WWD.com/business-news/mergers-acquisitions/staying-independent-vs-selling-out-3701351/
government-trade
government-trade

Analysis: Sell Or Go It Alone?

Contemporary brands share their rationale for either selling to a strategic partner or keeping their independence.

View Slideshow

To sell or not to sell? That is the question.

This story first appeared in the July 6, 2011 issue of WWD.  Subscribe Today.

The contemporary sector, which was on a hot streak for several years before the recession hit and has been rebuilding, is bustling with mergers and acquisitions activity. Catherine Malandrino is rumored to be negotiating with Kellwood Co., while Andrew Rosen is talking with Proenza Schouler. In the past year or so, Steve Madden Ltd. purchased Betsey Johnson, while Kellwood added Rebecca Taylor and Adam to its contemporary stable, which already includes Vince. VF Corp. has purchased Ella Moss and Splendid; The Jones Group Inc. added Robert Rodriguez and Rachel Roy to its lineup, while Tory Burch took on Mexican investors. Rosen, chief executive officer of Theory Link Holdings, made private investments in firms such as Alice + Olivia, Gryphon and Rag & Bone.

“We continue to see activity levels picking up,” said Paul Altman, managing director of The Sage Group, an investment firm in Los Angeles. Among the deals Sage has done are selling Vince and Rebecca Taylor to Kellwood, and selling a significant stake in Velvet to Snow Phipps. “The category is definitely in favor. People value the brands,” said Altman.

As these brands benefit from larger corporate parents and more financing, other firms mull whether to also seek a buyer or go it alone in the increasingly competitive sector. Industry executives pointed out the three main reasons firms decide to sell their businesses are that they reach a point where they want to start opening retail stores, they want to expand their product offerings and they seek to develop a larger international business. All of these require capital, resources and manpower. A well-financed owner also allows firms more opportunities for marketing and advertising. And there’s typically a pretty sizable payout to the brand’s founders over time as well. Of course, the downsides can be giving up ownership and control and, in some cases, losing rights to one’s name and leaving the company they founded altogether.

Firms such as Nanette Lepore, Milly and Tibi — all of which are husband-and-wife run businesses — have chosen to remain independent, which they say allows them to grow at their own pace and call the shots. But the interest from strategic and private equity investors is at a fever pitch.

“They’re definitely swarming around right now,” said Amy Smilovic, designer and founder of Tibi, discussing private equity and strategic investors. She said the way she recently put it to an investor is, “You sell out for tons of money and then have to report in to someone. The designer lingers on for three years and then disappears, and you have to give up three years of your life.”

Smilovic doesn’t see the appeal of selling right now. “If we’re profitable and making money and employees are well-paid, and nobody’s going insane, it’s a good life,” said Smilovic, who is in business with her husband, Frank, the company’s president. The business does about $30 million in wholesale volume. She said she would only consider selling to a company if they offered a competency that Tibi doesn’t have.

Smilovic pointed out that it’s a significant commitment even to consider a strategic investor.

“The due diligence is huge. You have to feel like you’re exhausted from your current responsibilities, which we’re not. For me, what I would love in a partner [or private equity investor] is someone who could support building the brand from a marketing perspective and funding the opening of new stores,” she said.

Tibi has a 3,000-square-foot store on Wooster Street in Manhattan and an outlet store in Sea Island, Ga. The company, which has repositioned itself from a printed summer dress firm to a diversified sportswear brand, also launched an e-commerce site in September. “It was a huge expense with an amazing payoff,” said Smilovic. Some 40 percent of Tibi’s business is done overseas through its wholesale channel.

Nanette Lepore was approached to sell her business a few years ago, and after lengthy negotiations, walked away from the deal.

“We came close to a deal, and we’re glad we didn’t do it,” said Robert Savage, ceo of the brand, which does around $140 million in wholesale volume. “Both partners are. We were going to roll out a bunch of retail stores…but when I heard that Bear Stearns was sold for $2 [a share], we both began to backpedal.

“I’m happy where we’re at right now. We own the company 100 percent,” said Savage, who is in business with his wife, Nanette Lepore.

He said growth can be a good and a bad thing. “We grew our business slowly. We learned so much. Mistakes were made early on when we were really small,” said Savage.

Savage said the company has as many retail stores as it desires right now. The 11 stores span the country, from New York’s Madison Avenue to Los Angeles’ South Robertson Boulevard, as well as a licensed store in Tokyo. “We’re comfortable where we’re at. Retail stores have started to come back a bit and there was an uptick in spring sales. During the recession, the stores cut back,” he said. In some cases, some stores cut back 20 percent of their buys. “I don’t feel we need to do anything right now until the economy kicks back in. I feel more and more comfortable where I’m at every day. Having partners is not easy,” said Savage.

Privately owned Milly has been in business for 10 years, and isn’t looking to cash out yet. “When our business started in 2000, we had a nice start. The first few years it was breakeven and from there forward, the business was profitable,” said Andrew Oshrin, president and partner in Milly. Oshrin is in business with his wife, Michelle Smith. “We’ve always been in a position where the business was well capitalized,” he said. Oshrin said when a brand sells out to a strategic investor or private equity firm, it has the responsibility of performing and following a strategy, and the new owners are trying to grow the business faster. “As a privately owned company, we can make decisions that are right for the long term,” he said. Milly has been approached the last four or five years by strategic investors, as well as investment banks, but it has not needed the capital.

Milly launched handbags in-house, as well as costume jewelry, which was introduced at retail in January but hasn’t been as successful, he said. The company added children’s wear this year with Mini Milly, which, Oshrin said, “got great support from retailers.” Milly created an e-commerce site in April 2010, which was its first retail store, and came within $11,000 of its sales plan. “Next year it should grow 70 to 80 percent,” he said.

In 2008, Milly’s business generated between $46 million and $47 million in wholesale revenues. The volume slipped to the low $40 million range, and this year will pick up again, he said. Milly opened its first flagship, an 1,800-square-foot unit, in May at 900 Madison Avenue, between 72nd and 73rd Streets. “We’ve done this all internally through operations,” said Oshrin, noting that he and Smith have put their earnings back into the business.

While these brands prefer to remain independent, the likes of Rebecca Taylor, Adam and Vince are pleased they sold their businesses to Kellwood, which has enabled them to expand their retail network and launch new categories.

“Being part of a large organization allows us to benefit from shared resources,” said Beth Bugdaycay, ceo of Rebecca Taylor, citing areas such as human resources; accounting; legal; IT, and customer service. Rebecca Taylor, which was sold to Kellwood in January, expected to be fully integrated by this past June. The company generates between $35 million and $40 million in wholesale volume. “These are functions we did previously, and now there’s an obvious benefit to the bottom line. There are real benefits with efficiencies of time management. Our leaders can concentrate on sales, merchandising, new opportunities and public relations,” she said. “We felt the timing was right to find a strategic partner. We had two objectives: to expand the product we’re offering and to have an accelerated retail rollout. We felt we could get there on our own, but at a much slower pace. We felt it could be faster with a partner.”

Rebecca Taylor presently has three directly owned stores — two in Manhattan in the Meatpacking District and NoLIta neighborhood, and one in Hong Kong, as well as two stores with a licensing partner in Japan.

Bugdaycay felt the timing was right to invest in retail stores “but only had so much cash flow and liquidity.

“We opened two stores with a $1 million investment for each store. If you’re an independent, it’s hard to roll them out at a fast clip,” she said.

She believes that a company is a better retailer when there are more stores, “otherwise you can’t leverage the expense over one store.” She also said a brand can do more exclusive products, have a seasoned executive overseeing the retail operation, and can add to its assortments.

“We’d like to open five to eight stores a year,” she said. “That’s what’s pretty amazing about Kellwood, their business model respects the design integrity [of the brand].” She said even though all of Kellwood’s contemporary brands are different, the shared services are similar. However, sales, design and product development stay independent. “We don’t have shared sourcing,” she said, noting that once the products becomes too similar, their unique personalities are lost. By offsetting the expenses of shared resources, Taylor can invest in product development and design.

Adam Lippes has had two investors since he started his company. One was the Atelier Fund at Compagnie Financière Richemont, and the second is Kellwood, which bought the company last August. “What has been amazing about Kellwood — the money is great, of course — is we can grow faster,” agreed Lippes, ceo of Adam. “Kellwood so impressed me because of the expertise they had. I was doing everything myself. I didn’t have a partner with the expertise of anything.”

Since Kellwood acquired the firm, Lippes has seen improvements in areas such as production, financing, merchandising and sourcing. “It’s been a really great relationship,” he said. Kellwood took over the warehousing and beefed up the back of the house and fabric department. “My shipping and financial department is all gone.…[Kellwood ceo] Mike Kramer said, ‘You need to focus on design. We’ll make the rest happen.’” The company generates a little more than $10 million in wholesale volume.

Christopher LaPolice sold Vince, the seven-year-old company he founded with Rea Laccone, and its investment partner, John Paul Richard Inc., four years ago to Kellwood, and the business has grown fourfold since to $200 million. LaPolice said his financial partner felt it was the right time to sell. “The multiples that companies garnered at that time were a lot different than they are today,” said LaPolice. He said they met with firms such as VF Corp., Jones and Kellwood, and received a few offers. “It was a personality fit and who would give us the space to do what we do. We felt that Kellwood really understood that they’d give us infrastructure, but were not going to try and conform us to something we’re not,” said LaPolice.

As entrepreneurs, he and Laccone wanted to ensure they could continue running the company. In the last two years, they’ve opened 18 Vince stores. The company is looking to open a unit in London, alongside a showroom there. LaPolice sees no downsides to the acquisition. “We go to work every day and have an amazing sense of ownership,” he said. Three years ago, Vince opened a men’s division.

LaPolice praised Kellwood’s credit and collection facility in St. Louis. Historically, Kellwood’s business was with the big-box department stores, but Vince came with 450 mom-and-pop stores. “Many big companies don’t see the value, but they came with a ‘can do,’ ‘can learn,’ ‘we’ll figure it out,’ spirit.”

With a minority investment from Rosen, Rag & Bone has made international expansion and freestanding retail a priority at the company. The partners chose Japan, South Korea and the U.K. as their first three areas of expansion. In November, Rag & Bone opened a freestanding store in Tokyo’s Omotesando neighborhood.

Stacey Bendet, president and designer of Alice + Olivia by Stacey Bendet, said she and Rosen have been partners from Day One. “We bought out shares from my original partner shortly after I started Alice + Olivia and grew the company rather organically versus through a cash infusion or investment,” she said. She added that Rosen has been invaluable in offering his experience and talent to the company. “There isn’t a day that goes by that we don’t speak about something, be it retail initiatives, department store growth or just ideas on how to expand the line. He is like fashion’s Godfather.

“We have grown on our own cash flow and been cash-flow positive since year one…but this year our focus has been heavily focused on our own retail store expansion, international sales and the launch of our shoe line. Andrew, having been through the growth phases we are going through, is always a hugely helpful hand,” she said.

Yet there are some cautionary tales as contemporary brands have experienced the disadvantages of selling to a conglomerate.

Pamela Skaist-Levy and Gela Nash-Taylor, the founding designers of Juicy Couture, started their business in 1996 and sold it to Liz Claiborne Inc. in 2003 when it was generating $50 million. The designers had an incredible run and the brand racked up sales of more than $600 million, but when new management came in, they clashed with the new ceo and ended up leaving the brand early last year. Nash-Taylor said they originally wanted to sell Juicy to Liz Claiborne because they were interested in rolling out retail and wanted to get licenses. “We wanted a fragrance and wanted to do accessories. We wanted to bust out big time. We still do.”

While the two founders ended up leaving Juicy after seven years, they have no regrets. “The trajectory and growth rate were astronomical. When you’re a young kid and sell your company, it’s a shocking experience,” said Nash-Taylor. The designers’ noncompete expired last week, and they plan to launch a new fashion venture.

“I think it really depends who you sell to,” said Skaist-Levy. “When Paul Charron was ceo of Liz Claiborne, it was a beautiful time for Juicy. Along with Angela Ahrendts, they let us soar and make magic. They were the best partners and allowed us to grow.”

View Slideshow