Is Fashion Ready to Break New M&A Ground?

Looking beyond the traditional boundaries of fashion can lead to a big payoff, but also carries risks.

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Irving Place Capital partnered with Creative Artists Agency to form Star Avenue Capital and acquire a majority interest in premium denim company J Brand.

Courtesy Photo

Estée Lauder went viral and picked up Smashbox.

Estée Lauder went viral and picked up Smashbox.

Courtesy Photo

There’s a new theme in fashion M&A that has “synergy” taking a back seat to “innovation.”

This story first appeared in the August 10, 2010 issue of WWD.  Subscribe Today.

“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.’”

The fashion establishment can be resistant to new ideas and several investment bankers told WWD that fashion companies have no business looking too far beyond their traditional boundaries.

But futurist Edie Weiner, president of Weiner, Edrich, Brown Inc., said financial specialists, like experts in any area, develop an “educated incapacity. They know too much about a topic to have truly breakthrough ideas. In a sense, they can’t see the forest through the trees,” she said.

Weiner said society is changing ever more rapidly and that meeting the needs of future consumers will require new thinking.

“Many of the ways we did things in the prior economy will die out as whole new ways of living and working and shopping emerge,” she said. “This is a fundamental transformation. The options are greatly multiplying and the players are just so diverse and the dollars in many of them are so huge.”

Yet observers say that while the corner-office rhetoric from many of fashion’s biggest players is innovation-heavy, the true strategy is light on new ideas, especially given the downturn that still has everyone frightened.

“They’re all talking the talk but I don’t see anyone really doing it,” said Elsa Berry, an M&A expert who this year ended a 20-year stint at BNP Paribas, where she had been head of corporate finance for North America.

“What they should be doing is buying companies that are younger and leaner and less traditional,” she said. “If they were to acquire such targets, the buyers would be integrating this new sensibility. I am surprised by how stodgy and how heavy-handed a lot of the larger consumer goods companies are.

“There’s a real opportunity for some of these giants that have huge advantages of market share and scale and resources and brain power to think different,” Berry said. “What’s it going to take?”

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