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NEW YORK — With $120 billion itching to be spent by investors, it’s no wonder “merger mania” is the latest catch phrase on Wall Street.
But buyer beware! Valuations are all over the map. And investors new to the retail and fashion sectors may be unaccustomed to the cyclical nature of these businesses. Still, there are some bargains in the market right now, and some great brands.
During a WWD Financial Forum roundtable earlier this month, participants weighed in on current market conditions and other topics, including how investment bankers help clients grow their business by finding the right backer as well as the strategic mind-set of financial players when they’re evaluating a deal.
The roundtable was hosted by Berns Communications Group, a business communications firm specializing in retail and fashion, and moderated by WWD.
Representing the investment banking community were: Kenneth A. Wasik, managing director at Houlihan Lokey Howard & Zukin; William S. Susman, president and chief operating officer, Financo Inc., and Mark S. Vidergauz, managing director, The Sage Group. From the private-equity sector, the participants were: Norman Alpert, managing director, Vestar Capital Partners; David A. Landau, partner, Apax Partners, and Bodil M. Arlander, partner, Bear Stearns Merchant Banking.
WWD: What sectors within fashion and retail do you think have the most desirable candidates for investment?
Susman: A couple of areas within fashion are getting a lot of attention. I would include that whole surf space. Quiksilver has been a leader in that market and there are a lot of other names out there. Another is the growth brands, the small $15 million to $100 million firms that could become $500 million revenue companies with the right kind of financial partner to help them institutionalize the business and grow.
Wasik: The luxury goods side is where the cycle is very exciting now. There are also a lot of discussions with the mall-based ‘tween’ retailers where I think you’ll see a natural cleansing of the market.
Vidergauz: In addition to those sectors, there will be some activity in the accessories space and I think there will probably be some activity in the denim space.
This story first appeared in the February 14, 2005 issue of WWD. Subscribe Today.
WWD: What is your criteria when deciding whether or not to represent someone in a deal?
Susman: Companies have to have realistic expectations. They also at their core have to have real businesses, real brands, real franchises. It is from that understanding of what their goals and objectives are that we can then work with them.
Wasik: Number one: Management teams are more important than they’ve ever been. The second thing is that thematic investing is back in vogue again. Before companies could get bought and sold with great financials. Now what people are really looking at are well thought out business plans. Does it hold up in all economic conditions? There are just so many more moving pieces in the companies that are being bought and sold that to have a really true differentiating business plan is a work of art.
Vidergauz: We place a lot of emphasis on the brand. We want to see that reflected in the gross profit margins. One needs to get an understanding of what the buyers are looking for, both strategic and financial. The largest strategic buyers are looking for businesses that can become $500 million or $1 billion dollar businesses. So when we look at young companies, we try to assess whether they have that potential.
WWD: How important is the brand when compared with a great management team or top-notch financials? Is the brand still the most important part of the equation?
Wasik: Brands are funny things. They take forever to build and they take a while to destroy, but you can destroy a brand quicker than you can build it. For investment bankers, the greatest value we have is not necessarily selling a company off its financial statements. It is really about selling off its brand because this is such a unique category.
When you look at others such as aerospace or the industrials, they sell off financials. We sell off brands, so it’s paramount that you can show not only what the brand does now, but where you can extend it. Having a management team behind it is very important, but your starting point is the brand.
Vidergauz: The term ‘brand’ is probably used a little too loosely by all of us. Most of what we deal with is probably labels that have had some success. Now when we see a company that is growing, has strong appeal and the business is in the contemporary space, that is what we consider brand potential and that is what is attractive to a lot of people.
WWD: How do you identify potential buyers?
Vidergauz: We spend a lot of time studying the buyers, both financial and strategic. We’re constantly looking at what they’ve done, what they claim to want to do and we’re constantly speaking to them. We think we have a good sense of what they’re looking for and that is a very big part of our assessment whether to take on an assignment or not. We need to understand where this is headed and we need to know on day one who the other buyers may be, both on the financial and strategic sides.
Susman: We’re trying to avoid pulling a book of 100 pages and mailing it to 1,000 of our closest friends. The approach needs to be more thoughtful and more tailored to the buyer.
Why could this make more sense for you, is what you try to answer. Strategics will be at different points internally, but financial buyers will look at properties differently. It is important to understand how they look at properties and make a case as to why this particular one makes for a compelling thesis.
Wasik: We have somewhat of a perfect storm working with the positives in the financial markets. These are great conditions to sell companies. We have all-time low interest rates, excess amount of capital looking for a home and a stock market that is appreciating. If you know the buyers’ universe — and that means you really have to be in front of the buyers constantly to know their strategy — then you will know when your clients should be selling.
WWD: Do you pursue only one track for your client or, when possible, are firms typically marketed in multiple ways?
Susman: It is very tailored to each situation. Yes, we do have to think about more than one track to the extent that there might be a public market alternative. I think you always have to offer clients choices. But you have to remember that the average transaction size of an acquisition is in the $200 million to $300 million range. These are not companies by their nature conducive toward the public markets yet.
WWD: What is your view regarding the advantages of a financial buyer versus a strategic one?
Vidergauz: It depends on the owners of the business and what they’re looking for going forward. Some want to continue managing the business. They feel that they have the skills to do that and what they’re really looking for is capital to take them to the next level, as well as perhaps some board-level advice.
A lot of our clients are at the point where they need help in a very fast-growing business. There are parts of the business that they like, such as merchandising, and parts that they don’t like, such as back office. The larger acquirers are at the point where they are pretty expert in the back office in sourcing and production and that lets the entrepreneur do things they like to do most, which is the front office, such as design and merchandising.
Wasik: A strategic buyer can pay more for a company than a financial buyer because the latter are bound by the constraints of financial returns. But that is offset by ownership and control going forward. A financial buyer generally will allow the management team to stay. But for a strategic buyer looking for that brand to be put into a bigger distribution channel, the management team is of lesser concern.
WWD: What is your firm’s criteria for deciding whether or not to pursue an investment or acquisition?
Landau: We’re really looking for the right management team to back companies with very strong consumer propositions and an opportunity for growth. Wherever that finds itself, we’ll go.
Had you told me a couple of years ago that we would invest in Phillips-Van Heusen to buy Calvin Klein, I would have said ‘Are you crazy? Why would we ever do that?’ But an opportunity came along. I’ve known PVH’s ceo for a very long time and I know how strong he is and his team. It’s a great company with a great infrastructure buying the world’s most recognized designer brand, which we believe was undermanaged. We thought the ingredients were right and we did it.
After we did that, we said ‘This is great, but we’re probably not going to do it again. The last thing we would do is go invest in an outerwear brand that’s highly seasonal. That would be stupid.’ Then Spyder Active Sports came along. It had a strong team and a lot of opportunities. The specifics of that situation were unique and we thought it was compelling. We’re looking for the team, the underlying consumer proposition and growth opportunities. Where that takes us we’re comfortable with. We don’t look for what’s hot or what’s not.
Arlander: We look at anything within retail. Critical to us is management. Without the right management team it’s difficult to get excited about it.
Equally important is what I call ‘a reason for being’ and that is the first question in my mind. Why is it in existence and what is its proposition? There can be two key reasons. One can be a brand that is strong enough and something that the consumer wants. Or you can have a situation, the case with Aeropostale, where you have a company where the brand was so strong, and that was why we thought the company would be so successful. They had identified a niche in the market where they had a value proposition and a consumer that wasn’t being addressed by anybody else and that allowed them to build a brand. The same thing with New York & Co.
Alpert: We consider almost anything. We’ve been in various forms of this space for about 20 years now dating back to our early investment in Avondale Mills in 1986. People say now is the best time to sell and I completely agree. The area we’ve had a lot of success with is in revitalizing brands, so we’re very brand-centric. We look at brands where we think we can improve either with new management or with some of the techniques used by other management teams we’ve worked with before. That’s the way we determine where the opportunities are, and we also focus on situations where we think we can get to the finished line.
WWD: How do you value a company? Is it a multiple of times sales or times EBITDA?
Landau: It is not times sales for sure. People look at a variety of things. You look at the multiple of EBITDA, the multiple of earnings or net income, and then what you think the company will be generating down the road and how would that be valued.
Today, if you want to invest in or acquire a successful business, you have to pay up. The art of our business in my view has changed. It is no longer how do you get a great deal for a successful company, but when do you pay up and when don’t you.
Now that’s one strategy for successful businesses, which is what I focus on. And so the considerations involve ‘Are you getting swept away and doing stupid deals?’ or ‘Do you really recognize value and can you add value so that what is a positive trajectory becomes an even better trajectory?’ That’s become a hard business and then you say after all this, ‘Can I afford to pay?’
Arlander: We never ever look at a multiple of sales, it is completely irrelevant to us. I wouldn’t necessarily say that we use a multiple of EBITDA to decide what we will pay for a business, but at some point in the process, we will always figure out what’s the multiple of the latest 12 months just to have a sanity check, because there’s a bandwidth within which it should pull depending on what kind of a business it is and what kind of growth profile it has and what other kinds of attributes the company has that makes it attractive.
Alpert: We think a lot about risk relative to return and the fundamental risk in the investment when we look at an acquisition. We might pay a low multiple of EBITDA or a high multiple. It is really a function of our confidence of what can be done with the business and what is the fundamental franchise value. If we think these brands have fundamental intrinsic value, whether or not the financials are reflected, and if we have confidence in the management team or the business plan or whatever it is, we could look extremely aggressive.
WWD: What is your strategy for putting together deals? Does your firm prefer to go it alone or is it open to partnering with others?
Arlander: We’re happy with going it alone or doing a deal fifty-fifty with someone else. Our experience has been that we have been more successful where we’re either a fifty-fifty partner or we’re on our own. We like to think that we add something to the investment and like to involved at least at the board level, even if it is not on a day-to-day basis. But if people are just looking for money to be filling a gap or hole and don’t want our involvement at any level, it is not going to be the right fit for us.
Alpert: We’ve partnered with others, and we’re more than willing to do it, but it’s very circumstance specific. We haven’t done a tremendous amount of it. For us, it is a matter of having an influence and being a catalyst so we won’t really get involved in situations where that won’t be the case, where we can’t have some influence.
WWD: Do you typically have an exit strategy in place before you actually make an investment or does that come later in the stage after you’ve done due diligence?
Landau: Our exit strategy is an integral part of our investment decision. But its very case specific in terms of the time, the type, and how many options you think you need. You always like to have multiple options for getting out. I think the critical thing is that there is a meeting of the minds and a comfort with management that the way you’re looking at the business and the exit is simpatico. That is critical because we’re not allowed to be 20-year investors. We have funds with time frames so it becomes a matter of matching that with the specific opportunities at hand and the desires of the management team.
Arlander: We look at it a little differently. It is fair to say that for every investment we make we always consider what our potential exit strategies are because we’re in the business of investing in a time frame of anywhere from three to seven years. It is important that you have at the outset some idea of where could you potentially take the investment.
It has been more a case of focusing on if we do the right thing with this company and we grow it properly, the exit opportunities will present themselves and that has been the underlying fundamental attitude that we go into when we make investments in companies.