There’s a new theme in fashion M&A that has “synergy” taking a back seat to “innovation.”
“This is like the geek trying to get the hot cheerleader to become cool at the high school dance,” said Sherif Mityas, a partner in A.T. Kearney’s retail consulting practice, describing the rush of companies searching for businesses that have the pulse of new consumers.
Fashion players and retailers are trying to get smart, and quick, on everything from social media and mobile commerce to celebrity — and they’re willing to think differently to do it.
New players are also entering the mix, making for some pretty interesting bedfellows.
Take Wal-Mart Stores Inc., which bought video download site Vudu. Denim brand J Brand sold a majority interest, said to be worth more than $50 million, to Star Avenue Capital, a partnership between talent agency Creative Artists Agency and Irving Place Capital. And the Estée Lauder Cos Inc. acquired Smashbox, picking up expertise in digital, social media and television distribution, as well as a photo studio to boot.
Looking beyond the traditional boundaries of fashion can lead to a big payoff.
“These are beyond synergistic type of opportunities,” said Mityas. “The opportunity will allow an organization to completely shift and create a new customer demographic, a new customer pool.”
Mityas described innovation as the “holy grail” of growth and said the industry is beginning to see innovation through M&A. “This type of acquisition, in certain cases, allows you to leapfrog your competitor,” he said.
This emerging M&A model is a distinct departure from the traditional one, where retailer A buys retailer B, reaching new customers while “realizing synergies” — firing people in the back office and dumping duplicate operations. The same can be done with brands and the model, at least on paper, leads to a larger company that is more profitable than the sum of its two parts.
Most of fashion’s dealmaking is expected to proceed along these lines, but the great recession has changed things. Being big doesn’t seem as important as being in the right spot as consumers evolve and technology advances.
But there are plenty of risks. Venturing into new areas can lead to cultural clashes and taking on a disparate business can distract management and pull them away from their core competencies.
Hot companies with new ideas and lots of growth ahead of them can also be pricy. Take Under Armour Inc. and Lululemon Athletica Inc. in the fashion world. Both public companies, while not necessarily for sale, have successfully tapped into very specific customer niches, giving them leverage to drive up the price for any possible suitors.
“I don’t think it’s about being bigger,” said Michelle Cherrick, chief executive officer of investment banking firm Demeter Group. “I think it’s now about growth. You’re seeing some young companies break glass as to how they’re going to grow.” For instance, television via HSN and QVC has turned out to be a successful launch pad for beauty brands.
“For a brand or concept to get a premium valuation, there’s going to have to be something truly unique they can offer,” Cherrick said. “If you’re just going to be a brand and launch in traditional channels, you’re going to get a traditional multiple. People are going to say, ‘I’ve seen that movie.’”
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