If Bigger Is Better, Why Are Companies Breaking Up?

While Splits and Acquisitions May Make Short-Term Financial Sense, too Many Companies Are Forgetting the Core Brand

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In Mountain View, Calif., Google is making plans to buy Motorola Mobility for $13.5 billion.

Four miles north in Palo Alto, Hewlett-Packard is making plans to dispose of its personal-computer division, which last year had revenues of $40.7 billion. (With the departure of CEO Leo Apotheker, H-P might be changing its mind, although according to The New York Times, "the board still endorses the strategy change.")

Is it better to buy or to sell? Is it better to get bigger or to get smaller? What would they say at the Harvard Business School? Are there management principles dealing with this issue?

Apparently not.

Take Hewlett-Packard.

After a decade of buying (Compaq for $19 billion, EDS for $13.9 billion, 3Com for $2.8 billion, Palm for $1.2 billion, 3PAR $2.1 billion), the company is thinking about selling its crown jewel, its PC business.

And recently, H-P announced its intent to acquire U.K. software-maker Autonomy for $10.25 billion, news which triggered a 20% decline in H-P stock. (Last year, Autonomy had just $860 million in revenues.)

All of these moves might make sense from a financial point of view, and they might even be logical.

But many of them don't make sense from a branding point of view.

What's a Hewlett-Packard?

It's a hardware brand. The world's best printer brand and the world's best personal-computer brand.

Software brands like Autonomy and IT services brands like EDS don't belong in a hardware company.

Sure, Autonomy is currently very successful, but years from now, after living in a corporate tent called "Hewlett-Packard," the brand is likely to be considerably weaker.

In the consumer field, a corporate tent plays almost no role in the consumer's choice of brands. Who makes Cheerios? Or Hellmann's mayonnaise? Or Aunt Jemima pancake syrup?

Who knows? Who cares?

But in the business field, it's different. Business executives care about their companies, usually even more their company's brands.

After all, when you work for a company, you're loyal to the company, not to the company's brands.

Meanwhile over at Google
At the same time Hewlett-Packard is trying to get into the software business, Google is trying to get into the hardware business with the purchase of Motorola Mobility.

Does this make sense from a branding point of view? What will Motorola smartphones be called?

"Google?" A name that means "software."

Or "Motorola?" A name that means "also-ran." At last count, Motorola had just 2.4% of the smartphone market.

Or "Android?" Smartphone companies that use Google's Android software would scream to high heaven.

Or a new name? It's awfully late in the game to try to launch a new smartphone brand, even with the financial resources of Google. (Some reporters have claimed that Google is buying Motorola purely for its patents. But that doesn't make sense. Why buy a cow if all you want is the milk?)

Many business-to-business companies downplay the value of corporate brands, or they think of corporate brands are only something to attract potential investors. Brands might impress consumers, goes the thinking, but in our business it's the specs that count. Brands don't matter very much.

But they do.

The rise of BtoB brands
Over the past three or four decades, one of the biggest revolutions in marketing has been the rise of powerful business-to-business brands. There used to be only one brand with the cachet of IBM. Now there are dozens.

Look at the strength of the Big Four, the accounting firms that handle the vast majority of audits for publicly-traded companies: Deloitte, PwC, Ernst & Young, KPMG. Why is it almost impossible for a No.5 to join the pack?

Lack of auditing skills? Or lack of brand power?

Many, many other BtoB categories are similar. A few powerful brands form a barrier that is almost impossible for a newcomer to penetrate.

How do you build a strong corporate brand? The same way you build a strong product brand. You stand for a word or a concept in the mind.

Apple stands for innovative computer products. Not software.

If the software business is so much more profitable than the hardware business, according to the thinking at Hewlett-Packard, how come Apple, which is still mostly a hardware company, is the most valuable company in the world?

Hardware at Hewlett is only marginally profitable because the H-P brand doesn't dominate the PC category the way Apple dominates its categories with its iPod, iPhone and iPad brands.

Would Apple buy a software company like Autonomy? Even though Information Week calls Autonomy "The world's hottest enterprise software company."

The world's hottest enterprise software company doesn't belong in a hardware tent.

Selling and buying your way to success
Oddly enough, the key decision that paid big dividends for Hewlett-Packard was the 1999 spin-off of its test -and-measurement operations under the Agilent name.

What was left was a computer-focused company. Then there was the 2002 acquisition of Compaq which created the world's largest personal-computer company.

Everything else detracted from the power of the Hewlett-Packard brand. Currently, H-P has 18% of the global PC market.

No wonder its PC profit margins are low. The company's biggest problem is how to increase its market share in order to become the dominant PC brand. Like Oracle in "relational" database software. And Cisco in "networking" equipment. And SAP in "enterprise resource planning" software.

Is it better to buy or to sell? Either way can be helpful provided you keep your marketing strategy focused on building a corporate brand. Not on assembling an unrelated group of companies which may be profitable today, but won't necessarily fit together under a corporate tent tomorrow.

In spite of all the evidence to the contrary, the driving force in most corporation is "growth," not on building a strong corporate brand.

Questions CEOs are most likely to ask: How do we get bigger? Who can we buy? How can we line-extend our brands?

If business were a football game, the fans would be shouting "Grow! Grow! Grow!"

Al Ries is chairman of Ries & Ries, an Atlanta-based marketing strategy firm he runs with his daughter Laura.
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