The meltdown at Deciem is a cautionary tale in many ways — especially for beauty giants taking minority investments.
Such investments are all the rage in the beauty world. But while that deal thesis used to live mostly with private equity firms, strategic buyers have jumped on board in recent years. Minority deals grant them access to fast-growing companies with disruptive, innovative business models for less money than waiting until the businesses are of traditional investment scale to buy them outright.
But Deciem is an example of how minority deals can be risky.
In early October, the beauty industry was captivated by public drama at Deciem, the vertically integrated, multibrand business in which The Estee Lauder Cos. Inc. acquired a 28 percent stake in 2017. Last week, Deciem’s founder Brandon Truaxe unilaterally decided to shut the business down — and he announced it via Instagram. After Lauder filed for injunctive relief in Canada, Truaxe was removed from the business, which resumed operations shortly afterward.
That situation — one where Lauder wound up in court to protect its investment — sheds light on complications that can arise from minority deals.
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“[Strategic buyers] are trying to short cut waiting on a brand’s outsized growth and success, and then having to pay a big price and a big multiple,” said Shaun Westfall, managing director at Jefferies. “The issue is, if you’re going to back or put your money behind early stage business models where the people are paramount, you have to be really careful around diligencing the people.”
Lauder, which backed Deciem and Have & Be Co., the owner of Dr. Jart, is not the only beauty business that’s experimenting with minority investments. Unilever, through Unilever Ventures, has made a slew of them, including Be for Beauty, True Botanicals and Beauty Bakerie. Other beauty companies, like Revlon and L’Oréal, have set up incubators to focus on smaller businesses.
“It gives them an early look-see into trends, into how that entrepreneurially led company is thinking and the market opportunity,” said Joyce Greenberg, managing member of CAPGreenberg LLC. “As long as they have veto power on the major decisions, it’s generally OK.”
In minority deals, the strategic would normally have a say in things like hiring c-suite executives, approving additional capital raises and M&A or divestitures, Greenberg said.
But even with those safeguards in place, investing in earlier-stage companies inherently carries more risk, experts agree.
“When you go earlier stage in the investment you still have a pretty new, growing business, often with the founders in place — that carries risk,” said Coye Nokes, partner at OC&C Strategy Consultants. Even if a full-fledged diligence process takes place before the deal, personalities can be harder to assess.
“Can you predict that everyone will behave rationally? No. You can put things in contractually that allow you to take some action,” Nokes said.
Truaxe, who had been posting erratically from his personal and Deciem’s branded Instagram account throughout 2018 even before trying to close the business, still owns part of the company.
Up until he announced the business’ closure, Lauder had been publicly hands-off, stating repeatedly that it was a minority investor and wasn’t able to control decisions related to social media and personnel.
“A lot of the acquisitions that have happened lately, part of the philosophy is, ‘We’re going to be relatively hands-off in our management of them because what they’ve done so far has been incredibly successful and we have a lot to learn from that, and we don’t want to destroy the business,’” Nokes said.
But with minority deals, keeping in touch is crucial, she said. “You want to have good contact and rapport with the management team…open communication, and a good line of sight into what’s happening on a daily basis.”
That being said, investments from big beauty companies cause a different type of tension than investments from financial buyers, where the outcome is clear.
“Anything that goes the wrong way is going to be interpreted by the entrepreneur as, ‘this strategic is limiting me and limiting my upside because they want to acquire me for a discount,’” Westfall said. “Once you partner with any strategic buyer you limit your options because no other big strategic is going to buy you — you’re already in the fold with they’re competitor. You’ve essentially sold the business without selling it.”
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