer Base Consumers increasingly are integrating their social and environmental values into their purchasing choices and are seeking to support companies that deliver on their core values. Generally, mission-based companies have developed strong bonds with their core consumers, Perrier states. Brown adds that most consumers of socially responsible products are at a point in their life where they can spend quite freely, and price sensitivity is not a big concern for them. In the U.K., he says, many consumers are willing to pay more for organic foods and people are looking to buy clothes that bear a seal of accreditation that the garments have been produced under fair labor conditions, rather than snapping up the cheapest imports. “An acquirer must really understand the consumer demographics supporting a niche brand or company,” says Cohen. “Usually, there is a good amount of heavy users with these kinds of products, and the 80/20 rule says that those 20% are driving 80% of the revenues. Acquirers of these kinds of companies certainly don’t want to end up doing anything to alienate those consumers.” Making big changes in the target company’s mission or products would not be a good idea, says Jackson. “In our case, I certainly believe that our customers would migrate away fairly rapidly if there were obvious signs that our brand’s core values were no longer being upheld. Our customers tend to be quite vocal. We get waves of calls from people if we have a product that is over-packaged or contains an ingredient that they think is less than environmentally responsible.” Stakeholder Groups When it comes to m&a, especially in acquisitions of socially responsible companies, says Browne, it is crucial for an acquirer to take into account the needs and concerns of all stakeholders, including employees, shareholders, suppliers, customers, communities, and activist groups. An acquirer must not underestimate the importance that a deal will have on these groups, the experts say. Just look at the hostile reactions that erupted from the community where Ben & Jerry’s is based and the concern of the group of socially responsible business people that had made a bid for Ben & Jerry’s. Judy Wicks, owner of Philadelphia-based White Dog Cafe, a restaurant known as much for its social activism as its cuisine, was involved in that unsuccessful buyout effort. She felt so strongly about the acquisition, she says, that she and numerous other civic-minded business owners and professionals, in support of Unilever’s decision to uphold Ben & Jerry’s values and mission, have pledged to adopt certain corporate policies and work toward achieving various goals within their own organizations. For example, they pledge to contribute 7.5% or more of their pre-tax profits to social change and to work toward labor, trade, and environmental practices that “narrow economic inequities and help restore the earth.” In addition, Wicks notes, participants will strive to change corporate charter laws so that a company’s board of directors “need not measure all of its actions strictly in terms of financial return to stockholders, much less be forced to sell a company only to the highest bidder.” “Vision, mission, and values are important, but where the rubber really hits the road is at the employee level,” asserts Paine. Jackson agrees, saying, “In these types of companies there is an internal branding’ issue to consider. Increasingly, in this very competitive employment market, people are looking for jobs in which they can express their personal values,” he says. One of the main reasons that many employees join socially responsible companies is because they want to be able to bring their values to work with them. In managing the many needs of a diverse group of stakeholders, the experts recommend that an acquirer consider meeting and working with community leaders and major stakeholders, signing long-term contracts with suppliers to demonstrate commitment, and relationship-building with target employees to help combat fear and resentment and encourage employee “buy-in” to the new organization. Market Positioning In many cases, the products of socially conscious companies are premium products that sell in specialty channels, such as natural foods stores. It might be tempting for an acquirer to consider buying a company whose brands are distributed regionally or in highly specialized channels, with the thought of expanding distribution or pushing the products through new channels. But the experts warn that an acquirer must think long and hard about whether it has the ability to transition niche consumers to the mainstream and whether the acquired brands would even be appropriate to sell in mass-market channels or on a wide basis. According to Cohen, most cause-oriented companies have a premium market position, which helps to drive sales. “Consumers embrace the brand at that position and that helps the company sustain higher sales. If an acquirer were to stray from that position, the 80/20 rule would tell you that quite a bit of the value would be chipped away.” “Sure you can reposition a brand, but it’s a risky proposition. If you attempt to move the brand, you’d better know what you’re doing. It’s not to say that it can’t be done, it just would cost you a heck of a lot of money, and that would drive down your ROI,” he adds. On the other hand, he notes, if a company were to move a brand away from its core consumers, the company could gain the ability to capture new customers, he explains. “It would be a very risky move but a potentially viable one. If a P&G, for example, got ahold of a company like Tom’s of Maine and blew it out to 99% ACV, it could have a huge business on its hands. But you’d have to assume that a lot of the original consumers would stop buying the products.” In that case, he says, one exception might be if an acquirer bought a domestic brand and repositioned it for overseas markets, where the current positioning might not be as meaningful to those new consumers. In any event, Cohen says, buyers of socially responsible products generally are sophisticated consumers, and an acquirer should consider retaining the target’s marketing team and current marketing knowledge. “You have to be careful about going in and eliminating the marketing people, who really understand the brand.” End Note It is important to keep in mind that more so than in any other type of deal, an acquisition of a socially responsible company should not be viewed as a financial engineering exercise, say the experts. A potential buyer must have a solid, strategic rationale for doing the deal and a clear understanding of the workings of this unique type of company. “Staying the course” seems to be the best strategy for a buyer, at least initially, Cohen says. “You shouldn’t buy a socially responsible company that has a distinctive position in the marketplace if you plan to strip it, squeeze out costs, or make drastic changes in the brand. You will lose more value faster in a situation like that than you would in a regular acquisition.”