Ahead of the Confederation of British Industry (CBI) annual meeting this Wednesday, the group is reportedly seeking £3 million from members to avoid financial collapse. Additionally, it appears to be discussing future collaboration with manufacturing trade group Make UK – including a potential merger.
All this comes after a challenging year for the CBI, which has included allegations of sexual misconduct and toxic workplace environments by current and former employees.
The potential Make UK tie-up raises interesting questions about the management of reputational risks in corporate transactions, particularly where brand and name recognition is a significant part of the attraction for potential partners or buyers.
Before his troubles, the CBI’s public profile was prominent and its views were widely shared. In particular, it gained a strong public voice following the Brexit vote and in the national debate over the shape of the UK’s relationship with the EU. However, after the public allegations were made earlier this year, the CBI faced a number of troubles, both reputational and, reportedly, financial, as members had their memberships canceled or suspended.
So then, if a partnership or merger is successful, how will Make UK assess and manage the potential contagion risk to its brand?
Firstly, Make UK will probably want to do extensive due diligence – lifting the corporate ‘bonnet’ of the CBI and seeing what kinds of issues might be hidden. Do the claims being made by current or former employees arise from prior inappropriate behavior? Can persons associated with or working for CBI face further investigation? Is there any substance behind such allegations and has the organization taken them seriously? What steps are being taken to ensure that similar issues do not arise again (such as a change in governance?) In the corporate world of mergers and acquisitions, it is important for potential partners or buyers to understand these risks as early as possible, and this It is likely that Make UK will do the same here.
Secondly, once the risks have been identified and investigated, what should Make UK’s plan be to deal with any negative PR risks that may result from engaging with the CBI? A key challenge will be how they explain the potential benefits of any arrangement to key stakeholders – employees, members, suppliers. Will the benefits outweigh the potential risks in building the UK’s own brand?
Another key challenge will be to assess whether a rebrand of a merged entity will be effective. Or will people be able to connect the dots, making any re-brand redundant or useless? We just recently saw Twitter rebrand as ‘X’ – will this re-brand do anything to draw users back, when the brand is still tied to bad press around Musk’s acquisition and changes in the business Is? It’s probably still too early to say, but it’s an interesting question to consider in the case of both X and CBI.
Third, could a deal be structured in such a way that legal liability associated with the CBI remains limited, thereby enabling Make UK to absorb the ‘positive’ elements without taking on additional risk? Although these types of structuring considerations are common in corporate M&A transactions, questions will arise as to how effective any solution can be in isolating or eliminating the associated reputational issues.
The corporate world provides interesting examples of how reputational issues can (or cannot) be dealt with.
Corporate history shows that some reputational toxicity is fatal. For example, the Weinstein Company – previously a successful independent film studio – was unable to protect itself from the financial and reputational damage related to its association with its eponymous founder and the serious allegations against him. However, note that the company’s bankruptcy brought opportunity, Lantern Entertainment acquired most of its assets and film library in 2018, seemingly bypassing the negative relationship with Weinstein himself.
It will certainly be interesting to see how the negotiations between the CBI and Make UK progress, especially as the CBI’s financial troubles mean a resolution appears to be needed soon.
The bottom line is – yes, mergers can work. But any deal will require a very careful balancing act on both sides. With the amount of public scrutiny and scrutiny a potential deal is under, negotiations could very well collapse in the event of a misstep.
Hamish Perry, Partner, and Mike Barrington, Senior Associate, are in the corporate team of law firm Charles Russell Speechlys.