Victor Fleischer, Professor at UCLA
Branding is an unappreciated feature of contract design. Corporate finance scholars generally assume that consumers focus on product attributes like price, quality, durability, and resale value. But consumers choose brands, not just product attributes. This Article claims that the legal infrastructure of deals sometimes has a branding effect – that is, an effect on the brand image of the company. Deal structure affects the atmospherics of the brand.
I explore this link between deal structure and brand image by examining the Google IPO from last summer. From a traditional corporate finance perspective, the goal of a properly structured IPO is to overcome the information asymmetry between issuer and investors and to lower the cost of capital. From this perspective, the success of the Google deal is questionable. Few would call the deal elegant or efficient. But this is not really what the Google IPO structure was about, or at least it is not the full story. When Google structured its IPO as an auction, it reinforced its image as an innovative, egalitarian, playful, trustworthy company. Talking about Google’s IPO makes you want to use Google’s products. By that measure, the deal was a success.
I also examine the branding effects of three other deals: the Ben & Jerry’s public offering in 1984, which sold stock only to Vermonters; Steve Jobs’s contract with Apple, which entitles him to cash salary of exactly one dollar; and Stanley Works’ failed attempt to reincorporate in Bermuda to minimize its tax liability.
Finally, I conceptualize the role of branding as it relates to deal structure. Certain legal events in the lifecycle of the company – what I call branding moments – provide opportunities for firms to signal company values. I also three types of companies – cult companies, integrity companies, and social responsibility companies – that are in the strongest position to take advantage of the branding effects of corporate deal structuring