The reputations of apparel companies have historically ranged from sloppy to sleazy and even criminal. but the reality is far different: many are in surprisingly good shape and considered attractive acquisition targets.

High-risk? Low-yield?Maybe not.

The apparel industry’s long-standing reputation as the place where money goes to disappear was always exaggerated, but financial experts indicate that it’s never been less deserved than now.

Consolidation and decades of tough business conditions have cleared away the weakest players so that the survivor class of today is generally solvent, creditworthy and, if not always possessed of long-term planning skills or financial acumen of its own, at least in touch with those who can supply those needs.

Lissa Baum, first senior vice president at IDB Bank, observes, "It’s been an interesting change. Years ago, people felt that buying stock or investing in apparel companies was very risky. They thought about potential for shenanigans, such as prebilling or not properly reporting inventory. However a lot of the apparel companies are doing fine today. Our industry is a pretty safe bet to put your money on because what you see is what you get."

It wasn’t always like that. A string of accounting and bookkeeping scandals throughout the Nineties — including The Leslie Fay Cos., Donnkenny and Sirena — had added criminality to a negative stereotype that previously hadn’t gone beyond mismanagement and occasional creative accounting.

"Those problems," Baum points out, "seem like such a long time ago already. This business has been so tough that if a company has survived this long and has its act together, it has to have a legitimate business."

She says that financial professionals, as well as corporate executives, have learned from the mistakes of the past and that the level of scrutiny now placed on how the financial statements are reviewed is far greater than before.

These new strengths and disciplines, Baum explains, became crucial in the aftermath of the Sept. 11 terrorist attacks, as companies "immediately got on top of their inventory and took whatever tough steps were needed to get out of their inventory problems. They were reactive and proactive on how to strengthen their balance sheets to get themselves strong and in a position to survive."To be sure, one key factor that perhaps forced well-run apparel firms to raise the bar on how they conduct their businesses stemmed from the retail consolidation of the Nineties.

According to Baum, the middle-market private companies have been forced to improve operations to maintain and even capture market share in order to survive. They’re not only competing for business in a universe with fewer players but also for orders from retailers who "have gotten demanding about how they expect product to be delivered and when. Unless companies can match the sophistication of their retail customers, they can’t be expected to survive."

For Phil Bleser, senior vice president at JPMorganChase & Co., who oversees the portfolio that includes middle-market companies, lending to apparel firms has been a very good business for the bank.

"In general, there’s a lot less risk than before. Many of these firms now have fantastic working capital along with inventory management. They have less debt and therefore less risk. The days when you order a lot of goods to sell to retail are gone," he says.

However, regardless of whether a firm is looking to be sold or a company is interested in making a strategic acquisition, the criteria for a successful transaction are the same. "The criteria is good management, good financial controls, good information controls and good product," Bleser says.

Allan Ellinger, senior managing director of Marketing Management Group, notes that pressure from lenders has meant that mismanagement is no longer an option for apparel firms.

"What’s been happening is that companies are taking a very hard look at themselves and their business models in a critical way because they were forced to do so by their bankers. They’ve had to control overhead costs and manage their receivables. The business today is different from 10 years ago because the risk factors have changed. Ten years ago, there were more retail stores to sell to and now concentration is a big issue. It is not unusual for a company to have 40 percent to 50 percent of its business with one large retailer," Ellinger says.

MMG has seen an increase in the number of firms looking to acquire brands, with apparel companies focusing more on strategic acquisitions than pure financial deals.Emanuel Weintraub, president of the Fort Lee, N.J.-based apparel management consulting firm that bears his name, says that data from research conducted by his firm indicates that 25 percent of all firms with annual volume of $200 million or less will be liquidated or merged within five years.

This year has seen several acquisitions, from Kellwood Co. buying Gerber Childrenswear to Liz Claiborne Inc. purchasing Ellen Tracy. Private equity has also been a factor in many of the transactions that have been completed over the last two years.

JPMorgan Partners, the private equity arm of JPMorganChase, earlier this month bought catalog subsidiaries Arizona Mail Order and Figi’s from Federated Department Stores for an undisclosed amount. The direct-marketing businesses will be combined into a new holding company called Crosstown Traders Inc. The women’s apparel catalogs under the Arizona umbrella include Arizona Mail Order, Old Pueblo Traders, Bedford Fair, Willow Ridge, Lew Magram, Brownstone Studio, Regalia and Intimate Appeal.

Just last week, Limited Brands agreed to sell its Lerner New York/New York & Co. division to the unit’s ceo, Richard Crystal, and Bear Stearns Merchant Banking for $78.5 million in cash, a $75 million subordinate note and warrants for 15 percent of the common equity of the new company.

Also busy this year was Warren Buffett, chief executive officer of Berkshire Hathaway. Buffett has invested in apparel firms selectively over the years. Earlier this year, his company concluded its deal to buy the operating assets of bankrupt Fruit of the Loom for $835 million. It also bought Garan Inc., a children’s apparel manufacturer, in a cash deal valued at $27.6 million.

Bryan Lawrence, managing director and head of the U.S. retail industry group at Lazard Frères, observes that there’s a "desire to find simple operating stories" among companies or investors looking for suitable acquisitions, whether they be entire firms or just parts of a business.

"The apparel business is a good, simple business that people can understand. Of course, there are complexities such as getting the distribution channel right, getting the merchandise right and managing the business properly. What you have are the professionally managed conglomerates like Jones Apparel Group and Liz Claiborne buying brands to diversify their portfolios," he says.Lawrence notes that the difficult and uncertain economic backdrop has made it very difficult to conclude merger transactions. "Buyers are filled with self-doubt and doubt about their targets. They are seeing everything that could go wrong and they’re right in many cases. So everything is taking longer, whether it is looking at the companies or [analyzing] market distributions. Deals for the good companies [eventually] will get done," he says.

Michael Hsieh, president of LF International, notes that his fund is now looking at more established companies to invest in. LF International is the U.S. investment arm of Hong Kong-based Li & Fung, a leader in the global supply-chain management resource network.

"In the past, we invested in companies below $10 million in annual revenue, but that is now a very difficult arena to play in. Companies need to have more brand power in order to be in more retail doors. We migrated to the larger-size firms that have between $50 million and $100 million in revenue because those are the companies with strong brands, good product and relatively strong management that we can combine with our global sourcing network."

According to Hsieh, while firms are definitely out there looking for partners, they are also more cautious about the opportunities that they consider.

"We see people who are scrutinizing the opportunities more closely. They are addressing which opportunities they want to go after, whether it is launching a new line or licensing another brand. While firms were more open to ideas before, management these days has a better sense of where they want to take the company in the future," he says.

LF International, which typically completes two transactions a year, gets wind of hundreds of potential deals a year and actively investigates about 50. The fund favors firms with top-notch management teams and a business that can grow using Li & Fung’s supply-chain resources. While the fund’s managers get involved on the board level and in financial discussions, day-to-day operations are left for the management team to fine-tune. Because the equity firm is a corporate fund, there’s no required exit strategy for the investments. "We’ve kept some investments, taken others public and, in some cases, sold our shares," he explains.Eveillard says that the deals she sees getting done are those involving "strategic plays," where the focus is on making acquisitions in order to add strong names to the portfolio of brands that the large companies are assembling.

"In apparel, it is very important to have diversity and creativity. Yet at the same time there’s pressure on these firms to be large. A company does both by adding to its brand mix. Large firms are looking for the ability to grow a midsize name. You have Liz Claiborne buying Ellen Tracy. That deal represents the strength of the brand name and the design positioning, two factors that determine which potential firm makes the cut in terms of finding a strategic buyer. We also see acquirers searching for firms that already have a strong niche market, particularly when the acquiring firm is looking to diversify based on price points," she says.

While the economic background suggests that there may not be much support for M&A deals, Eveillard observes that a weakening economy could just as easily spur more deals. "This difficult economic environment could cause more deals to happen because medium-size firms may need capital to grow, which is not easy to get today. They may realize that these kinds of deals are an appropriate option at the present time," she concludes.

Andrew Jassin, founding partner of Jassin O’Rourke Group, an apparel industry consulting firm, observes, "I have never seen it as active as it is today. That’s not to say there’s a lot of closure going on. I see a lot of looking and contemplating going on. Whether it is a firm looking to buy or be bought, they all realize the same thing and that is that this is a good moment in time to invest in the future."

According to Jassin, firms with some level of critical mass — a brand or trademark that is accepted on a certain level by consumers with consistent sales volume and a product line that can stand on its own merit — are the ones that have a better chance of being acquired.

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